IOST Community Opinion: How to Design A Token Economy Model
The use of tokens can be seen as a key element for a blockchain project to operate its ecosystem and apply blockchain technology in real use cases. Through tokens, a blockchain project can realize the conversions between digital assets and physical assets.
The Logic of Token Design
A series of evaluation is needed before designing a token. Here we use the Token Model Canvas to demonstrate the logic of designing a token.
Factors that need to be considered are: strategy, customers, value, consensus, scenarios, model and operations. When it comes to implementation, we need to consider: the deal structure, division of work, pain points, types of assets, the added value a blockchain could bring to corresponding industry and liquidity of tokens etc.
In this article, we will take IOST project as a sample project for case study.
Strategic Positioning
Positioning strategy helps to define how a blockchain project is placed to transform an industry. For example, IOST is named as “Internet of Services”, which means the project targets various services and offer them with added digital value.
Customer Segmentation
Define target customers when designing a token economy model.
Usage Scenarios
A token economy model is designed to specific usage scenarios. In real use cases, token generation, usage and consumption are realized based on token economy model. According to IOST positioning strategy, its blockchain technology can be applied to decentralized exchanges, social networks, advertisement, e-commerce, games etc, to offer them added value.
Value of Assets
Value of assets is the key element of a token. Users will benefit from holding or using tokens. Different from traditional assets, value of a token is based on its utility value.
Consensus Algorithm
So far, most projects are using PoW (Proof-of-Work) and PoS (Proof-of-Stake). Based on previous public chain projects, IOST has made series of improvements and created its unique PoB (Proof of Believability) consensus.
Governance Structure
The structure of token economy can be two parts: token allocation (team, advisors, R&D, marketing etc) and token sale (private sale, early bird, public sale etc) In design of a structure, a project will define its total value, hard cap/ soft cap, minimum subscription amount etc.
Model Operations
A blockchain project needs to maintain marketing and PR events in the long run. In addition, as more regulations come into crypto and blockchain, KYC (Know Your Customer), AML (Anti-Money Laundering) will be considered as key issues.
Economy Model
Issuance of tokens and incentive mechanism will determine the success of a token. We can use the Fisher equation, MV = PT
where:
(M=Money Supply, V=Velocity of Circulation, P=Average Price Level, T=Volume of Transactions of Goods and Services)
Comparing the token economy models of ETH, EOS and IOST
Gas fee on Ethereum mixed resources of CPU and storage, and this mix caused the low efficiency of usage of resources. In comparison with other mainnets, Ethereum has lower performance, which cannot accommodate larger-scale usage of Dapps.
EOS has relatively better performance than Ethereum, but computing of CPU is over simplified, tokens need to be pledged for using the system. Thus it create a situation where major accounts took up too many resources with less usage. Even when the mainnet is not busy, common users still cannot afford its high cost.
Based on pain points of previous mainnets, IOST is different from Ethereum as it categorized different kinds of resources and optimized the efficiency of usage. Saparately, also different from EOS, PoB consensus of IOST avoided waste of resources caused by centralization of nodes on EOS, and thus lower the transactions fees. These improvements permit the development of more sophisticated and high throughput Dapps and lowered the cost of usages for each common user.
A Case Study of IOST token Economy Model
An Overview of IOST Token Economy
Initial token supply is 21 billion with a fixed annual issuance of 2%, which is used to reward the Servi nodes, partner nodes and voters.
The system issue an additional issuance every 24 hours. Each additional increase = annual inflation coefficient (1.98%) * current IOST total * two additional time intervals (in milliseconds) / total time per year (in milliseconds).
Formula for calculating annual inflation coefficient: (1+x) ^ n = 214.2/210, x = Ln1.02 = 1.98%.
Token incentive mechanisms include: early bird bonus, referral rewards, bounty programs etc. These can help a project to gain users when the project is initially launched. Moreover, token lockups, token segregation, discipline of additional issues etc, will make the project reduce market manipulation and become more stable.
For IOST, there are three types of incentives: block production rewards, election rewards, contribution rewards.
Contribution value obtained through producing blocks can be redeemed with rewards in tokens from reward pool. Pledged tokens can be used to buy GAS to pay for the transaction.
Servi nodes can redeem token rewards from the reward pool at any time with the contribution value, contribution value is 1 to 1 for token conversion. The value of the contribution is destroyed after redemption and can be redeemed once every 24 hours.
GAS Rewards And Its Usage
A node can obtain GAS by pledging token, 1 token = 100, 000 GAS/ Day, and the pledge token is locked and cannot be traded.
System resources are categorized as NET, CPU and RAM.
We abstract the NET and CPU into GAS payments. The use of RAM requires pledged tokens. Apart from it, IOST recycle the tokens to maintain a balanced supply and demand: both voting or buying RAM and acquiring GAS require pledged tokens; fees for purchasing RAM are destroyed; GAS consumed by the execution of the transaction are destroyed.
With an increasing number of users using the system, more tokens will correspondingly be pledged and destroyed. In general, IOST economy model is deflationary.
Common Usage Scenarios of Token Economy
Below, we are cover some common usage scenarios of thetoken economy.
Monetary
The essence of monetary usage is as crypto currency, which is used for payment, clearing, pricing, investment etc. Current pain points of the market are: high financing cost, lack of transparency, lack of credit, complex procedures etc.
Traceability And Supply Chain
Mainly used in supply chain management. Through different technologies, physical products can be digitalized and be fully traceable. Based on tokens, an industry could be encrypted and traced.
Membership Points
Membership points are the essence of a membership system. Key elements are: members, points, promotions. Correspondingly, points can be tokenized.
Content
Content can also be tokenized and stored on distributed ledgers. In this way, authenticity of contents can be verified and copyrights could be traced and enforced.
Principles of Token governance
In general, blockchain governance could be categorized as on-chain governance and off-chain governance. After completing the design of a token economy model, projects need to be operated in accordance to the the will of the community.
Principles of Design
Basic features of a token have to be defined, which do not include features like ownership of stocks, ownership of transaction, financial instruments etc. The fundamental feature of token is its consumption functionality. Through votes, consensus mechanism can be adjusted, updates of parameters etc. So far, on-chain governance still reveals many limitations. A typical case is the upgrade of Ethereum cannot be determined by Ethereum Foundation or its founders, it is difficult to keep a balance between different sides through on-chain governance.
In daily operations of IOST, the project is discovering different approaches to keep the transparency and fairness in its communities: lowering the standard of node candidates, setting early bird bonus, increasing number of nodes etc. All these measures can help the blockchain more decentralized. With a stable deflation rate, with certain amount supply and destroy of tokens, the value token can realize a stable increase.
Special thanks to community developer Jason Wang who contributed this article for his participation in IOST Tech KOL Article Contest.
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