Token Model for Energy — Part 3: Token Design Thinking
This is the third part of a series of post on the “useful” or minimal token model design for the energy sector. Without the ERC20 Token specification, the plethora of ICOs would not have been possible on the Ethereum network. Since the initial rush, quite a few best practices on token design and ICO structuring emerged as well, which should be adopted and adapted to token sales in the energy domain.
I will make a short recap (Section A) of what happened in the past two months since Part 2. And then share a sensible approach I’d call “Token Design Thinking” (in Section B), i.e. focusing on the user/network needs, instead of sole engineering of the token for token holder interests, and engineering the token sale for reaching a cap (these are vanity metrics, guys — don’t do the same mistakes as big corporations with their shareholders, IPOs, etc. do). Depictions of these observations and interpretations are in the deck for The Rise of the ICO Summit in Linz.
Remember, we’re looking for the minimal Energy Token specification that hopefully will turn the world on its head like ERC20 did (finalized as EIP20 standard on September 11, after re-allocating over a Billion dollars). In Part 4 we will apply Token Design Thinking to conceive this/one minimal Energy Token.
Section A. The Recap
It was mere coincidence that while I was pondering about the minimal standard Energy Token, two remarkable teams published their whitepapers: Grid+ (spin off of the Ethereum consultancy Consensys) and PowerLedger (one of the pioneers in P2P energy via Blockchain technology). So I started the series with analyzing their approaches in Part 1 and Part 2. Part 3, I promised for August, would be about best practices — little did I know, I was about to enter yet another deep rabbit whole, thanks, Token!
In the meantime we all learnt a lot about the hard things about hard things: Tokens could be an exciting new business model, because they have a unique feature: namely, incentivizing and monetizing network effects — but they also, at the same time, are a hot mess of a new asset class with trading and building of derivatives — which are deemed securities, i.e. heavy financial artillery, and heavily regulated in many jurisdictions to protect people from losing their last shirt.
This section is going to interpret the observations during
- the ongoing token sales of Grid+ (private sale of chunks of tokens each worth minimum $50k on Slack finished, apparently landing the project a little short of $40 Mio) and PowerLedger (pre-sale finished with $17 Mio),
- general discussions since the SEC started speaking up and China and others following up with a ban on ICOs
- and conclude with a surprising emphasis put on the importance of the Token Model beyond ICO tactics
Observation 1: We did not see a carefully crafted token distribution event in order to align and balance stakeholder incentives — instead what we have witnessed until now is: “Token sale engineering”, an intricate mix between community building and web marketing in order to raise funds.
Potential token sale participants are groomed, invited to a community/ communication medium like Slack or Telegram (which hackers also conveniently use for phishing: a clear indicator that this decentralization machine has yet to develop its own decentralized coordination platforms for humans). Founders give their best to attend to any question or concern. Founders also go on a virtual and — if they can afford to travel or are invited — a real road show. This happens on Twitter, some news outlets or conferences, and mostly meetups. This is where Grid+ and PowerLedger both shined: Karl Ederer was probably the first token founder to give an interview with Bloomberg, and Jemma Green bringing an energy token to the intersection of Blockchain and VCs by delivering a convincing talk to Richard Branson among others. Energy is such a hard topic: to motivate people to reimagine the status quo, alone, is a big feat!
Observation 2: There are a handful others who prepare energy stakeholders for the coming change with humbling vision and commitment, but without a token. (So I’ll leave them out in this series, but not without a shout out: GridSingularity, LO3, Electron. SolarCoin along with a few other energy coins, which have been generated without a sale, will be discussed in the Energy Token Design in Part 4.) These projects value “smart money,” choose donors and users over investors, and they value your contribution, if they are open — which leaves GridSingularity via their work with the Energy Web Foundation and SolarCoin via the ElectriCChain Slack and projects. This observation leaves an open question: which is a stronger foundation: $200 Mio or a vested community?
Does this type of token sale engineering reach the right stakeholders with the right incentives? The employed tactics typically have their effects online, and in cryptoland where money is cheap and people are desperately looking for projects to diversify their tokens— since taking them out of cryptoland involves taxes. But mainly because they are convinced that crypto gains should be used to grow cryptoland — and not some states’ pockets — fair enough! This is why I was anxious to see whether there will be any non-crypto investments in the energy token sales:
Observation 3: PowerLedger sale with a balanced incoming distribution of ETH, BTC, and USD shows that people with fiat money are participating. Most probably stakeholders from the energy sector, early adopters of their offering, i.e. people with solar rooftops in Australia, and maybe even some newbie token investors.
Conclusion A: Importance of the Token Model beyond ICO tactics
Regulatory bodies are becoming active now because too many ICOs are outright scams and/or conducted by criminals, whose token sale engineering tactic was to get some celebrity to tweet about the ICO. Some are shutting down because they got scared by SEC and — at least returning people’s crypto back. Some nations like China and South Korea started just outright banning ICOs and shutting down exchanges as well… and many of the credible ICOs might still face death by over-funding.
