The Coming of Age of Social Tokens

New technical capabilities allow influencers and communities to turn social tokens from one-dimensional curiosities into widely usable currencies carrying reliable real world value, that are far better positioned to capture additional value for their issuers and others through building substantial and automated economies centered around the token.

• social tokens offer the promise of branded digital currency that allows creators to capture the value created by their community
• in the first generation of social tokens, technical features are one-dimensional, allowing for sending back and forth and to be included in liquidity pools like Uniswap — they can be related, with hard work, to off-chain economic activity but have no on-chain economics — actual value is aspirational, not provable, reliable or predictable
• social tokens hold promise but have yet to really take off like they should — leading platforms require programming or a permissioned facilitator, have limited capabilities — there’s no long tail activity
• additional capabilities and low-cost permissionless, easy launches will unleash potential — built-in direct liquidity, stable and predictable values, attached namespaces to create a full spectrum digital goods economy centered on the token; real value creation that is direct and measurable through directly connected on-chain economic activity like nfts, fan profiles, memorabilia, tickets, discount codes, coupons, log-in unlock, etc; measurable economic activity with clear results attracts speculators who can measure and predict engagement that inevitably leads to real value
• the Verus project, in non-stop development for five years, has built-in blockchain primitives that make these capabilities a reality now, offering more functionality, to more people — smart contract platforms cannot match these capabilities today absent an enormous engineering effort in bringing together multiple interoperating complex smart contracts
• additional capabilities include privacy enhancement, moral hazard resistance, easy group dynamics
• provable decentralized bridges to ethereum give the best of both worlds — intelligent next generation social tokens that can also emerge automatically, without programming, as ERC-20s
• experiments to prove these concepts require no programming, are risk-free and extremely low cost — core protocols exist now, tooling and apps still require build-out in a collective effort

Social Tokens — the Promise

Googling the term “social tokens” brings a host of articles discussing socal tokens as the next big thing. The idea has been around for a while since ERC-20s mainstreamed the idea of token creation riding on top of a base layer blockchain. Creating digital scarcity and expressing that as a transferable token was now possible without creating an independent blockchain; it could be done at relatively low cost and with low maintenance. Soon, people began thinking about tokens where an influencer, brand or community creates a branded token, pre-mines a little bit of it, gets their fan-base/customers/community to transact in it and, presto, the token will start to gain a little bit of value.

The First Generation

Early market leaders soon arrived, such as tryroll.com and rally.io. These platforms are well-funded venture businesses that managed to onboard perhaps thousands of creators into their own social tokens. Despite some fanfare though, there’s not much to these tokens other than

• enforced digital scarcity — they help creators create and issue ERC-20s (or Solana now, for Rally), helping them through what is an otherwise arduous process requiring some skill
• automated market making — they help set up Uniswap-like liquidity provision, but to gain actual liquidity creators must, in the words of the Roll website: “encourage their communities to contribute liquidity”
• handing creators a roadmap and examples to “build value” — this generally involves activities, services or products that creators will offer to their fans so that they can get their communities to buy the token and then trade the token for these goods — the idea is to generate real-world demand for the tokens

On the roll website, this last concept is pitched as: “After minting, you determine all the ways your token will be distributed and used across platforms, closing the loop that gives your social token its own independent value and starts your social token economy.”. But, as described in this article, “I discovered that it’s just a sh**tload of work to keep a token going”.

The end result is that value in social tokens remains fleeting or aspirational. Liquidity through liquidity provision in automated market makers can be a big problem. For a liquidity provider, risks are high, probably untenable since impermanent loss risk in an AMM with a fragile token approaches 100%. It turns out that liquidity provision in this context is a wholly altruistic activity, or worse, done by people who are unaware of the enormous risks. WIth minimal liquidity provision comes little market depth and unstable value.

Also, value for the token is tightly locked to a creator’s ongoing real world efforts to provide experiences, or events, or products, in order to drive continuous demand for the currency. There are no automated economic activities. If the creator’s activity stalls, or dries up, the token will lose value rapidly. Predictably, the vast bulk of these currencies peter out, and are forgotten, living on as zombie ERC-20s on ethereum.

No Long Tail

Anyone that’s really interested in creating a social token is met with an odd reality in the “decentralized” blockchain world. Both Roll and Rally, the social token leaders, require creators to go through a detailed application process, and then wait for approval. The Rally website says they’re looking for: “1) Evidence of a significant community size, … 2) Evidence of current transaction activity within your community … 3) Evidence that you have strongly considered the role that a social token economy would play in your ongoing projects.” Creators then wait for a review before being approved. Roll’s business model is to take a portion of the creator’s token for themselves. Rally’s is a little more sophisticated, attempting to have value created in their own token and sidechain in the process.

