Token Curated Registries: An Experiment in Game Theory, Part 2

If you haven’t read Part 1 of this series, click here. Part 1 reviews the importance of game theory in cryptocurrencies and how the TCR experiment has big implications for the future of self-sustaining networks.

The Basics: Applying to a TCR

Before we dive into the underlying incentive structure of Token Curated Registries, I will first describe how people, businesses or things are added to a TCR. Throughout this post, we will use the hypothetical example of a coffee shop called ETH Moon Cafe that is interested in being added to a fictitious TCR called “Best Coffee Shops in San Francisco.”

Note: When I describe the TCR application process and the underlying incentive structure, I meld together the ideas of several leading projects and proposals in order to make this a friendlier read. For details on the variations of leading projects and proposals, please check out the resource section at the end of this article.

The “Best Coffee Shops in San Francisco” TCR is managed by token holders whose token’s exclusive function (usually) is to act as the gatekeepers for that specific TCR. Token holders decide what coffee shops get added or removed from that list through an application process and by voting.

ETH Moon Cafe applies to the TCR by submitting a predetermined amount of ETH (let’s say 10 ETH, it is a very desired list) to a smart contract as a deposit. Token holders are notified of the application and have an opportunity to challenge ETH Moon Cafe’s application if they do not believe it is one of the best coffee shops in San Francisco. If no challenges are issued, ETH Moon is automatically included in the list after a predetermined amount of time.

If a token holder does choose to challenge ETH Moon’s application, they do so by matching the applicant’s deposit by submitting 10 ETH to the smart contract. The challenge is settled through a vote by TCR token holders.

If the token holders vote in favor of the challenger:

  • the challenger receives a predetermined portion of ETH Moon’s deposit (let’s say 60%),
  • the token holders who voted in favor of the challenger receive the rest (40%),
  • token holders who voted in favor of ETH Moon lose a percentage of their tokens and
  • ETH Moon Cafe is not added to the list.

If token holders vote in favor of ETH Moon instead:

  • the challenger loses their deposit,
  • a predetermined percentage of the challenger’s deposit is given to ETH Moon (60%),
  • the token holders who voted for ETH Moon receive the rest,
  • those who voted in the minority lose a percentage of their tokens
  • ETH Moon Cafe is added to the “Best Coffee Shops in San Francisco” TCR (list)

TCR Incentives: The Game Theory at Work

In this section, I will describe why token holders are motivated to curate high quality lists. I have one caveat for you; most of these incentives are untested assumptions. Very few TCRs are live at the moment. We will have to wait until live TCRs stand the test of time to see if this incentive structure is enough to create better lists than what we can already find on the internet.

Applicant Incentives

ETH Moon Cafe is motivated to be included in this list because consumers trust it and act on its recommendations. Therefore, getting placed on the list leads to higher profits for any given cafe. Cafes that have a low chance of being accepted are discouraged from applying because they are likely to lose their deposit. This benefits token holders because it prevents them from getting spammed with bad applications.

Token Holders Incentives

Token holders are incentivized to maintain a high quality list because doing so will lead to an increase in the value of their tokens. A high quality list will draw the attention of consumers (in this example, coffee drinkers) which will motivate cafes to apply to the TCR. When more cafes purchase tokens to pay for the deposit, this increases the value of the token.

A high quality list will also attract the attention of coffee drinkers interested in being curators (voting token holders). In order to be a curator, you need to purchase tokens. This will also drive up the value of the token.

Challengers

Challengers are incentivized to challenge low quality applicants because these applicants will degrade the quality of their list. Low quality lists will attract less consumers and therefore cafes and companies will be less inclined to apply. Token holders are also motivated to challenge bad applicants because they have a chance to win a portion of the applicant’s deposit if they are successful.

Another important incentive is requiring challengers to match the applicants deposit when they initiate a challenge. This encourages challengers to do their due diligence before issuing a challenge.

Token Holder Voting

Apart from increasing the value of their token, token holders are also incentivized to vote because they have a chance to increase the amount of tokens they hold if they vote with the majority.

Token holders are purposefully not created equal. Token voting is weighted, meaning that if I have two tokens and you have one, my vote is worth twice as much as your vote. The underlying theory here is that those with more tokens will pay closer attention to the curation of the list than those with less tokens because they have more at stake.

Token holders are purposefully disincentivized from voting incorrectly for two reasons:

  1. Voting in the minority will lead voters to lose a portion of their tokens. This motivates people to pay attention and do their due diligence before casting a vote.
  2. Just as important, losing a portion of your tokens also prevents token holders from gaming the system. If a token holder is not penalized for voting incorrectly, a token holder will be able to profit by casting half of their votes in favor of the challenger and half of their tokens in favor of the applicant.

Creating a Floating Ecosystem

Token exists independent to ETH

Very often people ask, “Why do you need a token for this app? Why can’t you just use ETH?” In this case, a token is very important because it allows its price to float independently of ETH. When token holders are doing a bad job at maintaining the quality of their TCR, token holders will feel it in their pockets. This feedback mechanism encourages token holders to curate quality lists.

Modifying Parameters

For an ecosystem to be self-sustaining, there needs to be flexibility in its design. Token holders can also vote to modify parameters that include but are not limited to:

  • the size of the deposit required for applicants to apply,
  • the window of time in which a token holder can challenge an applicant, and
  • the window of time in which a token holder can cast a vote.

The following is an example of how flexible parameters can ensure a healthy ecosystem. By allowing token holders to modify the deposit required by applicants, it allows token holders to benefit monetarily from the successful curation of their TCR. It also allows token holders to manage the volume of applications to a manageable level.

Like what you read? Follow me on Twitter @jmartinez_43

Want to continue reading? Here is part 3 of 3. Part 3 discusses the potential pitfalls of the TCR experiment as well as creative ways people are trying to overcome these pitfalls.

Citations/Resources/Learn More