Tokenomics by Design: How to develop a viable, sustainable, and profitable blockchain-based business model
An article published in Forbes estimates that the failure rate for enterprise blockchain projects may be as high as 92%.
Bitcoinist asserts that:
“More than 80,000 projects claiming to utilise blockchain technology have launched worldwide since Bitcoin’s underlying technology became the hottest buzzword in business. Of those projects, only a mere eight percent are still active, and the average lifespan of any given project is roughly 1.22 years.”
So why do blockchain projects have such a high failure rate?
It is important to remember that blockchains provide a completely new evolution in the ways of organising economic activities. Blockchains have the ability to support a new form of economic institution that is discrete from firms, markets and governments.
The “old” ways of structuring and building an organisation when applied to a blockchain-based environment may not apply and new business methods and practices need to be explored and established with regard to their design, implementation and deployment.
More recently, I have been fielding an increasing number of inquiries from founders, entrepreneurs and venture capital funds who are eager to understand whether their blockchain start-up business model is viable, sustainable and profitable.
In response to this demand for more information, I have outlined below three (3) basic frameworks for a new approach to structuring and designing blockchain-based projects. These frameworks emanate from a business and economics lens.
1. Business Model Framework
The Business Model Framework is designed to assist founders and entrepreneurs understand their own business model in a straightforward, structured manner. Throughout the process of building the business model framework, deeper insights of how the business functions and operates are revealed.
The Business Model Framework starts by considering:
A Problem Statement is a clear and concise description of a problem or issue. It identifies a problem’s current state, the desired future state and the gaps that lie between the two.
A Problem Statement is often the reason behind a start-up coming into being. A clever entrepreneur has identified a gap in the market and they seek to offer a product or service that fills this gap.
The key elements of an effective problem statement include:
1. Identify and describe the gap/pain/problem that exists now
2. Outline and describe the impact of the problem (support this with evidence and research)
3. Outline and describe the importance and urgency of the problem with reference to specific users, individuals, organisations, demographics (support with evidence)
4. Propose a solution
5. Describe and identify the benefits of the proposed solution
Unless you are solving a problem that has a high and significant impact on a specific customer segment, demand for your product or service will be low.
An Impact Statement is a statement that explains the significance of your project or start-up. If the impact on the target users is too low, they will not care that there is a solution
An Impact Statement typically consists of the following four (4) core elements:
- A clear description of the problem
- A description and explanation of its impact:
- why is it a problem? (highlight/explain the pain)
- who is impacted? (customers, businesses, departments)
- A statement and description of the potential actions that could be taken (plan)
- Identify benefits
- who benefits?
- how do they benefit?
The Value Proposition are the reasons why customers choose to engage with your start-up/company over that of a competitor. It solves your customer’s problem (ie Problem Statement). Each Value Proposition consists of products and/or services that caters to the requirements of a specific Customer Segment.
This brings us to our next important consideration — Customer Segments and Value Proposition Maps
Customer Segments are the different groups of people or organisations your organisation aims to reach and serve.
Key questions to consider when defining your Customer Segments include:
- For whom are you creating value?
- Who are your most important customers?
- Which Customer Segments are you looking to focus on?
Customer segmentation is important to make sure that your messaging and product/service positioning is meaningful to each Customer Segment.
Value Proposition Maps
The Value Proposition Map is a framework which can help ensure that a product or service is positioned around what the customer values and needs.
The Value Proposition Map is a visual tool that lets you plan what problems or desires your product or service addresses in a way that allows you to find a match between your product and the expectations of your customers.
In addition, the following key topics form part of the Business Model Framework analysis:
- Value Creation
- Revenue Streams
- Customer Segments, Channels, Customer Relationships, Key Resources, Key Activities, Key Partnerships and Cost Structure (https://www.strategyzer.com/)
- Blockchain Platform Analysis (transparency, security, streamlining, auditability, immutability, distributed network, consensus algorithm)
- Blockchain Platform Requirements
- Blockchain Accessibility
(A Blockchain Analysis and Feasibility study designed to determine if a blockchain platform is appropriate for the proposed project has been excluded from this discussion. It has been assumed that the application of a blockchain solution is appropriate for the project.)