Other than going after obvious scammers and criminals, there must not be state-level regulations! This tech space is so new, and the design space is so big, and the pace at which each one of us are improving so high — putting a break on this creative destruction by threatening with jail sentences, and putting inspiring people who might solve world’s untouched problems (untouched, because they don’t pay off in the old model!) with the help of the token model, or just naive entrepreneurs who chased after a “doomed” project, into one cell with criminals, is the most dangerous move of our times, because:
The exponential automation through software: specifically AI (automated decisions), Blockchain (automated business processes), Robotics & IoT (in manufacturing and pretty much any other industrial domain) will put many people out of a job. Token designer and token trader might be two of the new job categories that will be created if we can utilize this new token business model. The token model will work perfectly in-synch within the new automated industrial, business, and finance world. Additionally, tokenization of AI/Automation can become a new source of income (like a pension) specifically for those people who will be put put of a job through that AI. Let them be token holders in the new, and not just losers of the old model.
I wanted us to build AI that understands power systems, and use it to make Electricity free — that’s why I founded Freeelio around this time last year. I see clearly now, especially after the past two months, that I cannot own this, no one should. Instead we all should. That’s why the Energy Token Model has become even more important now. And it is clearly more than just a means to raise funds. More on this later! Follow Freeelio for updates.
Section B: Token Design Thinking
This section is based on my experience with design thinking and interpretations of discussions with very smart and knowledgeable legaltech people, which I met through our joint work and network at the German Blockchain Assosiation (thank you ALL!). I start with why and conclude with what token design thinking is. I will switch back and forth between general discussion and examples from the two energy tokens POWR and GRID on sale now.
Hence, this is no legal nor “investment” advice, just a common sense discourse.
Naive or criminal intent can and must be avoided by Token Design Thinking. In Parts 1 and 2 I had concluded that both POWR (+Sparkz) and GRID (+BOLT) don’t have the main characteristics of a minimal Energy Token we’re looking for: incentivizing disparate energy stakeholders to join a common goal and sustain a network around this goal, e.g. clean affordable energy. Of course that does not make these tokens scams nor bad. They are just engineered towards the token holder interest — which is not necessarily the user/network interest. This can turn out to be naive though, because:
Tokens, which do not put user interests before token holder interests, will underperform those which do. Why? One principle to keep in mind: the rule of this new game is to incentivize and then monetize network effects. Network effects are created by the increasing utility of the network for existing users when new users join. If you replace the word “utility” by “returns”,…
- Case 1: …and the network itself has no resources other than the new money from users, you get the definition of a Ponzi Scheme. (Food for thought and why I think this test is suitable: with this definition Fiat money, e.g. USD, is a Ponzi Scheme, digital money bitcoin as well; whereas Ethereum, the network, is not, because it is not “money;” yet you can “pay” with Ether — or your tokenized reputation or your tokenized anything — which brings us to the core of the coming creative destruction: read Jeremy Rifkin. Start with “The Zero Marginal Cost Society — about the meteoric rise of a global Collaborative Commons and the eclipse of capitalism.)
- Case 2: … and the network itself is built around the product of a company, you get the definition of a security. This is so business-as-usual, I would not even call it a token sale, but tokenized fundraising, tokenized crowdfunding or “simply” tokenized securites. The network returns solely depend on the utility of the product/success of the company. Since early adopters bought early into the token they act like an army of sales people, for the product, in the hope that the demand for their tokens (shares in the company/project/product) increases. But this is it. The token fulfills the function of a network marketing tool.
- Case 3:… and the network itself is sustained through the contributions of the users, then with each addition the resources of the network get cheaper to use. The token represents a positive sum game. It is important to note that in this case, without the user contribution, the network/product/project would be less valuable or even useless. Equally important is that founders need to motivate the network, i.e. why should anyone bother to contribute at all. And the answer is not: because you get a token. The answer is, because you all are building together what you believe in. You see how in such a network putting user interest before token holder interest will actually boost both. Whereas concentrating solely on token holder interest (e.g. adding “features” like voting rights, when the product/user does not benefit from them) will create a certain downward spiral.
I am well aware that Case 3 has very high standards. What network could possibly be sustained only by user contributions? Networks, we all need and use on daily bases. Networks which have not yet reached all of us, because both central planning as well as centralized capitalism failed: food, electricity, information.
When I look for a token design with GRID or POWR, I see the following leading design goal: Create demand for the token.
GRID: “Get this token, and you will receive cheap electricity until you run out” (the pre-sale with a minimum buy of $50k was geared towards “resellers” and utilities in deregulated markets — and probably also Raiden Network supporters).
POWR: “Onboard your customers to our Blockchain platform — don’t get left behind” (the users of the token are grid operators and utilities in regulated markets).
