Tokenomics Series: Part 1 — Design A Token Economy For Your Business
Token and cryptocurrency asset sales has reached over US$20 billion to date (2018). Blockchain projects and initial coin offerings are showing no signs of slowing down.
Tokens has become the key for blockchain start-ups to build access to their products and as a key revenue generation mechanism. It has also enabled new business models and for people to interact with other counterparties.
Our Tokenomics Series
We have encountered many start-ups seeking to establish public blockchain projects and launch their own tokens through initial coin offerings.
Our advice is always that the project’s tokenised economy must be fair, functional and compliant with any applicable regulations. We also note that the focus on token design has been mainly technical and the area where a lot more work is required is actually to link the token design to real customer needs. There is an absolute need for stronger linkage between token design and a decentralised business model’s value proposition
Through these conversations, we have seek to collect token design knowledge and share some keys to a successful and efficient token and initial coin offering design process.
Our goal through sharing a series of articles on this project is to encourage your feedback and views in order to build a more robust model to help committed start-ups and developers grow tokenised business models.
The Token Design Process
Let us emphasise that we are focused on utility tokens rather than security or investment tokens. Utility tokens are digital tokens that are designed to be used or consumed — generally as an incentive mechanism for platform participants to sustain particular desired behaviours in order to facilitate the core function of the platform.
In short, it is a key aspect for decentralised platforms to replace central authority and disintermediate existing business and economic models.
There are five key stages for the token design process as follows, noting that the process should be iterativerather than sequential, with feedback loops a necessity prior to the final product.
- Establish your token utility — what is the problem your token seeks to address and how does it align to existing customer needs.
- Build your token mechanics — Focus on the token user experience as well as economic mechanics for circulation, supply and demand, inflation and burn rate. Token mechanics include physical aspects (active/passive, open/closed source, , transferability, payloads, token flow such as straight line, circular or poker-chip model, divisibility etc.) and policy aspects (rails, forks, monetary and fiscal policy and token sale structure). The key is how your mechanism reaches equilibrium in the system.
- Legal advice and framework — compliance to jurisdictional laws where token is launched. In particular, a clear distinction that you are dealing with utility and not investment tokens.
- Technical design — Ensure technical feasibility with regards to smart contracts and other key features.
- Testing at each stage — This should occur throughout the prior four steps for example user testing in stage 1, game theory testing in stage 2, legal review in stage 3 and A/B testing in stage 4.
Stage 1: Establish your token utility
The first question a token design team should get absolute clarity is what is the use of the token and how essential is it to the business mode?
One way to think about this question is by making a linkage between:
- your business value proposition
- the involved participants in your ecosystem
- the token’s use
When looking at (ii) and (iii) above, you may want to go through the following exercise:
- List the type of participants on the platform
- Desired behaviours you want them to have
- Incentives you can provide them
- For each behaviour and incentive, a proposed token solution should be identified and ultimately prioritised based on business needs.
Another set of questions which can act as a necessary checklist is as follows — any ticks will make a better case of the adoption of token economy:
- Is the token tied to a product usage, i.e. does it give the user exclusive access to it, or provide interaction rights to the product?
- Does the token grant a governance action, like voting on a consensus related or other decision-making factor?
- Does the token enable the user to contribute to a value-adding action for the network or market that is being built?
- Does the token grant an ownership of sorts, whether it is real or a proxy to a value?
- Does the token result in a monetizable reward based on an action by the user (active work)?
- Does the token grant the user a value based on sharing or disclosing some data about them (passive work)?
- Is buying something part of the business model?
- Is selling something part of the business model?
- Can users create a new product or service?
- Is the token required to run a smart contract or to fund an oracle? (an oracle is a source of information or data that other a smart contract can use)
- Is the token required as a security deposit to secure some aspect of the blockchain’s operation?
- Is the token (or a derivative of it, like a stable coin or gas unit) used to pay for some usage?
- Is the token required to join a network or other related entity?
- Does the token enable a real connection between users?
- Is the token given away or offered at a discount, as an incentive to encourage product trial or usage?
- Is the token your principal payment unit, essentially functioning as an internal currency?
- Is the token (or derivative of it) the principal accounting unit for all internal transactions?
- Does your blockchain autonomously distribute profits to token holders?
- Does your blockchain autonomously distribute other benefits to token holders?
- Is there a related benefit to your users, resulting from built-in currency inflation?
We will cover the more in upcoming articles in this Tokenomics Series so stay tuned!