TOKEN ECONOMICS

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”― John Maynard Keynes

SELF’s economic model was developed by Chief Economist Tom Lam. The following is a break down of the concept behind our token economics shared by Tom himself:

I still remember when JC invited me to the SELF team, one of the earliest things we started discussing was the token economy design. At the time, I set four themes for this model: Win-win, transparent, Dynamic, and balanced (equilibrium).

Win-Win

In the beginning, I thought it was obvious what was important about this concept. The easy way of explaining it is that token economy should make all participants within feel like they get something out of participating, or else there would be no incentive to join. But in discussing this idea with other scholars, the response turned out to be an an ironic “sure you are,” meaning it was simply impossible. Later, I understood; in a world with so many crypto startups, if issuing tokens to make money is to target those who will lose in investing, then how could “Win-win” be possible at all?

If this is the case, how would we explain the butcher example? “I went to a store in the city to buy a chunk of beef. I paid money, yet it doesn’t feel as if I lost anything. The store owner gave me beef, and he doesn’t feel as if he lost anything. Is it so hard to let everyone win?”

This is a textbook example in economics, common-sense yet illuminating the very core of any economic system. To be mutually beneficial is for everyone to produce something someone else wants. It doesn’t matter if it is traditional currency or cryptocurrency, for currency itself is just a tool for recording transactions. Without work / production, any kind of currency we earn is straight out of someone else’s pocket, and as they stand to gain nothing, that is not “Win-win.” This “work” can be a product that expedites the transaction process, something that increases market potential. Even more directly, we can apply this notion to participant contribution. In another sense gaining rewards based on your contribution.

What’s worth mentioning is that this “Win-win” philosophy is not based on the assumption that the token price has to be increasing. That’s not to say that the token price wouldn’t rise, but it is crucially important to stress, as it is easily and often misunderstood, that the rise in value is the effect of a cause, not the cause of an effect. In other words, the idea that “if the value rises, everyone will like this economy” is not sustainable, whereas “because of its other elements, everyone likes this economy, so thus the value rises” is a logical sequence of events.

Transparent

SELF Chain’s Advocator Score and Rewards Algorithm are open-source, available for anyone to view. Blockchain’s smart contract allows us to link with merchants outside of the film industry, automatically carrying out our promotional mining rewards and reducing transaction fees in the process. Many people think that transaction fees simply mean “the fees paid in carrying out a transaction.” This easily elicits the feeling that “cash is pretty good then, if I pay in person, then the transaction fee would be low.” That is a misunderstanding. “Transaction fees” in this case includes the fees necessary to execute the smart contract, serving as a literal receipt to ensure that the rules of the contract will go through.

A lot of times with promotional mining rewards or with merchant collaboration, the complicated marketing plans or consumer-producer interactions are often only made available with smart contracts, resulting in a plethora of transaction activities unavailable before. This is also why transaction fees should include this broader definition. Reducing transaction fee by transparency is one of the most fundamental parts of the SELF’s Token economy.

Dynamic

Through SELF CHAIN, merchants can reward participants based on their consumption contributions, and the quantity of this mining reward can be determined by each merchant’s own distribution algorithms. This makes SELF CHAIN an incredibly lively, active entity capable of linking with all kinds of merchants varying in degree of participation. However, it should be noted that the accumulatable Advocator Score by consumption from each merchant will be adjusted by the merchants themselves based on the quantity of mining rewards they offer. For example, because Advocator Scores can be accumulated through consumption of all merchants, if a merchant gives only a small quantity of rewards yet gives a ton of Advocator Scores to recent consumers, then this would be unfair to the other merchants that give a large quantity of rewards and the consumers of these other merchants. So we base the “Advocator Scores” on an algorithm to ensure fairness among all merchants and all consumers.

Equilibrium

A commonly found mathematical concept, the Nash Equilibrium, are in white papers to prove that no one in equilibrium can benefit from a single change of action. This is because very often the economics behind cryptocurrencies is not as simple as the aforementioned purchasing of a chunk of meat. One of the complexities is that within the same economy, whether it is “using” the currency or “mining” it, the behavior of any participant can influence that of the others. So we cannot only consider a single type of behavior of a single type of person. Using the payment system as an example, if everyone is very active in spending with SELF Token and amassing promotional mining rewards, merchants will have more customers and film companies will have more funds to make more movies. But if a single party changes their behavior, saying they wish to opt out, then they would be losing out on all the aforementioned benefits. Thus, in our case, they wouldn’t wish to opt out, making this economy balanced and stable.

If the design of a token economy does not consider the Nash Equilibrium, then no matter how much money and energy one uses to maintain the initial phases, it will not last long. Some ask me what good a bunch of mathematics would do for SELF Token, and some ask why the SELF team would do so much to push everyone to actively participate and use SELF Token. My answer to both inquiries are the same: We aren’t throwing money to retain customers, rather we are building a community where everyone can actually benefit.