Truly Decentralized Pornography
A few thoughts on SpankChain
SpankChain is a “cryptoeconomic powered adult entertainment ecosystem built on the Ethereum network.”
You can find them here: https://www.spankchain.com
Understanding the Token Model
SpankChain was designed almost as a carbon copy of the Gnosis model. There are two tokens: a ‘mint’ token (SPANK) and a ‘utility’ token (BOOTY) that is used within the marketplace. The utility token is pegged to $1USD. BOOTY is generated and distributed to holders of SPANK based on a supply target.
I really like this model since it does not run into problems around velocity, and I believe to be a very interesting alternative to the single-utility token.
BOOTY
The amount of BOOTY minted per time period is equivalent to fee revenue if growth is stable but increases or decreases as a function of the change in growth rate from time period to time period. This is pretty simple — if the only tokens being burned are transaction fees, and the only reason why token supply should increase is because token usage increases, then those are the two only factors that dictate BOOTY production.
We should be able to estimate fees stable percentage of network revenue, depending on the final fee structure and the product mix between performer fees and advertising revenue).
There are some complications here, because the individual return is dependent on at what point in time you choose to stake your SPANK tokens. The algorithm has not been disclosed, so I will not speculate, but there may be significant differences on yield as a result of this unknown dynamic.
SPANK
The mint token (SPANK) seems to resemble traditional equity ownership in a company — its ability to generate BOOTY tokens that have pegged USD value is a function of the fees charged by the platform as well as the growth of the platform — but, in fact, it is more akin to ownership of the revenue stream of a traditional company. In a traditional corporation, equity holders only claim ownership at the net profit / dividend level. SpankChain allocates token production (which is again, related to fee revenue) directly to SPANK token holders before expenses are occurred. You can therefore estimate value using a traditional discounted cash flow model and estimate yield on the token.
The difference is significant from a valuation point of view. The value of the token is potentially a magnitude greater than an equivalent equity share in a traditional company with the same revenues (with, say a 10–20% net profit margin).
However, this difference in how revenues are owned and distributed also has significantly implications for the funding of SpankChain Co. Effectively, there is no cash flow that accrues to SpankChain Co. from transaction fees outside of their owned staked SPANK tokens. While the founders may individually own tokens (16%), this direct ownership makes them individually wealthy but doesn’t help fund things like salaries and operating expenses.(And because of how this is structured, I would also argue that this is a very high figure for the founders to own in a non-dilutable, revenue-based equity when compared to traditional venture capital).
Two additional concerns:
· Will pegging work? (no pun intended)
BOOTY is supposed to be pegged to $1USD equivalent of services, and the platform allows for fees to be paid in ETH or other ERC-20 tokens, but I wonder if the demand-supply dynamics of the token (especially the supply side of the equation, which is within SpankChain’s control with its SPANK production function) will allow for a stable peg, or whether or not there will be less-than-optimal equilibrium driving prices away from the peg since it is somewhat artificially set.
I don’t think it’s a massive concern, since SpankChain will be able to adjust these dynamics without too much issue. It just may not be able to keep it’s initial promise of target BOOTY supply levels at 12X usage over a time period, but the underlying value dynamics remain stable despite this. What is more important is for the ability for BOOTY to maintain its pegged price.
If SpankChain Co. also controls 20% of the mint supply, it will also have meaningful market power to affect and maintain the peg, so perhaps this concern is moot.
· Why build the fee reduction mechanism?
SpankChain appears to have also copied Gnosis’ proposal to burn SPANK tokens if fees are paid in ETH or other currencies. I simply don’t quite understand why this mechanism is necessary, when simply automatically purchasing SPANK tokens at the peg price would work perfectly fine and probably makes more sense.
On Sustainability
Given the above token model, like many other projects in this space, SpankChain Co. does not actually have any clear revenue sources laid out in any of their materials so far. It appears that the one mechanism for introducing cash into the company is via token sale — which they still have available but there is a fixed supply.
Given the high-flying valuation these days, this may be an afterthought for a while, since there is likely more than enough to fund the company for quite a while, but to recognize that there is no actual revenue going into the company in the future I believe is at least somewhat important to mention and plan ahead for.
· A 20% SPANK stake
I would encourage the company to consider holding and staking a full 20% (perhaps more) of the remaining tokens under their control indefinitely to continue to fund the continuing operations and development of the company.
When put in perspective, this is a very low figure relative to most companies — most companies do not operate with 80% margins, so funding the company with just 20% of revenue is optimistic. But again, we’re all new to these decentralized organizations, and so who knows what an appropriate number might be?