With Grid+, from the energy perspective, the whole raison d’etre of the network is to receive cheap electricity by undercutting current retail prices. There is absolutely nothing that the network participant adds to the network, which may create a positive sum game, nor is the technology they use out of the ordinary (a competing retailer with smart meters installed can have the same real time information about demand and use it to buy at cheapest wholesale prices). So the whole argument is that Grid+ will not be as cut-throat as current retailers. Ok, but if Grid+ became a real threat, than those cut-throat retailers would start a price fight to the death. So, there is not something in the network that creates a moat around their token model — except the founders talent in creating a community around it, which today’s retailers really cannot compete with and may never get. But that requires empathy with the energy users — I have a feeling that Grid+ team has more empathy with the Raiden network ;) And majority of their token holders may as well, which again would make their design quite thoughtful. Beware: this is my current interpretation, which may change when I learn more.
PowerLedger on the other hand is pulling off a grand stunt: Effectively liberalizing the regulated energy network (via P2P energy sharing/trading) from within their vertically integrated, regulated Australian energy market. So, the goal could be distilled as: liberalize energy networks. Of course then you need to incentivize the grid operators and national utilities. Which only happens through FOMO: “You’re going to get left behind, you have to transform, and Blockchain is your chance because it requires you to digitalize” or “Your customers are choosing to leave the grid all together by means of solar+storage, the grid fees for your remaining customers will get higher, they will start fighting you as well, the grid regulators will start demanding answers… or you hop on the fun train now before it’s too late”. It’s smart, and it is seemingly the only way to make regulated public companies progress. (Imagine if regulated telephone companies back then were ordered to roll out smart phones and apps… Yeah, that is what energy customers in regulated energy markets are facing when grid operators are asked to roll out smart meters and variable tariffs ¯\_(ツ)_/¯) So PowerLedger is doing everyone a favor! They are also making network participants with energy resources to token holders through a loyalty program, which both incentivizes and monetizes the network effect.
However, the token is geared towards regulated stakeholders. In liberalized markets, the token of the sale, POWR, is degraded to an accounting token (like Sparkz is now. Beware: this is my current interpretation, which may change when I learn more). This would diminish the inherent value of POWR it had as it is issued now and would have an effect on the trading price at the very least — if markets were informed…
Which is the point I have against state-level regulation: Instead of control, education and information dissemination is more effective in creating a real and safe market around tokens. Also since no one yet knows what is to be regulated here, some may forbid token economy entirely. This would be a dire mistake. Hopefully, other nations will come to the conclusion that a sensible approach will be regulatory sandboxing and starting with educating the regulators first along with self-regulation of the token economy actors.
Conclusion B: The 3 Steps in Token Design Thinking might keep you out of trouble
1. Start with “Why?” What is the purpose of the network(s)?
Why does the network need to exist? No, not the “product” — since we’re not interested in case 2 above (tokenized crowdfunding). No, not the “company” — since we’re not interested in case 2 above (tokenized securities, investment contracts where you place your money and belief on the efforts of others, the founders). And certainly not because you can make a quick buck and default (case 1 above). Why will people want to be part of this network, what are you all trying to achieve?
2. Who are the stakeholders and what are their incentive profiles?
This is the hard part. Where you pour Cryptoeconomics, a cocktail of mechanism design, game theory, deployed in distributed systems and secured cryptographically, into your token smart contract, and you get programmable incentives. Programmable incentives, that make these stakeholders work for the common good of the network, it’s raison d’etre you uncovered under 1.
3. How do you distribute the token effectively?
This is what ICO, or token distribution events, are all about. If you’ve been through with step 2, this step should be easy. You don’t start with this step unless you have a criminal or naive intent. But as fast as this community is we started with the last step first. Take a deep breath, this is a marathon. Token economy is just emerging. Your token distribution will determine the culture of your network. And as discussed at length, they are being engineered to reach vanity metrics. Two teachings of the lean startup movement of the past decade have been: (a) the moment you take other people’s money their business model becomes your business model (b) be ramen profitable. In the context of building networks, instead of companies or “products”, these translate into: do not take speculators’ money (no traditional VCs, no crypto daytraders) and only take what you need to make the network fly:
- Sufficient pre-sale conditions for tech-sophisticated investors and contributors
- If needed still: public sale discount for your crowdfunders and/or alpha users, i.e. early adopters
- Use a continuous token model instead of a public sale for the rest, i.e. tokens are minted for early participation and contributions (beta-testing users) in the network.
Through this you are avoiding what makes tokens, a 100%, in any jurisdiction, become securities: namely being issued and traded before they can be used in a functional network.
You know, after the party is over, and people start sobering up, users loudly will ask “hey what is 15% of $200 Mio? …is that worth this crappy minimally viable DApp we have to participate in the network after 6 months?” Now, if you as a founder thought that 15% also covered your worth, that you should get paid for that in USD and not in your own network’s token — then there is a huge misalignment of incentives and people should be alarmed. Don’t compromise your integrity, because easy money was too tempting.
Take good care of your network participants, do not solely focus on your token sale participants, select them carefully for your network’s sake (KYC is a side effect in this frame of reference), — and the rest: your carefully crafted cryptoeconomic formula will take care of. You have one, don’t you?
Stick around my twitter stream if you want to see Token Design Thinking in Action in Part 4, Encore, and thought snippets in tweets that lead up to it. I will not promise anything, but you might see bits and pieces around December.
