With the explosion of digital tokens coming to market over the past year, the perennial debate raging within crypto circles in 2018 remains: what gives a token value?

After all, when crypto veterans try to explain the blockchain to the uninitiated, one question they invariably field is, What gives bitcoin its value?

The first answer assumes bitcoin is a commodity whose value is derived from the number of people who want to own it. In other words, the more demand there is for bitcoin, the higher its value becomes.

But that answer, while nominally correct, equates price and value as equal yardsticks, an assumption that doesn't cover the larger value proposition of cryptocurrencies today.

For instance, saying that bitcoin only has the value reflected in the price of the last trade executed on Coinbase is akin to saying a house that sits on the market without being sold is worth nothing at all.

Surely, there's still value in the house if it can shelter somebody from the weather, and provide a safe, warm place to sleep. In essence, while the house may not be able to fetch its asking price in the marketplace, it still has a utility.

That's exactly where the discussion about the underlying value of tokens has migrated today: the use case. Basically, while speculation and get-rich-quick trading fueled the ICO boom and dramatic rise in token prices in 2017, the feature that will give tokens value in 2018 is how they're used.

Indeed, with all the focus on ICOs that minted hundreds of new tokens last year, it's sometimes easy to forget that in their most fundamental form, cryptocurrency tokens are literally just mini software programs. That's all they are, pieces of software code. Like any other software program or application, their value is derived from the functionality they offer, or the solution they provide for the problem they're designed to solve. In the long run, the tokens that will maintain and grow their value over time are those tokens which do the most, or solve the biggest problems, for the most people.

A case in point has been the relative resiliency of ether during the great crypto whipsaw of early 2018. Even as bitcoin came off its high of $20,000 in December 2017 to test a low of $6,000 in February 2018, and Litecoin sank from its high of $420 to a low of $100 – losses of 70% and 76%, respectively -- ether sank just 60% from its own high.

Then, in the recovery that followed those lows, ether's rebound outpaced bitcoin's 55% to 46%. (Granted, litecoin had a similar, 55% rebound.)

But perhaps even more telling was the timeframe of those swings. Ether peaked a month later than the other two, in January 2018. Perhaps that's because while December pegged the high water mark of 2017's speculative rush toward cryptocurrencies based on price, ether's peak a month later marked the beginning of the "use case" era of valuing crypto tokens on a larger scale.

One could make the argument that ether was relatively stable during the onslaught, even as bitcoin and litecoin tanked, because ether has a very clear, wide-ranging utility that is easily understood. Indeed, it's the ERC20 token standard, created by Ethereum, which allows anyone to mint their own, customized token – and as we saw during 2017, pretty much anyone did. Indeed, even as other tokens rushed to market to cash in on the speculative crypto boom, they had to use ether to get there, and by doing so, sustained and proved ether's value.

The fact that the Ethereum blockchain enables the creation of smart contracts, which in turn allows users to set agreed-upon terms of a transaction that are then fulfilled by automation – another very compelling use – only adds to its value.

Hence, ether the token has been able to sustain its value versus other major cryptocurrencies because ether the mini software program that runs inside it has so much functionality, and people can use it in so many ways.

While bitcoin allows a holder to use a distributed ledger, and litecoin enables transactions on a distributed ledger to run faster, those two use cases just aren't as robust or compelling as ether's multiple functionality at this point. In other words, bitcoin and litecoin allow you to transact; ether lets you to build.

That's the reason why bitcoin represents what's been called the first "dumb" generation of blockchain technology, and ether the second "smart" wave. But it's what you can do with the first two that has enabled the rise of the third generation of crypto, or what's now being referred to as the "intelligent" blockchain.

In conclusion, one could draw an analogy of the uses of blockchain applications, and the value of the tokens connected to them, to the Keanu Reeves movie the Matrix. That's because the blockchain, in many ways, is a kind of real-world iteration of the Matrix, just without the scary agents or human slaves used to power it.

Instead, the blockchain itself is powered by human beings who are incentivized and compensated to participate in the network to grow and further its objectives.

Its potential to lead to explosive scaling comes from the fact that once you put an application on the network – in the form of a token, those mini software programs – the work or problem its designed to solve is carried out, potentially, by everyone who uses it.

Just like user-generated content led to the explosive growth of social networks in the early 2000s, the network effect of the blockchain means that the entire world can use tokens to do work and solve problems together. That, in turn, will give people more reasons to join the network, benefit from the solution, and contribute to completing future tasks and solutions for others.

So, what determines the value of a token? It's only as limited as the number of uses our collective imagination can come up with.

About the author:

Philipp Pieper is CEO & Co-Founder, Swarm Fund. Philipp has been a start-up entrepreneur for the past 10 years and is a veteran in the digital data space. With Swarm Fund, Philipp is presently building the "Blockchain for Private Equity" which is laying the foundational building blocks for the AI-driven Investment Economy using AI, workflow automation and novel governance.