A Token Design Thesis
By Jack and Jean-luc, co-founders.
Vending Machine is a boutique studio that designs tokens for pre-token projects. We have recently shared the immediate problem we set out to solve; providing resource constrained founders with thoughtful token designs. Now we want to share why we think digital tokens and their designs will become increasingly important.
Tokens at their core are objects that represent ownership over something. They simplify the way we create, consume, store and transact value with other people in an economy. Verification systems are the frameworks that tokens exist within; they support economic participation by establishing and maintaining token authenticity and ownership.
Tokens come in all shapes and sizes: coins, notes, legal documents, passports, university degrees. These are all objects that represent someone’s ownership over something; over a house, an identity, a qualification.
Until the internet, the way we interacted was purely physical and therefore our token and verification systems were purpose built to support this economic structure.
(1) Physical interaction, Physical tokens, Institutional verification
Economies operate on trust. Users transacting tokens need to trust that the value of their tokens are upheld within the economy and they need to trust that counterparty tokens are legitimate. The role of the verification system is to maintain trust within the system so that participants can transact with confidence and minimal friction.
In the physical system, participants instil their trust in a conglomerate of third party institutions that collectively make up the verification system.
The price of lower friction is a system-wide dependence on opaque institutions. As power concentrates around these institutions, the economic system becomes vulnerable to manipulation by those in power; at the expense of those without.
Since the internet, the way we interact, consume and transact is increasingly digitised.
The internet represents a digitally native global bazaar, an ideas market brought about by near-instant global messaging. Geographical limitations that previously stifled network connectivity are removed, allowing esoteric and niche groups to form around localised interests.
Tight feedback loops, rapid iteration, abundant value creation.
The way we are interacting is becoming increasingly digitised, but our token and verification system supporting this digital economy is the same one that was tailored to support physical economic interactions.
(2) Digital participation, Pseudodigital tokens, Institutional verification
Coins and notes are increasingly 1’s and 0’s in a bank account, passports have biometric scans, contractual agreements are signed using electronic signatures. These are physical first tokens, verified by physical first verification systems, retrofitted to support an increasingly digitised economy.
The problem is that these psuedodigital tokens are supported by institutional systems, bringing with it friction and centralisation risk that detracts from the benefits of a globally accessible protocol like the internet…
- T-2 settlement
- Typing in card details online for commerce
- Scanning passport as proof of identity
- Persistent risks associated with centralised verification (data breaches, corruption)
Psuedodigital tokens on institutional verification systems are not natively designed to support digitised economic participation.
(3) Digital participation, Digital money, Blockchain verification
The need for opaque and power concentrated institutions to maintain trust within the digital economy is replaced with open-source and trust-minimised algorithmic consensus.
Decentralised blockchains are digitally native verification systems that provide the most appropriate foundation to-date, for digitally native tokens to exist within. They are publicly verifiable ledgers that validate the record of digital participation within an economy; in real-time, in the open, in perpetuity.
Digitally native tokens, like physical tokens, are objects that represent ownership over something with the aim of simplifying the way we participate with the world. Digital tokens and physical tokens are designed to achieve the same purpose, however, it is the way in which they are verified that lends to their differences.
Digital tokens verified on public blockchains have traits that are synergistic with the internet native economy. They are highly programmable, globally tradeable, created by anyone and verified by everyone. They are software objects that reduce friction within the digital economy by allowing for ownership of digitally native value.
Networks, protocols and tokens that are built on the same verification systems make up a homogenous, digital-first economy with permissionless participation. This is because tokens can be programmed to have codified touchpoints with these networks and protocols, creating a broad spectrum of what these tokens can represent.
We are just starting to understand the relationship between token design and user behaviour. With such a wide design space and with no clear standards, there has been a recent period of mass token experimentation. Builders are exploring how different token mechanisms and feedback loops impact user behaviour and how that resultant behaviour impacts network outcomes.
The impact a token has on user behaviour and in turn, on a network, can be thought of similarly to the impact a product’s design has on its market adoption.
- A product that directly marries the needs of its users with the supply of the good or service finds product-market fit
- A token that directly marries the needs of its network with the demands of its users finds token-network fit
The aim of token design is to find token-network fit; designs where tokens remove the friction within a network and allow for symbiotic relationships between user and network to form.
The complexity of designing tokens can be broadly categorised by three things:
(1) The vast optionality builders have when designing due to their highly programmable nature
(2) The unpredictability of how design decisions impact user behaviour and network outcomes.
(3) The lack of pre-existing models and standards
Determining how to program these tokens to interact with their respective networks and protocols, as well as with the greater digital economy, is an emergent design space called token design.
Token design can be considered a branch of applied economics that focuses on how the network value of crypto-based projects is created, accrued, exchanged and deployed within its own network and others around it. More specifically, it is the architecting of digitally native tokens to help determine what value a token represents, what purpose it serves and how it interacts within a network.
As economic participation continues to digitise, economic value creation will increasingly originate digitally. As value becomes increasingly digital, token design; the service dedicated to ascribing this value to digital tokens and making that value ownable, becomes increasingly important.
While token design can have significant implications on a network’s functionality, it’s commonly considered an afterthought for builders due to the already significant task of finding product-market fit within a rapidly evolving and competitive industry.
This dilemma is exacerbated at the early-stage, where pre-token teams suffer from capital and labour constraints. This is also the period in which token design is most meaningful and iteration is most flexible.
This is the problem we are solving at Vending Machine. We work with pre-token projects to design tokens and token-systems that compliment their core product and achieve their network objectives.
If you are a pre-token builder looking for token design support, reach out. We are eager to help.
Disclaimer: None of the token systems of the projects mentioned are designed by Vending Machine.
