Cryptoeconomics at Propy and How 100 Million PRO Will Be Distributed

Our Propy white paper was released on July 17, 2017. The extension of the white paper will be a token economy description. It will take some time and testing to develop it, and thus we are sharing some of the ideas in this blog post. Currently we have a Transaction Tool that requires PRO tokens and an incentive program for new users. For the Registry that will require PRO tokens, we are still working with governmental recording offices to prove certain token economy concepts. We are running token economy simulations to provide sustainable economy. It’s an iterative process; therefore, some of the aforementioned statements may change with time, and we welcome peers’ feedback.

Below we will answer the following questions:

1. What is cryptoeconomics?
2. How will we distribute 100 million PRO tokens?
3. How will we attract users?
4. How will title deeds and ownership certificates be protected by blockchain?
5. How will we incentivize individual users, title miners, and governments to use Propy?
6. How will collected fees be distributed?

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We all learned the basic principles of economics in school — everyone remembers the supply and demand curve. But can we apply the same laws to cryptocurrency?

Cryptoeconomics is a new economic model that focuses on how to use economic incentives and cryptography to design decentralized applications.

To understand it, let’s go back to one of the first examples of decentralized technology: torrents. Torrent sites have always used decentralized technology to share files (like movies). They relied on people downloading the file and then “seeding” (sharing) it with others. The technology only works if people share, so you were expected to seed the file if you downloaded it. But there’s never been an economic incentive to seed. If you already have a movie downloaded, why should you continue to share it with others? You’ve already gotten what you came for.

This all changed in 2008, when Satoshi Nakamoto published his whitepaper on Bitcoin and blockchain. For the first time, it described a way to give people an economic incentive to “follow the rules” — and this was game-changing for decentralized technology. Miners are incentivized to support Bitcoin because, if they produce new blocks, they’re rewarded with Bitcoin. Without that reward, why would they dedicate significant time and energy to supporting the technology? But there’s another layer. You’re only incentivized to mine a coin if this coin has value — and it all comes from something called a “network effect.”

Network effects happen when a service gains a new user, since their presence validates and increases the utility of the service for existing users. For example, if only one person held Bitcoin, it would be worth nothing. If thousands of people hold it and transact between each other, it suddenly has the potential for value. Token adoption increases as demand for a service increases — since people have to utilize tokens to complete their desired transaction. As the value of the service is being recognized, new token holders are attracted — driving momentum from the “network effect.”

How will we distribute 100 million PRO tokens?

As per our initial whitepaper, the tokens were distributed as follows (and here are some further clarifications on the usage plan):

1. 35-million Token Sale Pool: 16 million sold, 19 million unsold. More information on unsold tokens will be announced after the lock-up period is over on September 15, 2018. There are no plans to conduct another token sale this year or next year.

2. 35-million Network Growth Pool: No more than 5 million tokens per year will be distributed as rewards for users and title miners (this distribution may change when 1 million Token Circulation in the product is achieved).

3. 15 million Donation Tokens have a one year lock-up period and will be distributed to independent non-profit foundations for management and several immediate initiatives, with a goal of 3 million tokens distribution limit per year.

4. 15 million Development Tokens are locked in the company’s wallet.

How will Propy attract users?

When PRO tokens were created, 35% were reserved for the Network Growth Pool. This pool will receive tokens from collected Registry Fees (these are described below). The pool operates with multiple digital wallets for security reasons, and the addresses of the wallets are publicly available for audits. Propy will use the initial 35 million tokens to attract a critical number of Users and Properties (5 million tokens a year). The network growth pool will be divided into three groups:

- Incentivizing individual users to use Propy (for instance, to sign up and share listings)

- Incentivizing title miners (or uploaders) to upload titles to the Propy system

- Incentivizing government adoption — integration with centralized national land registries (to allow for validation of property listed on Propy’s platform)

Incentivizing individual users to use Propy

We’ve established that cryptoeconomics relies on incentivizing individual users. Therefore, Propy users would receive rewards in PROs when undertaking certain actions on the platform. For example, when a broker, homebuyer, or home seller joins the platform, they would receive rewards for registering, checking in at the listed property, sharing a listing on social media, uploading title history into the system, etc. The reward system intends to encourage the adoption of the Propy platform worldwide and increase transaction volume.

