The Rise of Microeconomy Ecosystems
Modelling Medium-of-Exchange Token Microeconomies as Ecosystems
Traditional business models usually involve one or more intermediaries between the consumer and the provider of goods or services. These companies (e.g. Uber, AirBnB, Expedia) take a portion of whatever the consumer pays, reducing the provider’s overall revenue.
What do these businesses offer that warrants them taking a cut? They connect consumers with providers. Consumers benefit through an easier buying experience (e.g. ordering an Uber from their phone, rather than finding a taxi driver). Providers benefit through being more easily connected with consumers (e.g. a driver being connected with someone who wants a ride). Intermediaries justifiably take a portion of this to cover their overheads, and then to make a profit.
But what if we could connect consumers and providers without a middleman taking a cut?
In this scenario, consumers pay less, and providers receive more revenue. Using our ride-sharing example, under this model, the consumer gets a cheaper ride, and the driver gets to keep all of what the consumer pays (or most; the app owner may still choose to charge a small fee and risk more competitive alternatives emerging).
But how does it work? How could entities ever be incentivised to create apps which don’t generate profit?
Instead of a win-lose profit & loss economic model, the ‘blockchain promise’ is to enable the creation of incentive structures such that all or most transactional interactions are win-win. A key way that this may be achieved is through the creation of carefully designed blockchain-based microeconomies:
- Provider: The provider (of goods or services) is incentivised to participate in the blockchain microeconomy, as it generates more revenue than under the traditional business model.
- Consumer: The consumer is incentivised to participate, as the lack of rent-seeking intermediaries means lower prices for the same goods and services.
- App creator: Because the creators of apps likely won’t take a cut of each transaction, they need to be rewarded in another way. Revenue streams for the creators of blockchains and blockchain-based apps may include a token allocation in the initial distribution, and (potentially) returns from staking these tokens (e.g. in a POS or SGPE model). Further, as usage increases and the microeconomy gains traction, the valuation of these tokens will be expected to increase (subject to sufficiently low velocity), replacing the need to generate profits through the platform itself. Charging licensing fees for commercial use of their underlying technology is an additional funding option, but this reverts back to a less centralised approach; instead, many projects are electing to embrace the open source movement and more liberal licensing options such as Creative Commons.
This seems like a prima facie foolproof model, and has thus been adopted by most blockchain-based apps developed so far — but this model is far more complex than most teams designing platforms appreciate.
Balance and Synergy — Microeconomies as Ecosystems
An ecosystem can be defined as “a community of living organisms in conjunction with the nonliving components of their environment, interacting as a system. These biotic and abiotic components are regarded as linked together through nutrient cycles and energy flows.”
Similarly, a microeconomy is a community of living organisms (humans, and arguably DAOs) in conjunction with the nonliving components of their environment (economic incentive structures, smart contracts, goods and services, protocols, etc.), interacting as a system. Like ‘natural’ ecosystems, these living and nonliving components are linked together — in the case of microeconomies, via transactions comprised of exchanges of value (akin to energy flows).
Under a sustainable system, when an ecosystem is in balance, all of its components behave and interact synergistically. However, when one or more of these components falls out of balance, the entire ecosystem is affected, growing increasingly unhealthy in a positive feedback loop (e.g. the runaway greenhouse effect).
Like ecosystems (and regular economies), microeconomies rely on balance and order to remain sustainable. As such, the incentive structures within a microeconomy need to be carefully designed to ensure synergy between all components. Additionally, myriad potential external influences and ‘Black Swan’ events need to be considered and accounted for.
All this is to illustrate the point that blockchain-based apps, protocols, and microeconomies are complex systems with interrelated components that are many and varied. Systems architecture and game theoretic analysis in this field are still in their early days, and current blockchain microeconomies are highly experimental, with many errors, misconceptions, and unexpected variables still being revealed.
When developing a blockchain-based token for its platform, a project needs to pay significant attention to how each component interacts within its economy, and how any number of these components may be affected by foreseeable and unforeseeable external influences. Creators should also remember that not every protocol needs a proprietary currency. Simply taking the “let’s do an ICO” approach is a risky and irresponsible move unless the platform’s token economics have been deeply contemplated and outlined to investors and key stakeholders.
Designing tokenised microeconomies is not a simple task; you are essentially behaving as the treasury and reserve bank of your own economy, and the risks and responsibilities that come with this lofty task should not be underestimated. Every new project that endeavours to design their own microeconomy highlights more key pitfalls and considerations, but we are still far from building a sustainable, synergistic model.
