The Official Lamden Tokenomics

The Scholar by Max Gaisser

The following paper was written by Alexander Butenko, a doctorate in Economics, explaining the tokenomics of the Lamden Mainnet Token (LMT). This paper was produced internally September 1, 2020 before the launch of the Lamden Mainnet and has been made public December 3, 2021 by Lamden.

Classical Economics & Token Economics

Multi-purpose instruments are intrinsic to the classical economy. Many economists and experts in the field agree that money is a medium of exchange, a unit of account, and a store of value. But why can’t an instrument behave as money and as something else at the same time? Multi-purpose instruments are all around us, and that is not something unheard of. Gold is the perfect example of a multi-purpose instrument from the monetary world. Even if we consider gold jewelry some unique form of money (it isn’t), the gold is still highly valued by electronic manufacturers, the medical industry, and other interested parties who don’t care about its monetary function.

We were all taught about the gold standard at one point or another. The gold standard is a monetary standard in which a county’s currency has a value directly linked to a fixed quantity of gold. The gold standard is not currently used by any government, so the current form of money is not multi-purpose. But even if disconnecting modern money from other use-cases is natural, we should still investigate and reevaluate the reasons. The economy is evolving, and technology creates new opportunities to transact more efficiently.

The classical economy works with many different types of artifacts, and some of them are considered financial assets. Money is a medium of exchange and a store of value, whereas equity is a share of company ownership and profits. Two different artifacts that are connected, but are still isolated, and do not overlap. Some forms of utility tokens have also existed for a long time; airline miles, credit card points, and arcade tokens are all forms of utility tokens. There has always been some way to convert money into equity or utility tokens (e.g. airlines miles), but we have always identified them as different artifacts/assets.

Current State of Blockchain Tokens

Blockchain technology enables us to create multi-purpose digital assets and crypto enthusiasts were the first to take advantage of the opportunity. Regulators have been playing catch-up and have often struggled with how to classify cryptocurrency. Some regulators call them cryptocurrencies (crypto) or utility tokens, and others have labeled them as traditional asset classes, such as commodities or securities. Regulators have been doing their best to create new legislation for crypto, but crypto companies also need to do their job of providing context for their marketing buzzwords and software code. Many crypto start-ups have been creating tokens to raise money for their next big app development idea, and they promote a fancy vision that the token will be needed to pay for app services when in reality the token provides no value to the actual service. They then get their tokens listed on exchanges and utilize marketing services and influencers to promote them and to get inspired crowds to invest in them. So, crypto projects could pretend their tokens have all the functions of a currency, utility, or security token, but it could all just end up being nothing but vaporware. Ask yourself the following questions:

• Do you need a currency that’s slow, extra volatile, and trusted by almost nobody? No!
• Do you need tradeable equity that gives you no ownership rights like voting or share of profits? No!
• Do you need a utility token that has no real use? No!

Subway tokens were a form of utility tokens that existed for a reason. Subway machines accepted tokens so you could easily ride the subway and not have to deal with the nuisances of obtaining exact change. What is the reason for most crypto utility tokens? Crypto companies have been taking advantage of blockchain technology by creating tokens that have no real fundamental value and using those tokens as vehicles for their get-rich-quick schemes.

It has been quite disappointing to witness because blockchain does allow for the creation of innovative assets that can combine all the functions of currency, value exchange, utility, or even security, but what many teams create is everything and nothing at the same time. If we want to create something better than the existing financial system, we should at least reconstruct its useful toolkits, and strive to make them better.

Lamden Token Has Real Economic Value

We’re at a point we realize blockchain technology opens unlimited possibilities, but it’s up to the crypto companies, projects, and developers to determine their token’s classification, role, purpose, and functions within their blockchain solution and ecosystem. The following sections breakdown some of the current classifications of crypto tokens.

Cryptocurrencies

When creating LMT we decided not to follow the typical cryptocurrency route. While many tokens are referred to as cryptocurrencies, it is usually more jargon than real meaning.

By just putting the label ‘currency’ on a token does not make it a true currency unless it can be traded with others who accept it as a currency. For example, if you persuaded your friend to accept tangerines as a form of payment, then these tangerines would be a medium of exchange between you and your friend, but you probably couldn’t use 1,000,000 of those tangerines to buy the new million dollar mansion on the beach. These tangerines would also lose their value when they become rotten and uneatable. Those who live in countries with weakened currencies know all about devaluation, and Venezuela is a prime example of this. The Venezuelan government was unable to create a properly functioning currency and the value of the Venezuelan bolivar continues to plummet, leaving Venezuelan people desperate for a hard currency like the US dollar. The bolivar has essentially become a rotten and worthless currency as fewer and fewer people are willing to accept it as a means of payment. Properly functioning currencies, including cryptocurrencies, must have the following characteristics:

• A medium of exchange that is widely accepted.
• A standard unit of account so everyone agrees on its value.
• A store of value that shouldn’t lose too much value over time.

