Unpacking Token Design
By Jack and Jean-luc, co-founders.
In this post, we aim to unpack what token design is and to demystify what token designers do.
Why does token design exist?
Blockchains have enabled independent economic agents to participate in socio-technical systems; where users create, accrue, exchange and erode value via smart contract interactions. The way users participate in these networks is directly influenced by: exogenous variables, their own evolving preferences and the economic ruleset bestowed to the network. Token designers work with teams to create and optimise the economic rulesets of these networks, while considering the dynamic and emergent properties of the environment. (We talk about the importance of token design more in historical context in our last post, Token Design Thesis.)
What is token design?
We define token design as…
“a branch of applied economics that focuses on the coordination of onchain value across blockchain enabled networks.”
This can be further broken down into two parts.
Onchain: the medium that blockchain native tokens originate from.
Networks: Socio-technical systems, which are the combination of social systems and blockchain enabled value exchange networks.
We can also define ‘value’ into key states.
Value creation: How network value is created.
Value exchange: The transfer of value from one stakeholder or component to another; the flow of value.
Value accrual: Where value accumulates in a network.
Value erosion: How the value of a network diminishes.
Also, noting that value is more than just money, for example:
What do token designers do?
Since token designers work directly with various types of value flows, the surface area of the design space is large. As such, the specific outputs teams might expect are dependent on network requirements.
Broadly though, token designers work on onchain economic problems.
We can provide clarity around the type of ‘work’ by defining the problems projects typically face at various points in their lifecycle. For this post, we will divide the lifecycle of a project by before and after a token genesis event (TGE).
Pre-token Projects
These teams are usually just starting to consider coordination mechanisms. There are likely to be many open questions: token functionality, distribution, governance structure, emission rates, stakeholder value, TGE mechanics and protocol mechanism parameterisations. The main problem for these teams is balancing a wide array of complex design processes with the other demands of early-stage projects.
Token design for pre-token projects focuses on those complex design processes. It involves going from no concept to a holistic token architecture and distribution campaign. Designs stem from first principles supplemented with referential points of in-market examples and iterated upon via modelling. The design process is systematic to avoid inconsistencies arising.
Across research, design, modelling and testing, there is a large amount of work that can occur during the pre-token phase. For engineers and researchers, this is of course exciting, but for teams this is impractical. Finding the balance between the design process and the team’s timeline and resource constraints is crucial. There is a need to be practical and realistic in the approach.
As token designers of pre-token projects are effectively co-designing the protocol and initialising the growth strategy, it’s important that they have all the necessary context so the design is aligned with the stakeholder’s needs and the team’s vision. For this reason, they should work through these problems alongside the team in a high-touchpoint environment and for an extended period.
Live-token Projects
The set of problems that live-token projects face is different from pre-token projects. The concerns are typically around performance, risk and governance. The solutions are mostly iterative and require accurate system monitoring.
For live-token projects, the essential first step for teams seeking to optimise the network is to be acutely aware of the network dynamics. System monitoring is a must. What token designers will find during monitoring is that the problem set is more specific than in the pre-token period: be it interest rate optimisations, risk parameter adjustments, governance structuring, funding rate management or incentive efficiency.
The good news is that with monitoring comes data availability, and data can be used for running live tests. Live testing is the process of creating improvements for the identified problems.
Of course, the implementation of strategic changes borne from live tests is not always straightforward. If for example there is a DAO in place that is tasked with governing system parameters, changes will need to pass through governance to be implemented. Token designers facilitate this process, putting forth the case to the DAO for parameter changes, supplemented with experimental results and reason.
Live-token token design is more iterative than the zero-to-one approach observed in pre-token token design.
Dynamic Systems and Independent Economic Agents
To add more complexity to what token design is, value exchange within these decentralised networks is either partly or entirely driven by independent agents with dynamic preferences, while also being exposed to exogenous forces. That is to say, networks are always evolving and equilibria changing. This speaks to the importance of token design being an ongoing process, where accurate system monitoring and live testing is important for understanding how these networks evolve and course correcting if needed.
Legal Considerations
There are legal considerations with all of this. The team should always have the correct legal guidance when considering a token system, as how each jurisdiction defines ‘tokens’ and treats the associated rights granted by ownership of tokens, is still up for debate. Teams should ask the token designers if they can provide legal counsel internally; if not, they should find the appropriate advice elsewhere. More often than not token designers who cannot provide advice internally will have strong relationships with lawyers who can help in this regard.
Conclusion
Blockchain enabled networks are complex and dynamic social-technical systems. Teams building projects on blockchains not only need to build a product in a highly competitive landscape but also manage an evolving economy with ongoing challenges. Token designers support teams to manage these economies across all stages of development. This looks different between pre-token and live-token projects, however, both play a significant role in network success. It’s also important to remember that these systems don’t exist in isolation and need to be grounded with real-world restrictions. Legal support is a must when designing token systems, as the regulatory landscape is another dynamic factor that needs to be considered.
