Lean Token Design
A token framework for communities with minimum viable utility
This was originally published in Jamm Session, a newsletter covering web3 social networks and crypto-consumer applications
The explosion of long-tail of tokens might upend the crypto narratives as we know it. Markets are manufacturing headlines faster than our mental models.
Bitcoin is the purest form of decentralization (and always will be!) But there are new communities blossoming on Ethereum, appealing to the same ethos as Bitcoiners believe. Communities that don’t have a premine, didn’t take any venture capital, and are looking to build sustainable communities with a real product.
Currently, many projects like Compound are following the “progressive decentralization” playbook. While this may be the best approach for infrastructure and crypto primitives, creators and communities are searching for alternatives that can help gain early supporters while aligning long-term incentives without taking on investment.
Lean Token Design
Unlike progressive decentralization, The Lean Token Design framework suggests that tokens shouldn’t have any complexity, but have some minimal viable utility to rally an early community. These tokens would be introduced early on in a community’s lifecycle along with an initial use case for the token to drive early demand. The framework also introduces a deliberately nebulous relationship amongst the community. As the community grows, the economics, contributions, and values become more defined, leading for the token to evolve and capture those contributions.
Minimum Viable Utility
$YFI (Yearn.Finance) is one example of a network that started off with minimum utility and grew alongside its community. What originally started out as a way to capture opportunities in yield farming, turned into a way to gain access to new products being launched in DeFi. The $YFI community was able to vote on new features being added to the network as more products were launched on Ethereum.
Aside from $YFI, another interesting experiment was the $YAM rebasing model that focused on treasury allocation, something many projects following the progressive decentralization framework have struggled with in the past. While many were quick to dismiss the project as a silly game (myself included), the model in itself presents a way to engage a community built upon existing communities.
$YAM follows the “lean token design” methodology using rebasing as the core feature. The token distribution is unique in which it leverages existing networks to evangelize for the community. The caveat is that the rebasing model detracts speculators from evangelizing the network since the network tries to maintain its peg. This model can build early supporters from existing networks while focusing on building long-term sustainable treasuries.
However, the lean token design framework works best with creators and communities. Instead of driving demand for a token through smart contracts, communities can leverage the _balanceOf function of a token to drive demand for exclusivity. One example of this context is exclusive telegram groups.
Finding the right templates
Using Collab.Land, users can map their Ethereum wallet addresses to their Telegram/discord handles. The bot will authenticate that the user holds the minimum balance of the token to enter the channel. If the user transfers or sells the token from their wallet, they’ll be kicked out of the channel. This spawns a variety of use cases such as investment groups, knowledge sharing, and superfan groups.
Another template is tokenized access to a URL: users can now only access products if they have the token in their wallet. Given how much hype is needed to generate buzz around products today, users can now buy access to the product similar to how early software application licenses were used.
$WHALE is one existing use case of a social token that uses the lean token design framework. What originally started out as a basket that was backed by NFTs, expanded into several different ways to spend and use the currency in marketplaces like OpenSea and virtual worlds like CryptoVoxels.
Projects can build their products alongside their community using the lean token design framework using these templates. Over time, the community and its contributors can bake in new incentives for the token holders. Early contributors will feel more willing to find ways to drive demand for the token, outside of its imagined use case because of the opportunistic surface area. For example, $WHALE is a social token that started out as a token backed by a basket of NFTs. Over time, this became a sought out currency within the NFT community in marketplaces like OpenSea and virtual worlds like Cryptovoxels.
This is a new design space for tokens: one that is more social-oriented and flexible. As the community grows and changes, the design for the token is able to change as well. This is similar to many early internet communities or fan pages. Once communities figure out which of these templates work best, more communities will shift towards the minimal utility model because it has low friction with its growing network effects.
Identity plays a larger role in lean token design
These products don’t require new logins: simply connect your wallet to all the different contexts. This will be the preferred method of authentication for consumers in the future, one in which they don’t need to rely on forgotten passwords or links. No more managing multiple exclusive access groups on Slack, or managing multiple logins for a single community. Your keys become your identity in a platform-agnostic way.
With a fairer token distribution with more community members involved, third-party developers can build in demand, creating an expanding use of the token. With expanding use cases, individuals would be more willing to reveal their holdings on-chain to prove they’ve bootstrapped early communities. Pseudonyms will become more common with early communities as it becomes easy to spin up a new token without a new entity. We see this already happening in digital art and the NFT community.
The Lean Token Model provides accountability
One of the problems with products without a token is that there’s no accountability on the founding team. Projects without a token can go months without an update and are building in secret.
Unlike progressive centralization, the lean token design creates a dynamic where the community is beholden to create value. No longer is the dynamic between a team and the token holders. The token holders are equal in the way they are seeking to create value.
The Capital Problem
One of the reasons why the progressive decentralization model works well is because it gives teams the capital they need to get to a token distribution event and exit to the community and achieve decentralization.
The lean token framework suggests that it’s not necessary to raise capital, but rather build an early group of believers who want to drive demand for the token. While this framework starts out at the opposite side of the spectrum (half-baked, wide distribution) it ultimately tries to reach a similar end state as the progressive decentralization model, one in which ownership is controlled by token holders.
Opportunistic Token Design allows for creativity and innovation on all levels
It’s worth noting that the lean token framework has a fair token distribution, but it can struggle to find early capital to reward early contributors. With rising audit and gas costs, projects need initial capital to get off the ground. Therefore the lean token design framework may work best for lightweight communities or membership clubs who are trying to build a product together. The token simply supercharges the building process, aligning incentives between the members.
An opportunistic token design with a large design surface can create multiple ways to drive demand for the token, outside of its initially imagined use case. By having minimum utility, communities can be flexible and adapt through small governance changes while trying to find token-market fit.