This makes sense for Roll and Rally because there is significant engineering and other work required to get the contracts up and running that define the social token and provide it liquidity. Creators who want to “do it themselves” are met with an arduous and limiting process — essentially, they need to be decent developers to get their tokens going. And to do all that for a one-dimensional token that can only be sent back and forth or placed in an AMM seems to be an unattractive proposition.

The result is that social tokens have yet to fulfill their promise. There’s no easy way for just anyone to do permissionless experiments at little cost, and little risk. And, when they do experiment, there is only the hope that by tying real world activities to their token, they might generate some value there, at least while they continue to offer those activities. This purported value is difficult to measure, and tough to capture, and exhausting to maintain. So there’s no real innovation and no “long tail” that allows unexpected modes of organization and value creation to emerge.

New Capabilities

What would it look like if there were new capabilities around social tokens? What are some of these, and how would they function?

Easy launch — low cost, permissionless, easy launch through point and click or simple commands. This would lower barriers and allow for just anyone to try out social token experiments. The law of large numbers tells us that some would stumble into real success, perhaps in ways, and through methods, we don’t yet understand.

Built-in Direct Liquidity — five years ago, the Bancor project pioneered smart tokens, which they called “money that holds money”. Bancor seems to have abandoned this concept in favor of competing with Uniswap, but the idea has real merit. A social token with this property would not need an automated marketmaker to be able to be a liquid token. Instead, users could convert into and out of the token directly, after first being “seeded” by the founder. This eliminates liquidity provider risk — and, in essence, every single holder of the token ends up providing liquidity, automatically. This leads to more market depth, and thus more stability and predictability in value. The fact that each token is “money that holds money” leads to provable value, and these tokens will be treated with care, as near money. Another result of this capability is that social tokens would have dynamic supply, where more tokens are automatically minted in response to increasing demand, and burned if the demand reverses.

Attached Namespaces — tokens have names, of course. If these are cryptographically unique names (like, for example, crypto addresses), they can be the root of a namespace. ERC-20 names are not unique and so cannot be namespace roots (unless referred to by their contract number). A different model for tokens, where their friendly names are defined in the protocol and processed as UTXOs just like native blockchain currency, points to whole new capabilities. For example, if someone called “Influencer” creates a social token called “Influencer”, they will have also defined a namespace called “Influencer”, opening up unique digital goods opportunities.

Digital Goods — a namespace on a blockchain protocol renders unique power; a simple model for digital goods on a namespace would include:

1. object definition — a protocol could allow unique friendly name identifiers within the namespace, meaning fans could register identities/names that are associated with the namespace, eg. “fan.influencer@”, or an influencer could assign meaningful names to digital goods attached to their namespace, eg. “ticket0001.influencer@” or “coolnft.influencer@” or “schedule.influencer@”
2. object control and transferability — a protocol could allow defined objects to be controlled by private keys and to be transferable from one set of private keys to another, either by command, or in an atomic swap transaction, eg. fans could transfer their objects to and from each other at will, or on automated marketplaces without intermediaries
3. objects as destinations/addresses/endpoints — as addresses on a blockchain protocol, these objects could receive, send and hold funds, or control other objects; eg. money could be sent to or from “fan.influencer@”; also, objects could be endpoints, and so could receive messages or be unique points in a communications network
4. object metadata — objects could contain space for metadata, and leverage data structures and off-chain storage (either centralized or decentralized, like arweave) to allow for arbitrary and updateable data to be associated with the object. Coupled with #3 above this allows objects to exist as NFT art, or verifiable online profiles
5. object signatures — being cryptographically unique, objects could provide verifiable signatures to arbitrary data, thus allowing for applications like sign-on/access, or voting

Immediately we see that meaningful digital goods economies could spring up around successful influencers. Examples of such digital goods would be:

1. Fan IDs — the simple act of creating a fan ID/address for just a few dollars could be seen as a show of support, or status symbol in an influencer community; or fans could create and trade meaningful IDs
2. Nfts — influencers, or even their fans, could create digital collectibles/art/memorabilia to be auctioned, sold or given away to fans
3. Fan Profiles — updateable, verifiable fan profiles are possible
4. Ticket — an object could represent a ticket to an event
5. Coupons/gift cards — an object could represent a right to buy merch
6. Discount Codes — an object might give a right to get ongoing discounts on merch or events
7. Memberships — an object can provide exclusive membership to influencer clubs or forums
8. Log-in/access — an object can give rights to enter websites or other digital arenas
9. Voting — objects could be used to signal support for an initiative, idea or proposal

This is far from an exhaustive list, and the “long tail” will surely draw out ideas which we’re not even capable of conceiving right now. Many of these goods would be automatic or community created and so could thrive even without continuous activity from the issuer. This is important for the longevity of the social token economy. It’s not difficult to see how strong community-created activity could thrive and persist.