Incentivizing title miners

Users aren’t the only ones who need incentives. We will provide both a protocol and tools for title agents, lawyers, and notaries to “mine” title history — which means they’ll digitize public title records and and upload them to Propy’s registry. They’ll also help Propy integrate with State Title Registries, where records aren’t public. For the first tests, we plan to reward miners with PRO tokens per each title record.

To start, we plan to incentivize miners with the following reward in PRO tokens:

• uploading a title to the Blockchain Title Registry system: equivalent of $1 per title

Compensation for the title onboarding comes from the network growth pool (instead of computational power to mine, we use the tokens and time and skills of uploaders). The mining process will use the Propy title protocol for onboarding the data in the required unified standard.

Incentivizing government adoption

The network growth pool will also be used to incentivize governments and other related institutional actors to use the platform. This will accelerate the realization of Propy’s vision — the acceptance of the Blockchain Title Registry as a decentralized ledger for real estate sales and ownership transfers. Meanwhile, the Propy Transaction Platform does not depend on Registry adoption and does not need any legislation change.

Propy also plans to incentivize integrators in different countries to create automatic interfaces (API) for the Blockchain Title Registry and Transaction Platform to integrate with.

Initially, the reward rate will be calculated based on the number of annual transactions made in a particular title registry as per the last calendar year. As a starting point, Propy will provide rewards at the rate of 0.15 PRO tokens per transaction. If a country’s national registry processes 1 million transactions annually, then integration with this registry will provide 150k PRO tokens for the integrators. Then, we will dedicate an annual or quarter PRO pool for the first government API integrations, with a tendency to decrease the rewards with an increase in integrations. Integrators could be legal entities, software companies, or consultancy firms. They would do legal research, provide technical support, localization, and help with communication with local governmental entities. API integration will allow Propy to verify ownership real-time and issue reliable ownership certificates on blockchain as the first step in getting closer to P2P transactions.

How title deeds and ownership certificates will be protected by blockchain

To incentivize citizens to move their ownership records to the Propy decentralized registry, Propy will initiate a special program that allows owners to have a Title Certificate that is protected by a blockchain address with a QR code. To start the process, users provide Propy with a existing title and record it in the Propy Blockchain Title Registry. Then, Propy verifies the title with local authorities (possibly via API). If the title is valid, the ownership is recorded and the citizen receives the Title Certificate.

Once Propy has a critical number of users and properties, the system should evolve to work in a decentralized way — in other words, to start to achieve the network effect. To this end, there should be a balance between Propy’s incentives and its registry fees. Below, the Registry Fee and Transaction Fee are explained, followed by an explanation of how collected fees will be distributed to incentivize new users. As per the white paper, smart contract executions require two kinds of fees: Title and Deed fees, which are needed for Registry and Transaction Platform operation.

Registry fee

According to the white paper, the Registry fee (or the Title fee) is needed for the smart contract running Blockchain Title Registry. We plan a flat fee to be between $1-$10, plus the cost of smart contracts execution charged by the blockchain network. We plan delegated community members (as registry representatives) to determine the fee in the future. In the short term, the team will determine the fees.

Transaction fee

A transaction fee unlocks the following actions, which comprise the automated purchase of a property: property payment, purchase agreement signing, title report and closing documents, uploading, and hashing. This culminates in a property ownership transfer. Transaction Platform smart contracts can be executed only if the Deed contract fee and the Title contract fee are both received.

The pricing of the Transaction Fee should depend on the property price and should not depend on the PRO token value at exchanges. (This will result in too expensive fees if PRO is traded at a high price, or too low fees resulting in inefficient incentive programs.

