Introducing Cyclical Token Models

Cyclical Token Models can provide an effective alternative to existing token models which fall short when applied to increasingly complex organizations.

Fixed supply medium-of-exchange tokens have dominated the cryptocurrency market. The medium-of-exchange token model is used for networks that connect consumers directly with service providers. The examples are seemingly endless and include decentralized storage solutions (Sia, Filecoin, Storj), payment channels (Raiden), gambling (FunFair), sharing economies (Bee Token, Arcade City), and more. These networks can be thought of as marketplaces where service providers are being paid directly by consumers for the value they provide. Medium-of-exchange tokens work well when there is a clear consumer to service provider relationship (eg. Alice pays Bob for a ride to the airport.). However, the model quickly falls apart when service providers need to be organized in more complex organizational structures such as decentralized insurance agencies, investment funds, franchises, marketing agencies, etc.

Cyclical Token Models can be applied to networks that need to incentivize collective value creation by coordinating many different actors. In this new model, service providers work for the network which then transacts directly with consumers instead of service providers working for consumers directly.

For our example, let’s imagine a decentralized news agency. A good news agency works hard to create and maintain a trusted brand. A well written and researched article will often bring more value to the agency than a fluff piece that lacks substance but generates more immediate revenue in ad views. The ad revenue generated by the agency is not a result of any individual actor’s work, but the collective value created by all service providers (writers, editors, researchers, lawyers, etc.) on the network since the agency was founded.

This new Cyclical Token Model is a subset of what’s known as a continuous token model. A continuous token model is a model where the supply of tokens fluctuates according to rules set by the network. Instead of a fixed supply, tokens can be minted (created) and burned (destroyed) increasing and decreasing the token supply respectively. One popular example of a continuous token model is the token bonding curve. With a Cyclical Token Model, tokens are minted for actors that provide value to the network and tokens are burned as a fee by the network’s consumers. I’m calling this a Cyclical Token Model because of the cycle that tokens flow through: DAO -> Service Provider -> Consumer -> DAO.

You might be wondering why the network would want to burn tokens. Burning tokens decreases the overall token supply thus increasing each token holder’s share in the network. If a token’s value (T) is thought of as the network’s value (N) over the token supply (S) or (T = N/S), then as token supply get’s smaller and the network value stays the same or increases, the token value goes up. Conversely, minting tokens increases the token supply diluting token value.

When reasoning about this model, we assume that token holders are financially motivated and incentivized to increase token value. This means making governance decisions that increase the value added per token minted (raise network value) and/or increase the amount of tokens burned for fees (lower token supply). Let’s jump back to our decentralized news agency example and see how this could work in practice.

This example references another cryptoeconomic mechanism called a token curated registry (TCR). If you are new to TCR’s you can learn more here.

The decentralized news agency called DecentraNews has a token called NEWS token. NEWS token holders manage DecentraNews’s reporters using a TCR. A contribution reward is minted for each article a reporter contributes. Ad placements on DecentraNews’s site are auctioned off for NEWS token which is burned. Token holders acting in their own best financial interesest will curate the reporter registry, adjust the contribution reward, and make other decisions such as number of ads per article. If the network is successfully governed, the true value of the token will increase due to either 1) The true value of the network increasing faster than the token supply or 2) The true value of the network increasing or staying the same while the supply of tokens decreases. “True value” is used to distinguish from speculative value or the actual price of the token on the market.

In this example, reporters are the service providers who earn newly minted tokens and advertisers are the consumers that burn tokens as fees. While this example is overly simplistic, we can start to see how DecentraNews could scale into a more complex organization. New TCRs for editors, researchers, and lawyers could be added, each with a its own contribution reward. Each service provider could even have a unique contribution reward allowing the network to evaluate service provides not just on the value they bring to the network but their cost as well. This can all be done without devising a complex system of revenue distribution that would be necessary with a fixed supply medium-of-exchange token.

Organizations using a Cyclical Token Model also have the advantage of having a continuous token distribution. With a Cyclical Token Model there is no need to sell off large portions of the token supply in an ICO or have a central party manage the organization’s funds. Tokens are minted as value is created allowing organizations to grow organically.

Cyclical Token Models have the potential to coordinate diverse sets of actors to create value in a completely decentralized way. I believe this model can be applied to countless use cases and am looking forward to seeing what the community comes up with.