While LMT might eventually inherit such characteristics (as any physical or virtual object might, except of course rotten tangerines), we are realistic enough to accept the fact that our token is not a currency, and we never intended for it to be one.

Security Tokens

A security token is a type of crypto token issued on the blockchain to represent an investment contract into an underlying asset such as a stock, bond, or fund. These tokens can hold some type of monetary value, represent ownership, and give holders a right to company profit-sharing.

So, if you hold a token that gives you ownership over something and you have a reasonable expectation of profit, then you are probably holding a security. Congratulations and welcome to the world of affluent!

Utility Tokens

A utility token is a gateway token that gives users the right to access some product or service.

It is very straightforward for developers to create utility tokens and claim the tokens need to be purchased to use their upcoming ‘XYZ’ application. What is often ignored is the fact that customers may already have access to a similar product or service that does not require the purchase of specific tokens, making these apps easier to access and use.

Economic agents (like ourselves) tend to choose the path of minimal effort for maximum gain.

For example, users would be happy to use LMT to access the Lamden Network if it’s an easier and better alternative than using their credit card. Our thought process was never to create a meaningless token and jam it into our technology for the sake of hype and crypto fans. There are many examples of companies copying existing products and adding tokens to take advantage of hype and crypto enthusiasts. The next crypto Facebook, crypto dating app, or crypto Airbnb? No! These types of developments undermine the true value of blockchain and are against what the core crypto community believes in. A crypto dating app is fine if the underlying technology is properly implemented so users feel the difference & gain the benefits of using a token & blockchain. Just attaching a crypto utility token to an old-style app has more to do with marketing than with actual technology, and many of the times it ends up being a flat-out scam. A proper utility token must-have functions that provide rights to access an app, enrich app features and functionality and provide benefits to end-users.

Summary

Traditional currencies, commodities, and securities have been trading on exchanges for quite a long time, but when it comes to crypto, everything starts to get complicated and nothing is as it seems. Likely, most crypto token holders do not know what type of token they are holding in their digital wallets, and that’s because standardized definitions and classifications are fuzzy for this emerging and innovative technology. If we evaluate our holdings, we may realize that their valuations are only based on exchange volumes and social media hype, and the volatility is based on rapidly changing emotions. The hidden risks are overwhelming. The real intrinsic or economic value of an asset is based on economic fundamentals, and not the hype of influencers and paid news articles.

• Real currencies are backed by states with all their economic and military power.
• Real utility tokens are backed by real products that benefit from a specific technology.
• Real securities are backed by ownership of real assets that can generate profit.

There is nothing wrong with holding and trading assets that do not have real economic value if there’s a clear understanding of the associated risk and its size. Placing too much trust into such assets might eventually leave you with nothing, literally. People who do not know anything about their crypto assets and only expect life-changing profits should probably read about Tulip mania. The current way of making money via crypto might seem novel and appealing until we recall the events of February 1637:

Tulip mania (Dutch: tulpenmanie) was a period in the Dutch Golden Age during which contract prices for some bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels and then dramatically collapsed in February 1637. It is generally considered the first recorded speculative bubble. In many ways, the tulip mania was more of a hitherto unknown socio-economic phenomenon than a significant economic crisis. Historically, it had no critical influence on the prosperity of the Dutch Republic, the world’s leading economic and financial power in the 17th century. Also, from about 1600 to 1720 the Dutch had the highest per capita income in the world. The term “tulip mania” is now often used metaphorically to refer to any large economic bubble when asset prices deviate from intrinsic values. [Wikipedia]

We kept all of this in mind when designing Lamden’s token. LMT is not a currency, security, or a useless utility token. LMT is a utility token with true economic value. But what does this mean? We base our token’s utility definition on fundamental economical characteristics.

Our token should not just be the best way to access the Lamden ecosystem, but it should also be the incentive that rewards network participants for their efforts within the network, and the reason why Lamden’s ecosystem grows robust. We strive to have Lamden operate like a real self-regulating decentralized ecosystem that exists in conformity with blockchain’s community philosophy.

