Decoding Token Economics: Insights from our Token Engineering & Token Economy Design Workshop at Berlin Blockchain Week
On 6 September 2018, Token Engineering Berlin, Ocean Protocol and OST co-organized a workshop to discuss why businesses tokenize, the optimal use cases for tokenization and the best approach to engineering and designing token economies.
Token engineering and token economy design are important but still emerging areas when it comes to the application of cryptoeconomics and Blockchain. Advanced work on this, especially on the design of token primitives, is being done in the Token Engineering Global community (the community’s progress can be found at http://tokenengineering.net). Here in Berlin, Angela Kreitenweis is driving this movement through the Token Engineering Berlin meetups.
To add to the understanding of the topic, Token Engineering Berlin, Ocean Protocol and OST co-organized a workshop at the Berlin Blockchain Week. Our aim was to provide developers, smart contract engineers, token economics enthusiasts, companies and investors alike with insights and hands-on experience on how to plan, design, and test concepts for building token economies. Throughout the workshop, we wanted to give attendees tools for cryptoeconomic incentive design, and frameworks for designing a token economy.
Dimitri De Jonghe, Head of Research and Co-Founder, Ocean Protocol, presented on the best practices for token engineering, drawing on detailed work on this topic at Ocean. This was followed by a token engineering workshop led by Ocean Protocol Product Manager and MusicMap creator Kwinter Crauwels who took the audience through the incentive design for MusicMap, a DApp that bundles insightful information regarding music genres and history in one dynamic map.
Representing OST, I presented ways in which the goals and business constraints of mainstream, web 2.0 companies impact their approach to decentralization, and the different token economy models that can be used to solve for their needs. Our goal was to provide an overview on how mainstream companies can build token economies that can materially move the KPIs of their business.
We’re currently in the midst of a radical transformation in society driven by the changing nature of trust (thanks to Blockchain) and the power of dynamic, self-organizing communities of millions of people.
Historically, major technology leaps have been hugely transformative for society. We saw this with the introduction of the Gutenberg Press in the 15th century when the way society interacts changed from one-to-one to one-to-many. In the 20th century, with the advent of the Internet, we find ourselves challenged once again, with interaction shifting from one-to-many to many-to-many.
This transformation has already impacted societal Knowledge (World Wide Web and the web 1.0 era) and Relationships (Social Media and the web 2.0 era). But we are only halfway through. With Blockchain, Relationships will transform further as the nature of trust and transactions shifts between individuals. Moreover, this could transform the Monetary System (Cryptocurrencies and Branded Tokens), all the way to a complete change in our Institutions (with DApps, DAOs, and the web 3.0 era).
This many-to-many framework was conceived by Mark Bonchek, Founder of Shift Thinking and OST Advisor, and has been instrumental in helping Executives of mainstream businesses cross the intellectual chasm and understand the full potential of redefinining trust, relationships and governance with Blockchain.
For some businesses, tokenization is an opportunity to recapture value from tech giants like Facebook, Google, Amazon, and Apple. Distributing this value across many, instead of a few, is very much aligned with what was envisioned in the era of the early Internet with the first generation of Open Protocols. With Blockchain and DApps, businesses can now go even further and make an Internet that shares value with everybody.
For others, this is a unique opportunity to use tokenization to launch their own Branded Token Economies. Many such companies already have large economies of active users making contributions on their platforms (think claps and comments on Medium, reviews on Amazon, traffic updates on Waze). Others have vibrant in-platform economies of P2P transactions (think in-game economies for items and level ups). Tokenization is an excellent way to combine the social incentives of the existing contribution economy with real financial value that can be shared with user communities.
When it comes to tokenization, there is a wide spectrum of use cases possible depending on the degree of decentralization that works for a business.
- At an early stage of decentralization, one can think of use cases where simple transactions are run on-chain for example for loyalty programs, payments, and P2P transfers.
- Going a level further in decentralization makes it possible to run incentive rules on-chain to run entire marketplaces in a decentralized way. Here, token primitives can drive use cases like trust-less registries, information arbitrage markets, information validation markets, content contribution tracking and so on.
- At the deepest degree of decentralization, we have DApps with governance on-chain as DAOs (Decentralized Autonomous Organizations). For example, DAOstack enables DApps to achieve this degree of decentralization.