· Second-layer funding mechanisms
This seems to be somewhat implied in their initial white paper, so I’d love to see more thought put into the details of what the potential opportunities are. What is most obvious is to have SpankChain Co. also act as a service company to the network (on the advertising side, production side, talent side) and also charge SPANK for the provision of these services.
One could argue that this introduces some centralization, but the platform itself does not show any preference for service companies and allows anyone to introduce second-layer solutions if they wish.
On more decentralized ownership
One of the idealized visions of this company would be to truly create a version of decentralized ownership where contributors, participants and stakerholders of other types substantially own the value that this network produces.
The directional intent of the SpankChain team is that some of the unallocated tokens are to be allocated to partners and other contributors to the platform, but as it stands, I believe that simply due to the liquidity of a token (as opposed to start-up equity), over time, ownership will trend towards spculation and mimic a traditional corporate equity breakdown in the long run. The only distinction is that access to equity ownership was greater earlier, but I would guess it is still largely speculative.
I would suggest the SpankChain team consider a formalized collective ownership structure, where performers and other contributors collectively own a 20% piece of the SPANK token pool indefinitely. This would allow for potentially the first ime, to have contributors of a platform to have equity-like ownership (and therefore the fees and ad revenues).
The percentage ownership of the block should likely be based on ‘total view count’ or a similar metric, which would allow people who have been with the platform for longer to build up their views and strongly incentivize joining the platform earlier.
As a marketing mechanism, this is really the 10X value proposition and creates a very strong case for early adoption and to accumulate as many early views and prominence on the platform as possible. Join us, use this platform, and own a piece of the pie forever. A performer who has built up an enormous history of views can choose to stop working and rely passive income based on their accumulated historical views.
As a block, there should be governance mechanisms that allows for them to make decisions based on their views as well, and potentially allow the block to increase or decrease their ownership of SPANK over time, as well as contribute to governance decisions for SpankChain as a whole.
This evolving, living structure allows for more long-term incentives compared to a straightforward token distribution to partners (even vested), because, again, due to the liquidity of the tokens, it’s essentially equivalent to handing out cash.
Additions from further feedback:
1. Further explanations of the GNOSIS / SPANKCHAIN model:
It’e easiest to understand by looking at a spreadsheet:
https://docs.google.com/spreadsheets/d/1A8slg8F_53z4_TxVGL7fIjuyPMWIRirx8gA3ys6z7Lw/edit?usp=sharing
How much of the utility token is minted for any given period is dependent on two sets of factors: 1) Transaction fees in the last period x the target supply multiple (set at 20 for both) — which sets the target supply; 2) Current supply less transaction fees for the period. The difference is the amount that is minted (or it can be 0).
In a stable, no growth state, token generation is equivalent to fees, which formed a lot of the basis for my argument. I think just to have token generation equal to transaction fees (and to have a mint token to generate those tokens) is the cleanest token model, and I’m would imagine there’s a pretty obvious way of doing that.
The imperfections around this model come when growth or decline is introduced. When the target supply multiple is set at 20, SPANK being staked during periods of growth are rewarded disproportionately (2X+) to the transaction fees because of the growth in the target supply — see the difference between generation and fees in periods 6–20. (And vice versa when transaction fees are in decline — see periods 21–35). The degree of disproportionality of this is actually a function of the target supply multiple — if it were <5, the problem would be much less pronounced.
More importantly, in aggregate, over any given period, transaction fees are still approximately equal to the token generation, with the balance being the difference between initial supply and final supply. (See the total line — but of course, over shorter periods or periods of high growth or decline, this difference can be significant). This just means that over a longer time frame (20+ periods, because it’s all relative to supply) the disconnect between transaction fees and token generation is also less pronounced — there’s just going to be more tokens generated over more time relative to the increase in token supply.
Overall, I do think the model is workable (and still the most investable model so far) if they tweak the target supply multiple down to reduce the magnitude of disproportionate returns for growth. It’s not going to be a perfect analogue of revenue, but all companies suffer from varying net profit margins or dividends during periods of growth and decline. This is no different.
2. Problems with the Peg
The risk related to breaking the peg is significant.
I think the company has two levers for controlling this: 1) They can play with the target supply multiple to get it to a more appropriate equilibrium (which I keep going back to as the most important variable for multiple reasons); 2) They should maintain control of a meaningful percentage of the mint tokens and sell the utility tokens at the peg price.
As long as supply is in the right range, I think there’s not all that much incentive for the service providers to sell for anything less than the peg. Then the company’s supply should act as the minimum price to disincentivize selling at higher. I think it will also help a lot if they have a lot of great, simple mechanisms to facilitate that exchange on the platform for both sides that make it very easy to buy and sell at the peg.
But all of these markets are a bit zany and the only answer is we won’t really know what will happen and the peg breaking really screws with the model.