Lamden’s Decentralized Economic Model

The majority of the crypto ecosystem exists around Bitcoin, Ethereum (ETH), and their forked codebases. Crypto communities believe in decentralized economic models, but it is a fact that most crypto applications are not decentralized. While Bitcoin is a truly decentralized system, it is not suitable for supporting crypto applications. ETH is a platform that allows for the creation of apps, but it does not dictate specific economic models for its app’s tokens. Most projects tend to build centralized applications with blockchain tokens just to highlight them as fancy features, and not because they believe in blockchain or decentralization. To create apps that are truly native to the blockchain, developers need to have a blockchain mentality, understand its fundamental value, and not attempt to control token economics like a classical service company. Do not get us wrong, there is no problem with a classical approach but that is just a different economic model.

Lamden’s Reward Distribution System

We desired to create a system that no single party controls and where no single party is providing the service. We use some similar concepts to ETH, such as stamps, which are like ETH’s gas function but also focus on a sustainable decentralized reward distribution system.

For Lamden, developers will create applications on the platform for anybody to use, and they will be compensated via Lamden’s reward distribution system.

High-Level End-to-End Transaction Flow

1. Developers will create great blockchain apps on Lamden.
2. These blockchain apps rely on Lamden blockchain transactions to work properly.
3. For transactions to be possible, the blockchain network needs to be supported by network consensus nodes.
4. Lamden’s nodes are made up of masternodes and delegates.
5. Masternodes accept transaction requests and distribute them among delegates.
6. Delegates execute transactions and return them to masternodes.
7. Masternodes deliver the transaction and confirmation to the end-user.
8. Masternodes and delegates will receive a transaction reward for processing and storing information.

Developers will receive a transaction reward for each transaction processed through their app.

Lamden does not want to run any servers to support the network; it is not our value proposition. We encourage the community to set up masternodes and delegates on the network and to provide transaction services as their own independent business. Anyone can set up a masternode if they are voted in by the network, and any developer can build a new app on Lamden if they choose.

Stamps as Compensation

Network participants are compensated with stamps which are a fraction of LMT, just as gas is a fraction of ETH. Initially, each LMT will be equal to 20 stamps, but this rate is flexible allowing the community to always be reasonably profitable and competitive, regardless of the token price on secondary markets. This simple mechanism already includes distribution rules that will properly compensate all network participants. Lamden as the creator of this system will also receive a fraction from each transaction, the same way other developers do, which will incentivize Lamden to build new functionality, features, and integrations. There is no single party that will take all the rewards for running the network, instead it is a competitive market where new participants can join, propose their services, and get properly rewarded.

Lamden’s Multi-party Execution

Multi-party execution is the fundamental concept of the Lamden ecosystem. No single party controls the Lamden network and no single party can monopolize it. If we look for some analogies from the classical way of doing business, we might look at the franchise model, but it’s not necessarily a correct comparison because in a franchise model the franchisor sets all the rules, and the franchisee just plays by those rules and can’t change them. We shouldn’t be fooled by blockchain projects implementing similar models as it’s the same as believing that Uber drivers are truly independent business owners. Some Uber drivers may think so until the day Uber bans them from the platform for whatever reason.

Blockchain technology allows us to operate with no single central authority, and smart contracts allow us to configure a set of rules and parameters which can be voted on and changed by decentralized communities. Lamden blockchain has many unique features, but in this paper, we focus purely on the economic aspects, and the facts are:

• Nobody controls the Lamden network.
• No single party provides the services or runs the network.
• No single party sets the rules for rewards distribution.
• The community determines all rules and ratios when it comes to rates and rewards distribution.
• Everything is based on a decentralized model and market forces.

By having an actual service provided by many parties, we create an ecosystem, and not just another centralized system/application.

Why Adam Smith’s “Invisible Hand” is Now Possible with the Right Technology

Adam Smith’s “invisible hand” concept is a metaphor for an invisible force in free markets, which drives the supply and demand of goods to an equilibrium. He assumed economies can work well in a free market where everyone will work for their interests.

Every individual who tries to maximize the value of his own capital and labour necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

[Adam Smith, The Wealth Of Nations, 1776]

Economists have always argued if Adam Smith’s concept is just a theoretical ideal, not realistic in the real world, or if it’s even something we can achieve. The question was never answered properly as the whole concept of ‘invisible hand’ relies on the free market, but most of the time governments intervene creating enough distortion to alter economic reality and market participants’ intentions. The government usually argues that in our imperfect world such intervention is necessary, blaming the lack of information that market participants face as one of the main reasons. That is not something we should argue with and the whole crypto space being full of ICO scams just underscores the wisdom of proper regulation. Although that does not mean particular ecosystems can’t arise and demonstrate real self-regulation if the ‘invisible hand’ is powered by technology, with transparency being one of the essential features of that technology.

