How To Design a Token For a Functioning Economy
As we work on building Centrifuge, we would like to share some insight with the community about our product design approach. The following is the first in a series of posts detailing our Token Design journey: from initial considerations to technical deep dives. Welcome to Centrifuge Token Design: Part 1.
Hi! I’m Cassidy. I lead Cryptoeconomics & Research at Centrifuge. My background is in Economics, most recently with a focus on Central Banking. I bring that focus into my work on token economy design and engineering. My passion, like many in this space, is to change the way we operate to better facilitate our needs as a global society.
With token design, there is potential to re-imagine what an economy should look like from the ground up. It is not often one has the chance to imagine and deploy an economy. This is where the responsibility involved in designing tokenized ecosystems lies, and why we at Centrifuge, think it is important to share this journey.
One of the features of building networks on the blockchain is the ability to use cryptoeconomics: a combination of cryptography and economic incentives to design robust, decentralized protocols and applications. [1] From participation, to value creation and distributed governance, we can design protocols to incentivize desirable behavior — so called mechanism design.
Centrifuge changes the way the financial supply chain operates. It is a protocol that connects businesses globally, enabling them to exchange financial documents (invoices, purchase orders, company data, etc.) in a private, secure, and verifiable way. Designing a token for such a system is a complex process. But, if we build on existing tools, research, disciplines, and methods — we can create a functioning and participative economy.
Our Token Design Journey: A High Level Overview
- Step 0: Why change the system?
- Step 1: Define the Prime Objective.
- Step 2: Understand our considerations for how to achieve it.
- Step 3: Analyze existing tools, research, and methods to apply it.
- Step 4: Draft v0.1 of the Token Design!
- Steps 5+: Iterate.
Why Centrifuge?
The flow of information, data, and money between businesses in the financial supply chain is stifled — and siloed in systems often controlled by a few intermediaries. The result: many businesses just don’t have access to financing.
For example, if a small business (or individual) invoices Nike, they probably would not get paid for at least 60 days. [2] Today, they could try to take that invoice to a bank to take out a loan against it — but it is unlikely the bank would accept it. And, if they did, the interest rate would be incredibly high. Although small and medium businesses often have the most need for liquidity, they are usually unable to access it. Why? Because, it just isn’t worth it for most banks to verify the data and issue a loan. And even if there were a bank that would be interested to finance that invoice, the small business is likely to be siloed away from access to it.
Enter Centrifuge. The goal: change the rules of global trade to foster economic opportunity everywhere.
Centrifuge opens up silos and connects the global financial supply chain by allowing any business, no matter how big, to transact on a global network while maintaining ownership of their data.
What does this do for the businesses of the financial supply chain? It enables novel types of financial services like instant financing of receivables [3], trade credit insurance [4], and deep-tier finance [5] — with open access on both sides. Not only can small and medium businesses gain access to new types of financing, but also financial institutions, credit analysis services, insurance providers, and even businesses higher up in the supply chain gain access to a much larger network.
I started working with Centrifuge because I believe in this vision. The Centrifuge Token Model must power this vision, and provide the framework needed to run the platform and accelerate its utility.
Step 1: The Prime Objective
To begin the process — it is important to understand the product first and determine the prime objective of the model. Before I could start working on the Centrifuge token design (including whether or not a native token is desirable), I first had to understand the value proposition of the Centrifuge Protocol and to whom it would provide this value.
The functional users are corporates, small and medium sized enterprises (SMEs), and service providers (such as networks) who use Centrifuge on behalf of their customers. The Protocol provides value to these users with the features of digital identity, immutable and auditable data ownership, and the ability to create and transfer standard business documents. These features together enable a new type of financial business document in the form of a non-fungible token, combining standards for NFTs with private off-chain business data to create unique, tradable assets we call Business NFTs [6].
Therefore, the value proposition of the Centrifuge Protocol is the ability to utilize these features to access new types of services. Businesses can gain access to instant financing by using the Business NFT as collateral in exchange for liquidity, or for a loan on a lending protocol like Dharma. They can access trade credit insurance through services like Hokodo. Or, through the graph businesses create with the flow of information on the Centrifuge peer-to-peer network, they can access liquidity through deep-tier finance. Through this graph, businesses could transfer the easy and cheap access to liquidity from large corporations down to their suppliers — and even to their suppliers, resulting in micro- , small, and medium sized companies receiving previously inaccessible financing.
So, how does the value proposition translate into the token design? The Centrifuge Protocol must provide the structure for these Business NFTs to have long-term verifiability, censorship resistance, and, ideally, data availability and processing. In addition, it must do so without relying on a centralized party (including Centrifuge). Therefore, the prime objective of the token design is to support and secure the use of the Centrifuge Protocol.
Step 2: Considerations (the how)
The next step is to outline the considerations for achieving the prime objective. As noted above, an important consideration is the removal of intermediaries and any reliance on a central party. The design must incentivize a distributed and secure network. However, we also want to create something that works today. As much as we want full decentralization, we lack the tools necessary to provide that today. That means making compromises in the beginning.
Another important consideration, or rather assumption, is that the Centrifuge Protocol provides enough of an immediate utility for users that an extra incentive to use the platform is not necessary. This is a crucial assumption that is fundamental in understanding the eventual design choices of the token model.
And finally, a core consideration is to provide a governance structure that allows users of Centrifuge to make decisions about its development as well as network parameters. Users of Centrifuge should be empowered to operate, control, and gain value from the platform.
Above all, we want to design a robust, decentralized system. Such a system may or may not need its own native token — and it is important that its existence is not a given.
This is the first post of a series on the Centrifuge Token Design process. In the next post we will take a closer look into how Centrifuge uses Cryptoeconomic tools to accomplish the prime objective of the model. Later we will deep-dive into some of the design elements and the tough choices we have to face along the way.
Learn more about Centrifuge
We believe that the time of incremental optimization of archaic processes has to come to an end. Only by collectively shaping an entirely new system for the global financial supply chain, can we foster widespread economic opportunity. This new system can only be established by dismantling the existing infrastructure, stripping it down to its essential components, and reassembling it for the 21st century. That’s why we’re called Centrifuge.
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