【Sharing Trilogy】Part 2: The Solution, Internal token circulation method (ITCM)
Columbus: After Christopher Columbus discovered America, some other captains from the meeting hall argued that Christopher was just lucky; as it was NOT difficult to keep sailing west until he stumbled into American lands. Christopher replied: “do you know how to make an egg stand on the table?” The meeting hall went silent, as none of the captain were able to answer the question. Christopher asked the server to bring an egg, and placed it hard on the table, crushing the egg’s bottom so it stood on the table. The captains who complained earlier again shouted that it was simple and everyone was capable of doing it. Columbus replied “yes, it is easy, but no one thought of it until I have shown how. It is about the ability to jump out of the box and discover the new.”
There are new things been recreated every day, every hour or even every minute. It is on token designers shoulder to keep rethinking about how to jump out of the box and find the best solutions, so as to discover unknown grounds.
Continuing the previous article that the foundation of value actually comes from the user’s side, it is important to understand the token economics behind the scene. Additionally, besides the typical projects that just focus on evaluation, token ratio, consensus mechanism, technical part and etc… it is important to go few layers deeper and grasp the core value of the token flow, which will be explained as follows:
- The Acupuncture map of token projects (Eastern approach)
A Human is made up of its body, organs and blood. Blood flows through all parts to fuel human’s movement. It is a simple example for one to understand the essence of the Token economy within a project just alike.
If a project is a body, then using a Western Medical understanding, one can understand its product functions as its organ, which requires a correct token economy to serve as the blood flow to maintain its operations. Or from an Eastern Medical understanding, the product function of the body are acupuncture points and the token economy is the “qi” that goes thru the body for its sustainability.
Therefore, it is suggested to understand the token project from the basis of its usage by mapping out all its potential functions. Once the map is drawn like a human body, the token designer ought to categorize the functions as inflow, outflow or both and work out mathematical assumptions / numbers for each organs to prioritize a project’s development schedule. Throughout the process, it is important to rethink whether that particular function is necessary as an inflow, outflow or perhaps not needed at all. Each function can act as an inflow and outflow at the same time or perhaps switch as the product evolves later on.
A sample product as follows:
However, the designer should keep in mind that as a human body grows its needs change, hence the designer will need to rethink the assumptions and usage for inflow and outflow on a regular basis.
2. Token balance sheet
Just like managing a balance sheet for accounting, the token designer should also transform the product map or body organs or acupuncture into a list where the left side states the inflow of tokens into the projects and the right side as the outflow. Instead of making both sides equal in the balance sheet, the outcome will display whether the token dynamics grow in demand or supply. A surplus of the inflow means the projects will actually benefit from the price rise, as consumers require tokens for its usage and will pay back to the project side; whereas a surplus of the outflow will mean the project is releasing more tokens to the market, which usually represents a decrease in price (most often done to attract users to the platform).
The above chart is coordinated with previous product tree, and shows a positive return of the internal token circulation that shall cause the token price to grow without the external efforts.
Sub-function 6 is usually considered as mining that motivate users by releasing the token pool. The F-Coin exchange that benefited from a short time burst of users only considered the outflow and soon after without a real inflow caused the model to collapse. Only if this ICTM was considered at modeling its token circulation, the disaster might have been avoided.
With this kind of business planning, the token value will be easier for traditional analyst to understand and take investment steps.
The designer should also be aware the market free float quantity due to pre sales, and that an extreme uneven inflow or outflow isn’t healthy as well, since the design process should take growth path into consideration together with the opening of new functions. Therefore, we suggest to plan ahead by setting a KPI for each Business Unit / Department with time line accordingly.
3. Lock up schemes
One of the key elements to withhold the outflow is to create a “Lockup” structure, however a lock up by choice is promoted. This kind of lock up can be categorized by 1) to Business and 2) to consumers. The following steps can apply for both categories: 1. the exchange of privileges and 2. the exchange of future benefits. It can be creatively set depending on the business sector and business model.
Looking from another classic angle of Supply and Demand.
The token economics can also be explained by the most fundamental economic understanding of Supply and Demand, as shown in the chart below
The Supply is token projects are usually fixed in the long run as the total quantities are fixed at date of issuing. The slope is the projects’ mining speed combined with foundation’s usage.
Using the correct lock up scheme the Supply graph will shift to the left causing the token price to drive up.
The demand is the need of the token, where the slope is defined by the number of functionality it serves, the more functions the steeper it is. The movement to the right is caused by either strong internal token velocity caused by multiple usage or by increasing number of users. Business model shall be taken into consideration here, an example of S2B2C, 2B2C, 2B, or jus 2C as each of them will produce different combination of token exchange in different business environment/sector.
The token designer ought to take both into consideration for initial the rise of token price.
By achieving these few major points, the token designer shall have made some of the most basic functions, forecast and understandings for the token growth. The value driven from internal circulation is the key concept, and that is the road to decentralization. The real value of the token economics should always come from the bottom of pyramid as shown in previous article “Why did the Pyramid collapse?”, the real users are the value to be captured. It may not rise so fast as it did during the earlier hype cycle, but it is more stable and long term. Just the like Columbus story mentioned earlier, it is an interesting journey for all token designers to rethink, re-challenge and jump out of the box!