Creator Coin 101: A Brief Explainer on Rally’s First Building Block
Creator Coin is a potential game changer that will empower content creators to build a whole new marketplace around their brand and community, opening the floodgates for both creators and their fans to participate in a greatly expanded creator economy. Not only are Creator Coins cryptocurrencies that are custom branded to each creator, they are also the foundational building blocks in an easy-to-use blockchain toolkit that will allow creators to unlock better engagement and monetization models in their communities.
As we began to describe in our introductory posts, the first and most critical building block we’re providing content creators is the ability to launch their own Creator Coin via Rally Network. The first several of these coins are now available and there’s likely more going on under the hood than is immediately apparent.
With this post, I’ll do a deeper dive into the details of Creator Coins with particular attention to:
- How our automated markets and pricing curves work.
- Balancing creator ownership of their coins against fairness to the broader community engaging in their economy.
- Current state of our private testnet.
- Early thoughts on the likely evolution of Creator Coins over time.
Creator Coin Pricing Curves
On Rally Network, each Creator Coin’s price and supply are managed by a unique pricing curve. These pricing curves define the behavior of an automated market maker (AMM) that provides Creator Coins or liquidity to anyone interested in buying or selling a Creator Coin. Similar to several of the continuous liquidity providers in the DeFi space, all transactions to buy and sell Creator Coins on Rally Network are executed with an automated counterparty that controls a liquidity pool and operates according to a well defined function.
To understand how this works, let’s explore some transactions against a simple pricing curve. For the purposes of this example, we’ll assume some simple values that help illustrate some key concepts:
- Our example Creator Coin has the symbol CC.
- CC’s value is denominated in USD.
- CC’s pricing curve is a straight line beginning at $0 with a slope that increases price by $2 for every 100 CC minted. That is:
While it may be initially counterintuitive to think of price increasing with quantity from a consumer perspective, keep in mind that this supply curve represents the perspective of our AMM as a producer. The more someone is interested in paying for CC, the more our AMM acting in accordance with this curve will be willing to supply.
To get things started, let’s buy the first $100 of CC immediately after the coin is launched and its supply is zero. The contract walks up the pricing curve to determine the price of each new CC it mints until it has generated enough CC for the $100 purchase request. Or put another way, it advances to a point where the area under the curve is $100.
With the assumed pricing curve, this moves us to a supply of 100 CC. The purchaser receives 100 CC while $100 is added to the liquidity pool and the price of the last CC minted is now $2.
The same operation effectively happens in reverse whenever we sell CC. If, for instance, we chose to now sell 50 CC, we would walk back down the curve to the point where supply equals 50 CC. The contract would burn the 50 CC supplied by the seller and release the associated liquidity. Specifically, we would now be at a supply of 50 CC, the price of the last CC minted is now $1, the contract would release $75 to the seller, and the remaining liquidity pool would be $25.
It’s important to note here that a key piece of our pricing curves working well is that there is no fractionalization of the liquidity pool. At all times, the liquidity pool is fully funded in accordance with the pricing curve. All funds used to purchase Creator Coins and all proceeds from sales of Creator Coins come and go directly from the liquidity pool as trades are executed with the automated market maker.
Launch Configuration for Creator Coins
While the simple linear pricing curve is helpful to illustrate functionality, it’s possible to begin designing for an economy with specific properties in mind by modifying the slope at various points along the curve. For our first cohort of creators, we’ve used our understanding of their existing economic interactions to inform a design captured in the following pricing curve.
The initial segment of the curve labeled ‘A’ effectively represents a supply floor. Upon instantiation of a new Creator Coin, we mint the first 50,000 coins with a small amount of liquidity. These coins go to the corresponding creator and ensure that they have the ability to own a large percentage of the Creator Coin supply at all times, with the intention of motivating creators to behave in ways consistent with the long term value of their coin economy. While the continuous liquidity properties of the pricing curve hold for this segment, the price approaches zero very quickly and the associated liquidity pool is small.
As we progress into section ‘B’, we start to gradually increase slope. At this stage, the liquidity pool begins to build, and leveraging the automated market maker to buy and sell quantities of Creator Coins without quickly dropping below the effective supply floor is now possible. Additionally, the gradual build of the liquidity pool creates an opportunity for early adopters to acquire a meaningful share of their favorite creator’s coins for a relatively modest price.
Within segment ‘C’, we see our largest slope increases. We designed the curve with the intention of arriving in this segment when we start to see a similar amount of activity in the new tokenized economy that our first batch of creators were typically seeing on an annual basis in their existing economies. At this point, price and liquidity increase or decrease rapidly in response to demand and the relative volatility creates opportunities for interesting interactions around Creator Coins and the digital assets they support.
Lastly, in segment ‘D’ we arrive at a leveling off of price increases and hit our effective supply cap of 210,000 coins. The price limitations at the high end of the curve should help discourage unchecked speculation and limit the coin supply to levels consistent with expectations around appropriate economic interactions between our initial cohort of creators and their fans.
It is important to note here that alongside the design of the supply curve, a key determinant for price will always be the demand for a Creator Coin. While the pricing curve establishes a relationship between price and supply, it is the demand for the coin across its various use cases that will allow market forces to ultimately determine where on the curve we will be at any given time.
Creator Restrictions
Because a Creator Coin is so heavily centered on a creator, both in terms of their ownership of the coin and the novel use cases they embrace that will drive demand for the coin, we don’t imagine we can rely solely on a belief in long term economic alignment to ensure a creator avoids behaviors that are unfair to other participants in their economy. With this in mind, we’ve created a set of rules around coin transfers and sales that limit how creators are able to interact with their coins.
