What are “Loot Tokens?” — Understanding an emerging asset class.
Edit: We just launched www.lootcap.com to track Loot Tokens — you can follow us on Twitter at (@lootcap)
TL;DR: Loot Tokens are any token you EARN by contributing to a community. Not by mining, staking, or having your computer do something automatically in a network, but by you earning the token from YOUR contributions and being rewarded a utility token.
In the beginning of the blockchain space, things were simple, we had “coins”.
Everything was mineable and its own blockchain, so just like Bitcoin, it was a “coin”.
Then the world got a bit more complicated.
We had new distribution models such as “initial sales” of tokens, proof-of-stake, and then new assets being issued on other chains.
After some debate as to if “coins” were mineable, the community ultimately settled on the vocabulary that “coins” were native assets of their chain, and tokens were secondary assets on a chain.
Existing Token Classes
Since then, we’ve seen the rise of multiple classes of tokens:
- Governance tokens
- Exchange tokens
- dApp Tokens
- Access Tokens
- Discount Tokens
- Dividend Tokens
So far, we’ve discussed tokens in very narrow bands of their protocols and their relation to financial gains — in most cases we’ve focused on building out categories under the assumption that tokens are primarily investments.
Even our discussion of NFTs often looks at financial return rather than economic or personal value.
Perhaps, this stems from the fact that a significant amount of the thought leadership and research in this space comes from venture capitalists and investment funds.
Which isn’t a bad thing — but, VCs and funds only deploy economic via capital and not during effort. So naturally, they have less interest in tokens where the distribution is earnable.
This is why I believe “the most important token class for the next 5 years has not clearly been defined or discussed.” (Until now)
Loot are the valuable goods and property, historically taken from enemies during war or pirating.
However, in our current colloquial it refers to something different from the world of gaming.
In gaming, ‘loot’ are the proceeds of overcoming a challenging boss fight or a quest with your party of guild.
You work together with a group, providing the unique economic value from your class (either as a healer, a fighter, a blocker, etc) and together achieve an economic outcome that would not have been possible as an individual.
The newly created economic value was only possible through your collective labor contributions, and the reward compensates those actions but is often not worth while individually.
For example, a guild may choose to take 30 players to fight a challenging boss in a game, this boss drops 10,000 gold and a rare sword worth 75,000 gold.
Perhaps each of the 30 players spend around 2,000 gold in supplies and gear for the boos fight. In total, they spent 60,000 gold.
Ultimately, only one player can own the rare sword, while the rest of the party splits up the gold the remaining gold, meaning that each of the party members received only around 344 gold for their 2000 gold spend.
Were these parties entirely strangers, the economic output of the endeavor wouldn’t be worth it for them.
But, since they are a guild who frequently works together, the calculus has changed. They will all benefit collectively from one of their players leveling up or being more powerful, and that will create a larger economic return for them long term.
How This Applies To Tokens — “The Problem”
One of the most interesting struggles online, has been how to empower and incentivize participation in communities.
Social networks and online communities are profitable businesses because of long-tail content value. Each view is worth fractions of a penny, but, when you add that up across millions of users and tens of millions of visitors the unit economics become profitable.
The problem is, if you try and pay people for their content or their contributions it ends up adding up to only a few dollars and the individual doesn’t feel its worthwhile.
It’s the same reason why it isn’t in Facebook’s interest to pay you for your data. Facebook makes up to $15/year per user for using their data to sell ads. Over hundreds of millions of users, this works out for Facebook.
But if the law changed and Facebook had to offer you money for your data, and they offered you $12/year for access to sell all your private information, would you take the deal? No.
This is why most incentive networks have historically failed.
Unlike the “guild” in our fictional game example above, the individuals are not bound together in a way where their future actions create economic value for the larger group.
So while a platform that connects users of specific interest groups might generate enough overall value to convince users to donate, or buy memberships — the amount of value created by any one member seldom rises to this level and so if individual members were to earn tips or revenue sharing, it often isn’t worth the economic cost put into developing the piece.
This is especially true since most social network sites, since views end up being a longtail distribution problem. Only the top 1% of users have large followings and therefore monopolize revenue shares — to get there takes years of under compensated content, and so while you may *now* be earning enough to cover the value of creating your content, when you average it across all the effort put into get there, the economic value still isn’t worth it.
How This Applies To Tokens — “The Solution”
This is why we’re starting to see the first inkling of an emergent token class that I’ve been referring to as “Loot Tokens.”
These tokens are ones that are earned for a “qualitative labor based contribution to a community” and in turn represent “a reputation, influence, stake or authority within that community” and “align the members of that community with incentives to continue to generate economic, non-financial, value for the community and not just the individual” which can “in turn create economic value and a mutual means of exchange with the larger tribe”
Let’s break that down a bit.
“qualitative labor based contribution to a community”
Loot tokens, are tokens you can earn.
You earn them by making a contribution to a community that you are a part of.
That contribution is not financial. It is through creating value, such as (but not limited to) creating content, hosting events, helping others, sharing or curating content, or discussing governance.
Not all actions are created equally.
The community needs a way to decide, measure and proportionality reward the amount of value created by an action.
If two users post equally long forum posts on a message board, but, one adds value and the other is just content spam — they cannot be rewarded the same amount of loot.
There are many ways to solve this such as voting methods, or other allocations. But, the contribution needs to be compensated for the economic value it creates not strictly the labor it created.
