Designing a Token Economy — Stakeholders and Markets
How to attract and retain the participants in your token economy.
To design a successful Token Economy you will need to know who will participate in it, what do they get for their effort, how to attract them, and how to keep them. In this article we share our lessons learnt.
Every successful individual knows that his or her achievement depends on a community of persons working together.
— Paul Ryan, American Politician
In the previous part of this series we introduced the background and purpose of this Token Economy Creation Framework, as well as its first step which was defining the goal of the Token Economy.
In this second part we will introduce the next two steps of the framework, which are Stakeholder Mapping and Market Design.
While the economy goal guides the design of the token economy, the next two steps will define who are the participants of our economy, how do they obtain value by being part of our economy, how do we entice them to enter our economy, and how do we keep them as active members of our economy for the longer term.
An economy is a network of individuals that transact between themselves, expecting to obtain value from these transactions. There is a symbiotic relationship between an economy and its participants, at the same time that these individuals benefit from participating in the economy, they also increase its value.
When designing your economy you must consider what is it that your economy needs to function according to the economy goal, which stakeholders can provide that asset or service, and what will these stakeholders get in exchange that is enticing enough to convince them into participating in your economy. During the design of Strea it became clear that the value of the economy resided in the accurate and relevant emissions data, coming from the companies, analysed by bounty hunters and curated by the tribunals.
There is always at least an opportunity cost to participate in any economy, even if you are just asking for the attention of your stakeholders to consider transacting, your economy is already using their time which is a very precious and limited asset. Your economy must return to each stakeholder at least the opportunity cost associated with their attention while they are considering to transact, otherwise your economy runs the risk of being seen as a waste of time.
There are several methods to describe your stakeholders, and a stakeholder map as shown above is a visual tool that can be quite useful when communicating your economy design. However in early stages of economy design my preference is to make a simple list of the stakeholder types, along with the value that each one expects to obtain from the economy.
Often this simple exercise is enough to find weak points in an economy. If an stakeholder doesn’t get any value in a proposed economy you already know that there is a missing part. In Strea the value that Companies extract is difficult to predict and quantify at a first glance, while their risks are easier to articulate. At this point in the design you can already see that attracting Companies to the economy above will be one of the major challenges and you should design powerful incentives for them to participate.
This being a framework about decentralized token economies the individuals that will maintain the network infrastructure will be regulars in the stakeholder map. One of the reasons for the success of Bitcoin was that there was a clear value for infrastructure stakeholders to obtain from the economy. Bitcoin miners get rewarded in Bitcoins for processing transactions and that is as the price of Bitcoin grew more and more miners entered its economy. The fact that the patterns for infrastructure incentives are well known means that often this is omitted from marketing materials and left in the more technical documentation.
If you got this far when designing your economy you will now know who is important to your economy and why would they consider becoming part of it. If you are like me, that will be very satisfying.
Once you know what is the purpose of your economy, who are the individuals that take part in it, and the reasons for these individuals to participate, you will need to provide an environment for them to transact.
There is a whole area of study in traditional economics devoted to the study of markets as the environments in which individuals transact, and that knowledge is readily translated into practical advice for the design of token economies.
When designing a market there are three qualities that you should pay special attention to and which in the academic literature are referred to as Thickness, Reducing Congestion and Safety. I personally think that the academic terms don’t translate too well into software development or business audiences and prefer to refer to them as Scale, Efficiency and Risk Management.
Scale / Thickness
The value inherent to an economy is directly related to the number of potential transactions it enables. The more participants in an economy, the more types of participants, the more products, the more types of products, the more transaction methods, all these options are the value that your economy has on top of the actual assets being transacted.
It is possible to estimate the value of each additional user or product in an economy, and therefore the value available for other users to obtain from participating. Within a class of stakeholders not all require the same network value to start transacting in the economy and from this statistical distribution follows the concept of critical mass.