These restrictions are meant to be easy to understand and generally unobjectionable to any creator who is aligned around using Creator Coins as a cornerstone of their digital economy. The simple approach we’ve taken is to restrict a creator’s ability to sell or transfer portions of their initial 50,000 token supply with a flow control that is responsive to the size and activity of their coin economy at any given time. Specifically, the outstanding coin supply determines a cap on a creator’s maximum transaction size; and the daily buys, sells, and transfers of their coin by the rest of the participants in the economy determine the rate at which they can execute transactions of that size. The maximum transaction size and rate informed by the activity in a Creator Coin economy feed into a token bucket algorithm that effectively shapes a creator’s ability to sell off their supply of Creator Coins.
Expected Benefits and Challenges
We believe the approach of combining a well-defined pricing curve with an automated market maker and a fully funded liquidity pool offers some important benefits specific to the creator economies we anticipate emerging around Creator Coins. While the details of these new economies will evolve over time, we’re using our understanding of the current transactional opportunities present in creator economies as guideposts to inform appropriate designs. Specifically, across existing platforms for content creators we see consistency in sizes of audiences, paying users, and transactions that suggest we’ll need a system well suited for hundreds to thousands of payers and tens to hundreds of thousands of dollars in transactions per creator.
At these levels, a more familiar auction system would present significant challenges. At any given time, open orders to buy or sell Creator Coins within these sorts of communities would be at or near zero. So even when appropriately overlapping interest in buying and selling did exist, it would be extremely difficult for independent parties to figure out a fair price at which to transact. We’d likely always be under the scale thresholds required for efficient price discovery and trade execution required by a more standard order book; and below levels required for efficiency, we’d expect to see very limited trading and near zero market depth at most times.
By creating an automated market controlled by a well defined pricing curve, we immediately remove these barriers. At all times, price discovery is possible by simply observing the point on the pricing curve associated with the current circulating supply and the automated market maker stands ready to act as a counterparty to any buy or sell demand presented at that price. We believe this approach to providing continuous liquidity is well suited to the community sizes we can reasonably expect for each Creator Coin and should enable much more robust market dynamics than a conventional order book at this scale.
Despite this conviction, it would be inappropriate to not at least acknowledge some of the potential challenges a system like this presents. Out the gates, a common concern raised is how unfamiliar a system like this is for creators and fans. While some of these concepts are familiar in the financial world and have been more recently explored with on-chain implementations in the DeFi world, they look a bit unfamiliar to general consumer audiences. And that lack of familiarity could easily translate to skepticism about the fairness or reliability of the system. We welcome a healthy dose of skepticism and will do everything we can to make the functioning of these markets and their underlying liquidity pools as transparent as possible.
Beyond that skepticism, another appropriate concern with this approach is how important it is to define the right pricing curve to support expected interactions. However, since there’s no way to know exactly how these creator economies will operate, it makes defining the perfect curve a priori nearly impossible. We would love for all of our creators to achieve a level of success comparable with their peers at the top of their respective markets, but our initial pricing curve designs would likely be unsuitable for most creators if we designed them with that level of success as an input assumption. Eventually, we believe we can work around this concern by introducing parameterized pricing curves that respond dynamically to demand in order to scale appropriately to each individual creator’s economy. However, as a starting point, we can only acknowledge this as a design challenge and will begin with static templates that require substantial up front assumptions about how much economic activity a Creator Coin is likely to support.
Expected Evolution
It is important to note that in our current pilot stage, Creator Coins are operating on a private Ethereum blockchain that is isolated from the main Ethereum network. During this phase, all interactions with Creator Coins are handled entirely by Rally Network via a first party application on rally.io intended to demonstrate the functionality made available via the Rally Network API. While we believe this approach gives us the ability to create a user experience that is much more familiar and user friendly than the typical decentralized application, it is our intention to advance user control and transparency as quickly as possible with the ultimate aim of being completely decentralized both in terms of the functionality offered by Rally Network and the community driven governance that will determine its direction.
In the immediate term, we’ll be focused on advancing user control and transparency while still operating on a private network by providing full visibility into the liquidity pools backing each Creator Coin along with on and off ramps that make getting value into and out of Creator Coins as seamless as would be expected of a decentralized application running on the Ethereum mainnet. These liquidity pools will operate in two key phases while we’re running on a private network. First, Rally Network will hold value used to purchase Creator Coins and convey information regarding the available liquidity and movement in supply of each Creator Coin via rally.io. Users will be able to buy and sell Creator Coins according to the pricing curve and automated market maker while rally.io serves as a convenient interface ensuring the compliance and security of each transaction. Second, this liquidity will be translated into a cryptocurrency native to Rally Network that is connected to several popular public tokens and stablecoins via an Interledger Protocol connector. While still operating on a private network, this connector will give users the ability to seamlessly exit the Rally ecosystem and exchange Creator Coins they’ve accumulated for the cryptocurrency of their choice without requiring these coins to be listed on a centralized exchange like Coinbase.
Following these initial liquidity phases, we will continue towards the trust minimization and transparency expected of a blockchain project by linking the Rally Network to the main Ethereum network. At this point, Rally Network will operate as a Layer 2 solution that maximizes transaction throughput for creator economies without incurring large network fees and still benefiting from the security and scale of the Ethereum network.
While it’s still early days, the project is off to a promising start. Our creators and their fans have truly made Creator Coin their own. In the coming weeks, we will share more product updates and announce new creators. Right now, Creator Coin is invitation only, but interested Creators can join our waitlist here. Have questions? Join the Creator Coin conversation on Discord.