In loot models not all labor is equal — it can be equal at times, but, it needs to be able to differentiate.
“a reputation, influence, stake or authority within that community”
Loot tokens are not dividend sharing tokens. They are not revenue sharing tokens. They are not securities.
They are strictly those incentive models which reward users in influence, authority, a vote, a voice, or some other merit based on their contribution.
For example, this could be like Reddit Karma which is a measure of contributions to various Reddit communities. It has no real economic or even practical value with in its system.
It can also be the ability to unlock new features such as avatars or colored names on a forum. New features in online communities are often symbols of status that can act as their own reward.
Further, more practically it can act as the ability to influence or directly vote on the governance and direction of the community.
While these tokens can become economically valuable and even increase in value, something is only a ‘loot token’ if it has a practical use and is not designed specifically for economic distributions.
This is where systems like Steem struggled. The only redemption was for financial use (buying ads) and things were clearly denoted in dollar values.
There was no redemption model for aligning future incentives and making someone part of the community; and there was no utility beyond simple financial redemption.
“align the members of that community with incentives to continue to generate economic, non-financial, value for the community and not just the individual”
The incentives that a member receives from generating their reputation or stake within a community must in turn be more useful/valuable the larger the system is.
- Encourages the user to participate in growing the community.
- Encourages the user to continue to add economic value (such as new quality content) to the system.
- Results in the user’s individual goals being aligned with the long-term goals of all the other users (regardless of which value they seek)
This is why it is critical for the value not directly be financial.
While some individual users may seek financial gain for the value they create, some are seeking the reciprocal value, and others are seeking to exchange financial value for other means of value.
“in turn create economic value and a mutual means of exchange with the larger tribe”
Right now, communities who share common interests (such as a Facebook group for classic car collectors, and a message board for classic car collectors) are fractured.
This topic “tribe”, as we often call it in marketing, has significant user overlap and likely content overlap, but lacks clear mediums of exchange.
When a loot token takes off and provides economic value in one site within a niche, because of the member overlap it automatically becomes somewhat valuable in the other site as well.
This is the same model of economic pressure that saw currency systems around the world that previously operated on ropes, stones, and seashells quickly adopt the gold standard the moment they came in contact with other cultures that needed it.
We don’t need to want money for it to be valuable to us. We just need to know someone who wants it.
This effect of loot gaining influence beyond the digital borders of a specific site also creates a race condition — where the first entity to issue the asset in a way that it takes off in the community is ultimately able to capture value not just from their own website but from all communities surrounding the same topic where the loot token eventually becomes influential.
Loot Tokens ELI5:
“Loot Tokens are tokens that you earn by contributing to a collective community goal. They increase your standing, access, reputation or authority within a community, can be redeemed for use within a community rather than just used for money, and by owning them you want to contribute more to the community over time.”
The Loot Scale:
Just like most MMORPGs put loot on scales from trash to legendary, we can do the same with loot tokens by graphing how many of the loot criteria they meet.
For example, Bitcoin and Ethereum are clearly not loot at all.
Dogecoin is Loot-ish because originally its value came from earning and spending it in a subreddit community, but, that value has since been lost, and it’s not a token.
BAT is Loot-ish or maybe even “Common Loot” because it allows you to earn BAT for an action you take, but it doesn’t have a strong community angle, governance or non-financial redemption (yet).
Next we have things like Kleros, Flux Market and UMA where you can earn for taking actions such as judging cases or oracle validation. These actions require labor input, but each either require staking or could be machine powered to some extent.
Then we have Santiment which rewards users for very clear community contributions measured in a qualitative manner. But, the token purposes are a bit limited in scope currently. The token can be used to unlock more access to the Santiment network but it lacks governance or features of status/reputation.
If we go right to the top of the Legendary section we have Reddit Donuts, a subreddit token for /r/EthTrader where users earn the cryptocurrency based on their posts on the subreddit.
These tokens in turn can be used in weighted polls, redeemed for loyalty badges, colored names, and new features like embedding gifs into your post replies. (The ultimate meme war weapon!)
As these communities expand the influence of this token grows and can begin to stem outside the community.
Why I Think Loot Tokens Are THE Most Important Token Class for The Next 5 Years:
For economic stores of value to be effective, they need to be:
- Non-Specific: Can’t have a limited and predetermined set of use cases.
- Non-Intrinsically Valuable: They can’t have a single purpose that gives them value in and of itself.
- Authoritative: They must derive value from an understandable source. (Each source, such as “being decentralized” supports only one asset, others need a new source).
Loot tokens balance this by creating value within communities which are often places of shared interests.
The authority at first stems from the issuing authority, as they create the token and likely create its first use cases. But, as the token gains recognition among that community, because of the high-frequency of user overlap with other communities in the same niche, the token will start to have value in those communities as well.
These expanding circles of influence stand to make a loot token the de facto currency among community/niche groups.
We’ve seen major players like Reddit and Tapatalk start to explore the implementation of these token models — and it is only a matter of time before someone takes the plunge at scale.
These tokens are often overlooked by VCs because many of them don’t have investment models — you have to earn your stake, or buy them from someone who already has.
There are millions of active, passionate communities out there on the web who have been creating incredible niche value for over 20 years.
Loot tokens will give them the power to further align and incentivize their users, and grow their tribe beyond just the borders of their own website.