Jonathan Caras and Michael Hasson
In this post, we will respond to the article written by @TrustlessState, where David outlines a general token economic model. This piece will be the prelude to a series we intend to publish which will describe a framework for a generic value capturing token model with follow-ups exploring potential use case examples.
Does your application need a token?
Since the ICO boom and bust there have been many attempts at launching blockchain based network tokens of numerous forms (payment tokens, governance tokens, work tokens, etc) with the aim of coordinating network participants to collaborate and bring value to new decentralised networks (in most cases, marketplaces). To be clear, we are not talking about base layer “commodities” like BTC, ETH, ATOM, DOT, XTZ and the like. We are talking about tokens for networks designed to disrupt “such and such” industry, built on the infrastructure of one of the aforementioned base layer protocols.
To date, most token economic models for dApps and protocol networks have been flawed, likely because the success of Bitcoin and Ethereum led entrepreneurs to think “Hey let me create my own network specific token and I too can ride a rocketship to the moon”. Bitcoin and Ethereum are examples of commodity monies which can be the basis of a new economy, but services built using these monies will need to follow the same time tested rules governing the offline economy — ie businesses exist to generate a profit. We do believe that open source systems built on public blockchains will enable organisational enhancements and that the vision of Web3 will be realised, but that at the end of the day it will be because it will make the best parts of the existing capitalist system work better.
We have spent a lot of time over the last year thinking about models for tokens that better capture value, as well as, profitable DAO structures. Many analysts have posited that the general buckets of potentially valuable tokens include commodity tokens, utility tokens, and security tokens. We believe that the two most important to focus on for the evolution of this industry are 1) Commodity Tokens and 2) A specific type of Utility Token, what we call Network Equity Tokens. We will describe our Network Equity model in more detail in our next article. David’s post sparked us to respond and begin putting our thoughts down on paper so here we go…
A response to “A generalized token model for exposure to application growth”
We want to thank David Hoffman, for putting together this fabulous article outlining his view of a general purpose token model. We will now review the token model he introduced and its mechanism for providing a means of organising, incentivising and coordinating multiple actors within the PoolTogether protocol.
If you have not read David’s article, we recommend doing so. The success of the space depends on critically thinking through value capture, and our goal here is not to disagree with David per se, but rather to expand and tweak what he presents.
Not all applications need tokens. After the euphoria of 2017–18 died out, the community discovered that tokens are generally unnecessary, and if you can build your app without one, then you probably should.
David starts out by saying that tokens are mostly bad because they create friction for the end user. We agree. We envision most users will only ever touch one of a few potential general purpose payment tokens which will be accepted across multiple venues. This could include DAI, ETH, BTC, or some other hyper accepted token (likely not XRP ;).
However, there is a “generalised” token model that any application can leverage.
This token model does a number of the positive things that the ICO mania was praised for enabling (although it never achieved)Allocates capital to projects who want/need itGives users upside to the growth of the applicationAligns incentives between funders and projects.
Here’s how this token works:Create an application that captures ETH or Dai into a reserveCreate a token that has a claim on these reservesSell the token in a token saleAllocate the funds generated to the reserveBecause the reserve is larger, the value of the application increasesThis generates more revenue from the applicationThe revenue generated from the application is added to the reserves
Let’s break this down one by one….
This token model does a number of the positive things that the ICO mania was praised for enabling (although it never achieved)
There were three major problems with 99.99% of tokens that came out of ICO mania:
Infrastructure to actually build out the visions described by most whitepapers had not yet come into existenceBusiness models and value accrual mechanisms were completely flawedOverfunded projects and founders with little liability, and direct access to all capital
Allocates capital to projects who want/need it
Years of building consumer facing products have taught us that there are two ways to easily kill an early stage venture:
Underfund the projectOverfund the project
2017 was a clear case of the latter. Founders, often with little or no experience in company building, were given millions of dollars and zero oversight. To succeed in the startup space you must always have a sense of hunger, and a feeling that your time is short, and the day is long. When a team receives millions of dollars before they have released a product, the drive to succeed is greatly diminished.
Ongoing financial rewards based on milestones and accomplishments are necessary in order to align incentives between investors and founders. Founders must not have the ability to exit before investors see a good ROI on their investment. During the ICO boom, many founders received their exit on day 1 of fundraising. Even in cases where founders committed to extended lock ups, the financial windfall they saw at the start of the project reduced their personal risk to essentially zero. With no personal liability, it’s not surprising that most of these projects never came to mark...