Lamden’s Self-Regulating Governance System

Lamden platform is fully governed by smart contracts not being influenced by any government. The community itself makes major decisions on how the network should operate and how the rewards should be distributed. As all decisions are transparent, all participants act in their best interests perfectly knowing that their intentions are visible to other participants, and there is no way to fume others or pretend to have market powers they don’t have. The simplicity and immutability of the system guarantee an unprecedented level of trust and reason behind any decisions. Does that mean the Lamden platform will be a perfect example of an effective market regulated by Adam Smith’s ‘invisible hand’? Well, there is no guarantee, but this experiment has many more chances to succeed than others that were never actually intended to be transparent or self-governed by a diverse pool of participants.

The whole idea of the Lamden platform’s economics is to provide hassle-free transparent reward distribution that is adaptable to current market conditions by the true interests of all participants. We recognize that there is no magic bullet, and any predefined reward ratio might be a hit or miss, and that’s why we implemented self-regulation mechanisms so the community can decide and change parameters when necessary.

As noted earlier, our Lamden ecosystem participants and their roles are:

• Platform users who need transactions to be executed and are willing to compensate others for this service.
• Masternode owners and delegates who process transactions if they are fairly compensated.
• App developers who create applications if they are compensated.
• Lamden foundation, as a developer, who adds ecosystem functionality and features if fairly compensated.

What fraction of each transaction should go to the developers, to the masternodes, and the Lamden Foundation? A market economy is an antithesis to a regulated economy. That’s why we shouldn’t guess and pretend we know the right answers to these questions. And these conditions might change with changing market conditions. So, how does self-regulation work?

Masternode owners and delegates have direct voting rights on such key decisions as rewards distribution, stamp rate, and platform functionality upgrades. They run the system and that’s why they are in charge. If nodes set unfair compensation to developers, then nobody will develop for the platform, and the nodes will not receive any rewards. The same applies to the Lamden Foundation. If the network participants decide they do not need new functionality to be developed by Lamden, then they have options to change developers. They can just vote Lamden Foundation out of the platform or limit their share. Nodes can even ‘hire’ other developers and decide how to compensate them.

Network Participant’s Equilibrium

This system naturally strives for an equilibrium where each party will naturally act in their best interest to maximize their reward, but the reaction of other parties will limit greed and punish for unfair decisions. With time, market forces will act as an ‘invisible hand’ pushing all parameters to the ideal balance, when every party is happy to provide services and be fairly compensated. It won’t just be the formula as formulas can be manipulated, but it will also include actual voting by participants acting in their best interest and based on their understanding of potential feedback from the market.

Price Above Equilibrium Price

Price Below Equilibrium Price

But what if outer forces affect the equilibrium? As LMT might be traded on the secondary market, its price might be subject to artificial fluctuation. Simple reward distribution has no way to fix this as the market participants should not negotiate on their fraction of profits each time token price changes. And the most affected party will be actual platform users being forced to pay more for the same transaction. We neutralize this issue with Lamden’s stamps, which were discussed earlier. Stamps are similar to Ethereum’s gas but have some major advantages. Each transaction will be compensated with some amount of stamps determined by the complexity of the transaction itself, and not by any artificial factors. So, the stamp price of a transaction will always be fair.

But how about the LMT price that may be subject to volatility? By implementing a fixed stamp-to-transaction complexity ratio, we also implement a flexible LMT-to-stamp rate. The rate itself will be determined by voting, making the system efficient and self-regulating. If market conditions make transactions too expensive because of the LMT price, then network participants will vote to change the stamp rate to return transaction price to

market equilibrium. But if, for example, electricity or hardware prices rise significantly, network participants will vote to reflect this change in a stamp rate, so they can remain fairly compensated and not lose interest in running the network. This is where supply and demand law will balance the interests of platform users and those who run the network.

When Deflation Is Good for You

There is often a misconception that deflation is bad for the economy and that is probably what most people know about this phenomenon. Although it is not that simple and there is a reason why we implemented a deflationary mechanism into the Lamden platform.

What is Deflation?

Deflation is the decrease of prices in an economy and an increase in the purchasing power of the economy’s currency or payment medium. The reasons differ, but generally, it means the economy is cooling down and might be heading into a recession. If the production exceeds demand, prices fall, and manufacturers decrease production. At the same time, customers realize they will be able to get more for the same amount of money tomorrow and stop spending their money. All this adds up launching a downward spiral of economic crisis.