2. Behavioural Insights Framework
The Behavioural Insights Framework is designed to assist founders and entrepreneurs understand the behavioural drivers within their blockchain network, including incentive and rewards structures revealing insights into how participants will likely make choices and decisions.
The theoretical frameworks includes an analysis and consideration of:
- Hedonic Value
- Utilitarian/Functional Value
- Prospect Theory/Loss Aversion
- Endowment Effects
- Default Bias
- Choice Architecture
- Behavioural Nudges
- Cognitive Bias
- Network Behavioural Nuances
This theoretical framework must be tested (hypothesis testing) with the assistance of experiments (interviews, surveys) to gather empirical data to determine if the model is accurate.
The experimental data is then included as feedback into the theoretical framework to provide a clearer understanding of how the blockchain network is most likely to behave.
Assisting this part of the research process are:
(a) Network Personas
Network personas are semi-fictional profiles which are created based upon your research to represent the different customer types that might use your product or service in a similar way. Creating personas will help you understand your users’ needs, goals, experiences and behaviours.
- They help guide product and service development to suit the needs of your target customers
- They will assist you in attracting and engaging with customers that are more likely to value the products and services you have to offer. Further, you will be more likely to retain these type of customers
(b) Network Empathy Maps
An empathy map is a simple, easy-to-digest visual that captures knowledge about a user’s behaviours and attitudes.
The mapping process can help synthesize research observations and reveal deeper insights about a user’s needs and behaviours. The empathy-mapping process helps to distil and categorise your knowledge of the user into one place. It can be used to categorise and make sense of qualitative research such as research notes, survey answers, user-interview transcripts.
It should act as a source of truth and reference throughout a project and protect it from bias or unfounded assumptions.
- Better understanding of the user and their motivations
- Distilled information in one visual reference
- Highlight key insights from research
- Fast and inexpensive
- Easily customisable based on available information and goals
- Provides a common understanding among project team members
3. Tokenomics Framework
The definitions of this term vary widely (and wildly) across the internet. For the purposes of this discussion, I have defined tokenomics as follows:
Tokenomics is the design and alignment of rewards and incentives in a token-based network/economy
The Tokenomics Framework draws information and guidance from the Business Model Framework and the Behavioural Insights Framework. It specifically considers and defines the following key areas:
- Token Distribution :
- Token Supply
- Token Allocations
- Token Distribution Models
- Business Scope :
- Value Proposition
- Market Opportunity
- Supporting Research
- Primary Business Model
- Other Revenue Streams
- Token Price Stability :
- Inflationary or Deflationary Currencies
- Stablecoins and Token Pegging
- Token Actions
- Token Functions
- Network Valuation Models
- Governance Models :
- Blockchain Governance Model (including on-chain and off-chain considerations)
- Scope of Governance
- Governance Operating Model
Blockchain ecosystems are highly complex and fluid networks. Their design, structure and operation are multi-layered and driven by numerous variables. Therefore, it is critically important to strategically design and define the Business Model Framework, Behavioural Insights Framework and the Tokenomics Framework so that the blockchain incentive and reward structures are aligned and balanced within the network.
Further, these frameworks will assist you in understanding the potential outcomes and flow-on effects any changes to the network structures may bring.
With a thorough, detailed and strategic understanding of these three (3) key frameworks it is more likely that you will be able to develop a viable, sustainable and profitable blockchain-based business model.
Nathan van den Bosch is a Behavioural Economist, Tokenomics Specialist and Blockchain Strategist, with more than 30 years of experience in emerging and disruptive technologies. Nathan has degrees in Economics, Commerce, Behavioural Economics and Applied Blockchain.
Nathan specialises in designing the reward and incentive schemas for gamified metaverses, digital ecosystems and digital economies. His focus is based upon understanding the behavioural drivers that spur adoption and sustained usage in blockchain-based network environments.