The team is working on a pricing mechanism where we are considering:

A.) A formula with a stable coin (such as Basecoin) and property price factor

or

B.) A normalizing formula to dynamically calculate the fee for every transaction. The formula will depend on the following factors:

1. The property price — scales transaction fee to the economy of the country of the transaction property.

2. Transactions volume — registry maintenance and demand component.

3. Token supply/demand curves intersection — normalizes the fee to prevent large fluctuations in value.

4. “PGas” — the cost of smart contracts execution charged by the blockchain network.

Or

C.) Predefined flat fees. Before the above suggested a) and b) mechanisms are developed and simulations are conducted, the fee will be flat. It will depend on the price of a property or a stake of a property as follows:

We expect the average fee per transaction to be between 100 to 400PRO + PGas in the nearest future in the targeted markets. The long-term goal is to reduce the cost of the fees to 10–100PRO, when a wide adoption with hundreds of millions annual transactions is in place.

How collected fees will be distributed

Two-thirds of all collected fees will be placed in a separate wallet for the Network Growth Pool and will be dedicated to attracting new users (in an automatic and transparently auditable way). Here is the formula to determine the appropriate PRO reward per new user:

Let x be the number of transactions (deals) executed via the Propy Transaction Platform by new registered users;

let y be the number of new registered users, i.e. prospective buyers;

Let CR be the conversion rate, i.e. the number of transactions per registered user (in real estate marketplaces and brokerages, the CR varies between 0.2% and 5%, depending on the market)

Then x=y∙CR

Let b be the fee per transaction in PRO;

Then the amount of collected fees into the Network Growth pool will be:

NG=x∙b∙2/3

Let k be the annual growth rate of yearly transactions, and also the growth rate of registered users, since the two numbers are proportional to each other. In other words, we assume that the user growth rate is not stable, but increases at a rate of k each year.

Then a, the reward in PRO per new user required to achieve this growth rate for the next year, which we can also call CAC (customer acquisition cost), should be:

If we assume that the conversion rate (CR) will be 1% and the targeted annual growth k will be 15%, then the reward per new user should be:

The average transaction fee (b) is predicted to be 200 PRO; thus, the average cost per new user is:

a=1.16PRO

This means that under the initial assumptions, if Propy rewards each new user with 1.16 PRO, there will be 15% growth in the user base, which will result in 15% more transactions, which will attract 15% more users next year through the Network Growth Pool incentives, and so on in a classic case of exponential growth.

The mechanism described above is the core driver of the self-sustaining decentralized Blockchain Title Registry.

Here is an example of a scenario under the above mechanism:

If we project several years from now, with 100,000 purchases executed annually at an average price of $1 million per house, then we should have 500,000 properties registered for sale (5 is the average ratio of listed over sold properties in other real estate marketplaces) and 10 million users registered on Propy (if we assume a 1% conversion rate). The turnover of ownership transfer fees then will be 20 million PRO per year; the turnover of registration fees will be 2 million PRO per year. Two-thirds of the collected 22 million PRO will be distributed to the network growth pool. The collected 14.6 million tokens will be used to attract new 12.7 million registered users and 127,000 new purchases.

We will implement the rewards protocol logic on the server-side, where it can run independently, driven only by the rewards rules. The protocol itself is not a decentralized system on the blockchain yet, but it gives a lot of flexibility to test it out before deploying it on the blockchain. Tokens will be collected and distributed — as per the reward and mining protocols — transparently on blockchain. The protocol will use one of the wallets of the network growth pool, which will contain a limited amount of tokens for security measures.

Conclusion

This Token Economy model aligns the plans for needed protocols and incentives so each new user or title miner will justify the utility of Propy services and generate Network Growth to attract more people to the platform and transact. We plan to further enhance the network rules, ultimately aiming to generate sustainable cryptoeconomic development.