The <Financially> Unforkable token

If you’re at all involved in the blockchain space you’ve probably though something along the lines of ‘why not just fork it?’ either in the face of absurd token prices or a cool application nailed to a poorly designed cryptoeconomic incentive system.

last week I sat down and thought about this problem, because it seemed to me that it was possible to model and then actually solve the problem of forking.

The results are interesting, the process of preventing forks for financial reasons is effectively the same as preventing forks for social reasons.

And even better the cryptoeconomic means to force investors to agree on a monetary value set exists.

This is a short form version of this post which goes into more detail.

There are store of value cryptocurrencies and utility tokens, financially motivated forks and driven by values dissonance between investors about what type of cryptoeconomic instrument they are investing in.

A utility token has users, these users drive revenue into the system, this revenue is distributed back to token holders either through buybacks, burning, or some method of depreciation for existing holders. A utility token has a price to earnings ratio, like a company but on the scale of the price you pay for each token compared to the earnings from the system that token entitles you to.

store of value coins on the other hand are like collectibles, they have value because people think they have value. They don’t focus on fostering a userbase that will transfer wealth to existing token holders, in fact they usually hand out wealth in the most distributed way possible in order to foster interest.

For example Beanie Baby token is a system that registers valuable Beanie Babies to prove their authenticity and has millions of users, the revenue from these users is paid out proportionally to token holders.

Alice sees Beanie Baby token as a good business and wants to buy some in order to make a return on her investment through the token’s revenues.

Bob has decided to collect Beanie Baby tokens because he also collects Beanie Babies. He doesn’t see his return as user revenue, instead he expects to be able to sell the token to someone for more money later.

perhaps due to the nature of Beanie Babies there are a lot more ‘Bob’s buying in than ‘Alice’s. Since Bob buys with no regard for revenue the price to earnings of Beanie Baby token is soon abysmal.

But Alice still thinks it’s a great business idea still wants access to the user revenue of the token. It’s just not practical to access that value by buying the token at it’s current inflated price.

So what does Alice do? She forks the token and pays users to switch.

But what can we do to solve this problem? Can we force investors to agree on a set of values before buying? The answer to that is yes.

A token with a bonding curve is a token that buys and sells itself. The bonding curve is a function of the number of issued tokens and determines the price, denominated in the reserve currency (most commonly Ethereum) that the token may be bought from and sold back to the on chain contract for.

Using this curve we can enforce rules for a maximum and minimum value the token can possibly have, if the buy and sell values on the contract are the same the contract for all intents and purposes is the market for the token.

If we set the bonding curve to.

Token price = total yearly network revenues / total tokens in circulation

Then the token is always great to buy! Any given new token will always print it’s own purchase value in network dividends every year. The problem is that it’s such a good deal that tokens in circulation will almost certainly outpace total network revenues, resulting in inflation and a decreasing token price despite tokens selling like hotcakes.

It will never make sense to fork this token because the price is held artificially low by the bonding curve, this particular bonding curve is so low that the original investors won’t actually make any money at all.

In the longform version of this post I explore this in more detail. In general the goal is to set a bonding curve aggressive enough to make money but conservative enough that Alice can never quite justify the capital to fork.

Markets help solve complex problems in distributed ways and taking the full burden upon yourself to set the price of your token for it’s entire lifecycle is complicated and fraught with peril.

But if you are truly dedicated to solving the problem of forking, at least financially motivated, it can be done.