For the kinds of web 2.0 businesses that OST works with, starting with simple transactions on-chain is often the most feasible on-ramp to working with Blockchain (more on that below under ‘Let’s Design a Token Economy’).
Importantly, even at that early stage of decentralization, businesses who are on-chain will likely share more net positive value with their users compared to off-chain businesses. This is because whilst off-chain businesses can share positive value, the net value shared is often negative due to the disproportionately greater negative externalities they might inflict on users and society (think the impact of fake news on Facebook). On the other hand, greater transparency and trust by running transactions on-chain drastically reduced negative externalities for businesses, making net value shared positive. This shared value only increases as businesses decentralize further.
Let’s design a token economy!
To understand token economy use cases for a web 2.0 business as it evolves through the different degrees of decentralization, let’s use Medium as an example. Since this article itself is posted on Medium, we can walk through this example live (this was also done as a workshop exercise with participants right after the presentation using models developed by OST along with existing work in the Token Engineering community).
Medium currently has a vibrant in-platform social economy where non-subscribers, who are the majority of platform users, give claps to articles to signal their appreciation for content (I’m sure as I write this you’re thinking of clapping for this article). However, at the moment these claps carry no financial value (at least when used by non-subscribers). In that sense, there is no cost to ‘spending’ claps, just a limit per article of 50. So if you’re my friend, you just keep the clap button pressed to give the maximum 50 claps to this article.
Medium’s social economy has elements of a micro-economy where claps from subscribers (the small committed user group) converts part of their subscription fee into income for writers through a hidden algorithm. However, there is no ‘earn’ value for writers that get these claps from non-subscribers (the majority user group). In fact, non-subscribers cannot even read more than three premium articles. So, if you’re a non-subscriber, I’ll appreciate your claps, but sadly won’t know if you really found my article useful, and it won’t do much more than make me happy that you read it. Your claps at best send a weak signal to others that my article is worth reading and make minimal difference to my social balance sheet of reputation.
Now, what if we tokenized claps on Medium? Could we increase community engagement and social signaling for the value producers on the platform?
Let’s hypothetically create the Medium Token.
With Medium Token, when you appreciate my article, you’ll have to ‘spend’ Medium Tokens, which means that even if you’re my friend, you won’t just hit a button till the tokens run out. You’ll actually think about how useful my article really is and how much you’re happy to spend to show your appreciation.
At my end, since tokens of value were spent by you, I’ll now know that you really found my article useful. Moreover, it will send a strong signal to others about how good my work is and be more effective in building my reputation. With these and more tokens that I earn from other articles, I might even be able to fund my monthly Medium subscription (yes, currently I’m a non-subscriber).
It’s also easy to see how over time, with real financial value at stake for all readers and writers, the overall quality of content will improve on the platform. In this way, Medium Tokens could transform the platform’s current limited social economy of claps into a better functioning micro-economy of value for both readers and writers.
In Medium’s case, starting with moving the simple transaction of sharing claps onto a Blockchain could be an easy first step towards decentralization. Looking ahead, we could set up incentive games on-chain (e.g. curation markets) to have a community-owned curated list of top writers on the platform. Going even further, we can even imagine that the governance of such games could be put on-chain to run such mechanisms in a truly autonomous manner.
Putting Token Economies Into Production
Token economies, once designed, have to actually be launched on-chain.
To wrap things up at the workshop, Benjamin Bollen, Chief Technology Strategist at OST presented frameworks for building token economies on-chain and using different design tools to experiment with on-chain rules that make such economies function. Here’s the video of Ben’s presentation:
The OpenST Token Rules Engine can be used to put token economy designs into production even if you have zero blockchain engineers.
Reach Benjamin Bollen for feedback at ben at ost dot com or @BenjaminBollen.
OST blockchain infrastructure empowers new economies for mainstream businesses and emerging DApps. OST leads development of the OpenST Protocol, a framework for tokenizing businesses. In September 2018 OST introduced the OpenST Mosaic Protocol for running meta-blockchains to scale Ethereum applications to billions of users. OST KIT is a full-stack suite of developer tools, APIs and SDKs for managing blockchain economies. OST Partners reach more than 200 million end-users. OST has offices in Berlin, New York, Hong Kong, and Pune. OST is backed by leading institutional equity investors including Tencent, Greycroft, Vectr Ventures, 500 Startups.