An Economic Model for the Digital Goods — to capture value for the issuing influencer (and others), there is no necessity ever to sell tokens directly to the public (which might bring securities laws into the issue anyway). The social tokens would always be just a commodity/good/coupon that can be acquired to show support, or to be used (exclusively) to acquire digital goods like those described above. An issuer would always, likely, issue “free” tokens to themself as part of the creation process (a “premine”), or retain the right to issue new tokens at will (perhaps only after the passing of a period of time). They would also need to “seed” the token with a little bit of real world money to provide initial value to the token. Note that this seed money would never actually be at risk of loss, and could always be recovered; in fact, recovery (and more) would be quite easy in the case of thriving token economies. Once this is done, then fans could acquire the tokens (directly, without an AMM) by converting their currency, like USDC, into the social token. Every time a fan does this, they increase the supply of the token a little bit, and they also drive up its value. When they spend the token on digital goods (like ID creation, buying a NFT, getting a membership, etc.) the amount that they spend gets burned from the supply of the token, which reduces its supply and further drives up its value. During this process, too, the robustness of the reserves of “real” currency are improved, providing more depth and stability to the token’s value. It will become easier and easier for the issuer to start selling down their “premine”, or to issue themself new tokens, and thus capturing the created value, without crashing the value of the token.

With this model, further value enhancement might come from speculators who see that an influencer is growing in power. Speculators like these would be analogous to collectors who have an eye for talent, and that can spot trends. All they need to do to profit is to get in early on the right tokens by the right influencers with the right potential economic activity that would *inevitably* drive value increases. In this way, market dynamics might allow influencers to capture future value today.

This Exists Today — the Verus Project

This is not just theory, but is about to be put into practice. Five years in development, and with a working network (minus these token capabilities) for the last three years, the Verus Project has built the protocols. Verus aims to be a public good. There are no VCs funding the project and so no returns on investment that need to be drawn from users to pay back investors. It is a community developed FOSS blockchain protocol. The only fees involved in creating and using social tokens on Verus will be paid, as in bitcoin, to miners who power the network.

These capabilities as described do not exist on smart contract platforms today. Perhaps they could be engineered on a case by case basis by a team of competent smart contract developers. But, this would require complex interconnecting smart contracts to deal with all of the disparate elements. It would be an enormous engineering effort, fraught with risk and complexity. On Verus, using primitives as building blocks, these tokens can be issued in just a few minutes, with bespoke variables, by non-programmers, and at little cost.

Additional Capabilities

Apart from the core functionality of social tokens described above, there are also some interesting capabilities that enhance the concept. First, as a fork of zcash, Verus offers private transactions on its native currency. And, as a UTXO blockchain, wallets control multiple addresses which cannot necessarily be traced to the same wallet. This gives the ability for intelligent apps to protect user’s privacy as they interact with social tokens.

Also, on-chain escrow mechanisms allow for issuers to timelock their holdings for arbitrary periods. This helps reduce potential moral hazard where fans and speculators might be concerned about issuers dumping their holdings and “rugging” their community. Roll has always been concerned about this possibility, and that led them to provide centralized escrow services for their issuers. Unfortunately, a security incident at Roll led to these “escrowed” amounts being stolen and liquidated.

Social tokens might be tied to entire groups, rather than a single influencer. In this case, Verus protocols allow multisignature approvals for the issuance or sale of the tokens. Multisigs can be up to 13 of 25 different participants.

Finally, Verus testnet currently includes a provable decentralized bridge to and from the ethereum network. This bridge allows any token created on the Verus network to be bridged to ethereum, where it *automatically* emerges as an ERC-20 token, without any additional programming required. This is a crucial element, as ethereum is currently where the users are. Once created on Verus, an influencer can bridge tokens over to ethereum, where it can be used for giveaways, liquidity provision, or any other purpose for which social tokens are used today by Roll or Rally. Similarly, tokens can be bridged from ethereum, meaning that USDC, ETH, WBTC and other valuable currencies will exist on the Verus mainnet.

Status

These protocols exist now on the Verus testnet and are scheduled for imminent release to the Verus main network. As a community project, and FOSS project focused on core protocol development as a public good, Verus community members have not yet advanced consumer-ready tooling and apps that can take full advantage of these core capabilities. Nevertheless, forward-thinking influencers can start now, since experimentation is inexpensive, permissionless and easy, and some of the tooling and apps do exist for capable users. More importantly though, there is a business opportunity here for companies or entrepreneurs to leapfrog Roll and Rally, or for those companies themselves to pivot to, or supplement their current offerings with, a more capable rent-free platform. The Verus community stands by to assist anyone who would develop tools and applications and businesses leveraging the protocols.

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