When your economy has a low inherent value it will attract only participants with a very low entry threshold, but as the economy grows it will be known to more potential participants, at the same time that entices a larger proportion of them to transact, often with rapidly changing adoption rates. This point where the adoption rate starts changing rapidly is known as critical mass and tends to be a crucial milestone in the development of your economy.
This critical need for a certain amount of users and products that will give to the economy enough value to reach critical mass is the reason for the marketing strategies that give advantages to early adopters. By providing extra value as reduced fees or free features the economy is trying to lower the entry cost and increase its own value by the potential transactions enabled by the new participants.
These growth strategies have a cost, though, and are unlikely to be sustainable for an extended period of time. If you are analysing or designing an economy that needs them to reach critical mass you will need to consider how much value will the investors give away to users, and whether that will really take the economy far enough.
Efficiency / Reduce Congestion
If reaching a certain economy value to attract new participants is one side of the token, the other one is to allow them to efficiently transact when the economy reaches a certain scale. Whether they price it exactly or not, most users have an inherent feel of the value of their time, and the time used in transacting in your economy is subtracted from the value that they get from the transaction itself.
There are two sides to designing a token economy for efficiency. The solution architecture and usability design will have a large impact on reducing congestion but are out of the scope of this article. However, within this framework we must discuss community dynamics and their impact on efficiency.
The participants in an economy will create content for it such as transactions, offers and communications. This act of creation should be steered through incentives to maximize the relevancy of the content to other economy participants, and to discourage pointless transactions or discussions that consume the time of other participants without providing enough value in exchange.
An example from existing solutions is the moderation of the participants in social networks such as Reddit. Some users are incentivized to become moderators in exchange for status, and these moderators curate the content posted to ensure that the users that are less involved quickly access content that is relevant for them and stay in the network.
Another example from Strea is the existence of a decentralized tribunal that would curate the content created by bounty hunters. In this economy any member of the public is allowed to report flaws on the carbon emissions reporting of companies, but an independent and decentralized tribunal is incentivized to ensure that only fair reports make it into the network.
Risk Management / Safety
The final consideration in designing a market should be the safety of the users. Human beings are notoriously inept at dealing with probabilities, in particular when they have no control of the situation. There are a number of risks in transacting that could cause unexpected losses of value to the participants and extra care should be taken not only to prevent them, but also to make clear that they are being prevented.
An obvious risk is theft, often by not delivering goods or services or by not paying for them. Token economies easily implement escrow payments that limit this risk, and just being able to build a safer market is enough for some proposed economies to have an inherent value higher than the current alternatives.
Another risk which is central to the cryptocurrency narrative is currency volatility, that causes economy participants to feel afraid about their assets to lose value for causes out of their control. The main reason for Tether and all other stablecoins is to provide safer markets without a currency volatility risk.
The list of risks continues with the long list of those considered in financial circles such as market risk, credit risk, counterparty risk, settlement risk and so on. All of these are factors that could push your economy participants to safer economies or to stop transacting at all.
Finally there are a number of risks that are less quantifiable in nature but also significant and which can be grouped as reputational risks. All economy participants will be grouped together in some narratives, and that could be detrimental for some of them. If your economy could be used for illegal or paralegal purposes some potential participants would lose brand value by participating in the same economy.
Attracting participants to your economy and giving them an efficient market are costly endeavours, and you should be careful of not losing them to often misjudged risks.
In this second part of our Token Economy Design series we have shown some guidelines to build an economy out of individuals, breaking the process in steps to know your individuals, designing a market for them, attracting them to the market so that they transact, and mitigating some of the reasons that would cause them to leave.
In the next part of this series we will conclude by providing an introduction to the concepts that keep an economy thriving over time, either by incentivizing participants to act for the greater good of the economy, by manipulating the macroeconomic qualities of the economy and finally by providing a political framework to account for our imperfect knowledge of the world that surrounds us.
Originally published at www.techhq.io on December 5, 2018.