At ArtPro, we know that the product we’re building will create actual value for its users and the art industry as a whole. We also recognise, however, that tokenizing the platform does not automatically make the APT token a good investment.
To make this project as successful as possible, we knew we had to create a token that captures the value created by our product. From the very start, we recognised the importance of developing a strong token economic model to ensure that a) the APT token captures as much of the value created by the platform as possible and b) our incentives as a team are aligned with those of investors.
In this post, we’ll take you through our rationale behind the various token model design choices we made. We’ll start by providing a short introduction to token economics before outlining the model we’ve selected for the APT token. We appreciate there’s a lot to take in here, but if you get lost along the way, jump to the conclusion for a tl;dr on the APT token.
Are you ready? Then without further ado, let’s dive right in…
What is a token economic model and why does it matter?
A token is a crypto-economic unit of account that represents or interacts with an underlying value-generating asset. A token’s value is made up of its intrinsic or utility value, the percentage of the token’s value that derives from demand for the underlying asset, and its speculative value i.e. the percentage of the token’s value that derives from demand due to an expectation of future price increases. While speculation is nice, it is hard to control/predict and puts projects at the mercy of short-term-oriented investors, like our friend below:
The utility is what ensures that a token’s price grows alongside adoption/success of the underlying product. As we are at a comparatively early stage in the evolution of crypto assets, price variations can largely be attributed to speculative value for now. As this asset class matures, however, it can reasonably be assumed that utility will overtake speculation as to the primary pricing mechanism. Furthermore, even now, crypto assets that offer little by way of utility or intrinsic value will wither far quicker than those with mechanisms for capturing value and that have a genuine use case.
A token’s intrinsic or utility value is dependent on two factors: the value created by the underlying asset and the percentage of this value which is captured by the token. We’ll now address both of these.
Value creation and value capture mechanisms
The value created by the ArtPro platform is in allowing for verified buyers and sellers to come together and trade artworks with verified provenance records in a decentralized manner with much lower fees than current alternatives.
APT is a medium of exchange token which will be used to access a variety of services on the platform including payment for artwork, artwork provenance verification, artwork storage and promotion. While Fiat will also be usable for the purchase of artworks, users will be encouraged to use APT through a 50% fee reduction for transactions made in APT.
This in itself provides APT with significant utility and is similar to many other token models in which the token is simply a medium of exchange allowing access to platform services. We swiftly realised, however, that if these were its only use cases, the token would also suffer from what has become known as the “velocity” problem, a common flaw of the medium of exchange tokens.
Under this system, while buyers of artwork would be incentivised to acquire APT tokens in order to pay for the artwork they seek to buy (thus increasing demand for APT), there would be no incentive for sellers to hold onto these tokens and incur price risk vs fiat which means they would immediately sell these tokens onto the market (thus increasing supply of APT by the same amount as the initial increase in demand). This would result in high velocity for the token, as the increase in demand driven by buyers acquiring tokens to pay for art would always eventually be matched by a corresponding increase in supply.
Thus, the net effect of this token economic model on APT’s price would only be positive if there was a consistent stream of buyers purchasing artwork through the platform, and it would only be significantly positive if there were a growing number of buyers purchasing artwork through the platform.
The most common solutions to this velocity problem are
- Design token models that include some sink within them (i.e. places where tokens disappear from the system), such as burning a portion of transaction fees. This ensures a part of a total increase in demand for the platform is captured by the token’s price in the form of reduced supply.
- Reduce token velocity by encouraging people to hold tokens. This can be done through mechanisms like staking or other clever gamification that encourages people to hold tokens.
At ArtPro, we decided to implement both of these. We will burn 50% of the fees collected on all platform services, including buying and selling art, storage, authentication, verification, trading on art investment platform and promotion. This effectively transfers some of the value captured by the platform from ourselves to token-holders, allowing APT to capture more of the value created by the platform. This also ensures more APT is burned as velocity increases. The deflationary force created will encourage people to hold tokens and thus reduce the token velocity.
We also decided to implement staking mechanisms. Users who lock APT tokens for a predefined period will be entitled to one of three membership tiers known as Silver (1,000 APT), Gold (5,000 APT) and Platinum (10,000 APT). Tokens that are locked for at least three months will be entitled to a membership tier commensurate to the stake for the duration of that period. Privileges include enhanced reputation, a membership profile badge and fee reduction on all services. Artists who elect for ArtPro membership will have their work featured prominently on the site, and all members will be entitled to various perks including an exclusive invitation to the opening of all ArtPro exhibitions and events. Encouraging users to stake tokens in this manner will reduce velocity and constrain circulating supply, leading to increased token value.
Cumulatively, the fee burn would have the effect of ensuring that a more significant percentage of the value created by the platform (in the form of fees charged) is captured by the token through reduced supply, while the encouragement of staking would constrain circulating supply and reduce token velocity.
In terms of incentive alignment, it was very important for us to ensure all token holders have aligned incentives with the goal of maximizing the token’s long-term value and that we conducted our token sale in a way that was fair for all stakeholders. This is why we decided to only allocate 20% of the total token supply to team and advisors and keep just 17% as a company reserve. In addition, we’ve implemented Silicon Valley-standard vesting schedules for team and advisors. Team members tokens will be frozen for a year and then released gradually over two years. Advisor tokens will be frozen for three months and later released gradually over six months.
This ensures that tokens will not be dumped on exchanges post-ICO and that team members are incentivized to maximise the long-term value of the token since they’ll only receive their tokens in three years. It also ensures that insiders don’t control a large proportion of total token supply and are able to exert undue pressure on the price.
It was also extremely important to us to be transparent about our project and plans to use the funds raised. Our whitepaper includes two separate detailed “Use of Revenue” tables, one in the case we only hit our soft cap and one in case we reach our hard cap. In addition to regular updates on the platform adoption metrics such as DAU, a number of transactions and number of tokens burned, we will be publishing yearly accounts audited by a third party in order to show investors our progress, and whether or not we’re sticking to the plans, we committed to.
We have no equity investors attached to the project and thus no conflicts of interest in terms of fiduciary duties to shareholders. Our only responsibilities are to our token-holders, and our aim is simple: to make ArtPro a success from the perspective of all participants. Because of the token economic model we’ve designed, we’re confident that as ArtPro grows, so will the appeal of the APT token.
We hope this blog provides reassurance that we’ve thought genuinely about how to design a token model that captures the most value for token-holders and aligns incentives between all ArtPro stakeholders. Our aim now is to work closely with our community of artists, art-lovers and investors to make ArtPro the world’s fairest and greatest online art marketplace. The APT token and the mechanisms programmed into it will play a pivotal role in helping turn that goal into reality.
Crypto tokens, by their nature, are volatile and subject to market pressure, including that incurred by the assets they’re tied to such as BTC and ETH. We know there will be ups and downs along the way, but we’re confident that in APT we have designed a token whose adoption and the utility will grow as the ArtPro platform matures.
For more information visit https://art-pro.io/