Although that sounds dramatic, the reality is not that simple. If for example, you go to buy a new car, you know the car’s valuation will eventually decrease, especially when next year’s model comes out. This is the same for high-tech gadgets and many other goods. But we still acquire these goods as we believe we need them in our lives. Deflation as a market force competes with our current needs, and the fact is our lives have time limits, otherwise, we could wait forever.

Technological progress and improvements in productivity also lead to lower prices, but that does not kill the economy, it increases the effective demand. So, deflation is not necessarily bad if it’s reasonable and controlled. Controlled deflation is not a problem, and while it can’t be easily achieved in a classical economy, blockchain smart contracts allow us to control it via a programmed burn mechanism.

Lamden’s Deflationary Model

Lamden Mainnet burn mechanism is hardcoded into the system itself to burn one percent of every transaction fee in stamps. The token supply is limited, and new tokens cannot be minted. The increasingly limited supply leads to the token’s scarcity. At the same time, it does not necessarily mean the transaction price that platform users pay will be affected. By regulating stamp rate network participants will always stabilize the price in tokens.

But if the transaction price is not affected why does such a mechanism exist? We want to inspire early adopters to join earlier. That’s how we justify the deflation mechanism. By joining the community, providing services, and keeping some tokens, all parties create value for the whole community. Each new transaction will slowly but steadily decrease the number of tokens available. At the same time platform users will not be affected as they will not care how many tokens they can afford for some set amount of fiat currency; the only thing that matters to them is how many transactions they can execute with their tokens, and this ratio will always be calibrated by the self-regulating token economy.

A deflationary model will stimulate platform users to acquire tokens in advance as it means being rewarded (just like keeping deposit in a bank) but there is no deflationary risk that users will postpone their transactions to some future time when the token’s price is lower. A transaction is not some service that you need when it is cheaper, but a service that you need to run your app. It is like food or another essential service that’s not easily deferred to the future, even if we wanted to. Only in some rare and unique cases, someone will defer using the software today, to get a small discount tomorrow.

How Lamden Token Economics Protects Neutrality

Blockchain Transactions

Blockchain is a distributed network running over the Internet and one of the key concepts of any blockchain is a transaction. Transactions process information and create value, there is no blockchain without transactions. But somebody should process transactions and there should be some order in which they are processed. The nature of the Internet is somewhat similar where Internet Protocol (IP) packages are transmitted over the network by routers, and technical masterminds are always worried about critical applications. You need guaranteed processing time and even some priority when you do a surgical operation over the Internet. Unfortunately, the reality is leaning towards giving the priority to whoever pays more. Big companies tried to negotiate with providers to give their video content a green light at the expense of others. As it often happens, technology is used not to help those who need priority handling, but to benefit monopolies. In the United States, the government tried to implement the so-called ‘net neutrality’ to make this practice illegal, but then the decision was reversed by a new administration. That is not surprising because if technology allows businesses to take advantage, they will take advantage of it for money, lobby power, or other means.

That leads us to the decision that ‘net neutrality’, when it comes to a blockchain, means that transactions should be hard-coded into the technology so no economic or political power will be able to change this fact that all transactions are created equal.

Unfortunately, Ethereum, while being the largest and most commonly used network for blockchain applications, is not neutral by design. Every party which submits transactions decides how much gas to supply and whoever supplies more gets a priority. It looks like an auction because it is an auction. You pay more so you run faster. What is even worse is you never know how much gas you need to achieve specific transaction speed as this auction happens every time, and with every single transaction. How much money do you need to be guaranteed to win an auction? Yes, unreasonably high bids will probably win, but a practical application of any technology should be reasonably priced.

When All Transactions Are Created Equal

We believe that transactions should be equal and if the network runs slowly participants will be incentivized to vote and add more masternodes and delegates to increase the network’s processing power. But there should be no preference for those who can pay more, especially when it comes to everyday use cases. Will you run a database if you never know how much each transaction costs? Will you open an account with a bank where transaction speed and cost are unpredictable, and you are always of minimal priority when big corporations send their transfers?

The Lamden network is designed to have the same transaction price for any transaction of the same complexity. The price is denominated in stamps and depends just on the transaction complexity. Two transactions of the same complexity will always require equal amounts of stamps to be processed. At the same time, the stamp rate-to-LMT and market of the token itself might fluctuate as described above, but that won’t affect the main principle that all transactions of the same complexity are created equal. Yes, we understand some use cases might benefit from faster transactions, but we also understand that by allowing this we will create a dangerous precedent where powerful players might be able to lobby their apps, and at the end of the day we’ll face the same situation as the Internet. So, we decided to make such a scenario impossible by design. By promoting equality, we promote true values that the blockchain community stands for, and we hope to create something better than the existing ecosystems we have used before.