Introduction

The cryptographic tokens landscape has greatly evolved from its early iterations as colored coins to its present form. The industry is now populated by thousands of unique tokens with different properties, and most of them are looking to incentivize behaviors that will grow their reach in the economy, though many still have no real purpose.

The first projects creating tokens on Ethereum, such as Augur and Golem, were designed to be the fuel that would allow the first Dapps to properly scale in a distributed fashion. But 2017’s exuberance attracted startups and blockchain-native projects that saw tokens solely as a fundraising mechanism, with little to no utility.

Most of these first iterations were payment tokens, used as the only means of payment for a service, and were quickly dismissed by thought leaders in the industry[1]. Reacting to the velocity problem narrative, projects then started cramming as many features and rights as possible into a token design, such as Hypernet and its HYPR, used for staking, reputation, payments, mining, and voting. Not surprisingly though, without knowing who their users were and how they behaved, those features never led to increased usage. In fact, token activity has been overwhelmingly dominated by speculators, leading projects to de-tokenize, for the sake of their product[2].

We still believe tokens are incredible incentive tools that can help startups scale to a global user base at a fraction of the traditional cost and they will be one of the greatest mechanisms to build long-lasting competitive moats. What if their utility and purpose were simply not introduced properly?

A new shift in token design

The main difficulty of token economies is bootstrapping an engaged and sustainable community of token holders. The initial purpose of the ICO, aside from fundraising, was to get future users to become stakeholders with skin-in-the-game and would thus act in the best interest of the ecosystem. As token sales became plagued with speculators that would buy up the totality of the available token supply just to resell it at profit, projects decided to switch their focus to private sales with institutional investors. The public sale as we knew it was dead[3], along with the promise of powerful networks bootstrapped through a sale.

To either replace or enhance those public sales, projects introduced airdrops. Unfortunately, untargeted airdrops led to a similar result as speculators were hoarding free giveaways with bots and tricks[4] in order to make a couple dollars as soon as the token became tradable. Projects will have to take a step back and realize that token holders do not automatically become users nor value creators.

Projects need to understand that “build it and they will come”, is probably much closer to the truth than “incentivize them and they will come”. Bootstrapping an ecosystem and an economy is impossible without a product that users actually want. The tokens should only be introduced after you’ve nailed product-market fit because only then can its purpose be understood, instead of forcing artificial demand when they can’t actually be used for anything valuable. As we have seen in the Etherdelta/ForkDelta episode[5]users will fork Dapps that introduce useless tokens impairing their experience.

Great tokens will always have systems that will help them flow from users to value creators. Though, we strongly believe that those mechanisms should be introduced gradually, starting with what we call Minimum Viable Utility. This flow will probably take on many forms but today, with the current level of mainstream knowledge regarding cryptoassets, the Minimum Viable Utility should be the mechanism that allows a project to gradually distribute tokens to real users. After all, tokens are still only associated with speculation in the average consumer’s mind as we have yet to show true purpose. Startups, especially consumer-facing ones, have a unique opportunity to condition a specific behavior of its user base by properly introducing tokens as a reward. A lot of work has to be done around the UI/UX of these rewards but with the right design, projects will be able to slowly educate users on the purpose and future functionalities of cryptographic tokens.

Thus, instead of using a spray & pray method for their token distribution, projects can introduce the notion of discounts, memberships, governance, etc. and make users understand why they should hold on to their rewards so that they can derive greater utility value later on. Part of token economies’ raison d’être is to help startups scale globally for a fraction of the cost of cash incentives like Bird is trying to achieve[6]. Founders have to ask themselves if a token will make their value proposition more attractive to their customers or will instead create a barrier to adoption; today enterprise clients probably don’t want to manage crypto holdings on top of integrating with a new product or service.

If we use the Bird example, the company could easily save millions of dollars in cash incentives if tokens were distributed to those who charge scooters instead of cash, also reducing the friction created by payments in multiple currencies once they scale outside of the US. Compared to points, tokens also offer a much more appealing incentive as the latter can be exchanged for cryptocurrencies or money at all time and the company can resell tokens instead of having complete giveaways with points.

Token Economy
Token Economy
Bird hunter hard at work

Once a significant number of tokens has been distributed to actual users and they have shown a notably increased frequency of the expected behavior (e.g. charging scooters, voting on daily matters, referring friends, etc.), then projects can start implementing ways to use the tokens within the ecosystem. It’s then the team’s job to increase the tokens’ intrinsic value with mechanisms and features that do not disrupt or prohibit the usage of non-token holders but increase the experience of token holders (e.g.: instead of forcing payment with the token, offer a discounted rate for users who pay with the token while also allowing payment in fiat and other cryptocurrencies such as ETH).

In the Bird example, holding tokens could provide users with discounted rides, exclusive access to new scooters or even premium features like scooter delivery or reservation. Payments made to “Bird hunters” could gradually switch to become 100% token-based as the real utility is introduced and demand from users emerges, creating a lively market for those cryptoassets.

Creating product demand from rewarded users isn’t the final step. Projects need to fuel additional token demand from outsiders and users who either can’t or won’t earn enough tokens through the Minimum Viable Utility. Without mechanisms soliciting external pressure, the token economy will stagnate as distributed incentives will always be enough to supply users’ needs. These mechanisms can take many forms, all justifying the purchase of additional tokens on secondary markets, such as greater trading limits for trading platforms, premium access for membership models, or more exposure for service providers within an ecosystem. Perhaps we will see the creation of a new twist on freemium models, where casual users will be able to earn the tokens they need to use the service while power users will look to buy more than they can earn in order to access the premium features they are looking for.

To spark additional demand for the token, Bird could offer a subscription model similar to Lyft[7] for which users could obtain unlimited rides per month and obtain a 50% discount if paying in tokens. Most power users will not want to accumulate enough tokens through “Bird hunting” every month and will thus choose to purchase the required amount of tokens on the open market. Such process will effectively distribute tokens to value creators or “Bird hunters”, which can either be power users who will purchase such product with their rewards or sell them to other users and cash-in for their efforts.

Once the token economy is properly set up, the token ecosystem will have educated users, a great token flow from users to value creators, and enough liquidity created by external demand so that speculators can easily exit to pave the way for real users. Only then will projects have created a sustainable token economy that will actually generate value for the startup and for its token holders.

We definitely look forward to the adoption of token economies by blockchain and “traditional” technology companies alike. Token economies have the potential to challenge the domination of incumbents that choose to ignore this new paradigm. Though, there is still a lot of work to be done to be able to introduce tokens that accrue real value for projects and users. Time will tell if tokens accelerate adoption instead of creating a barrier to entry. If there is not a major shift in entrepreneur mindset, token economies could easily go down as a failed experiment instead of becoming the foundation and bond of global cryptonetworks.

Acknowledgements

A special thanks to Nicolas Hourcard, Thomas Barker and Max Kogler for their feedback.

[1] https://medium.com/@cburniske/cryptoasset-valuations-ac83479ffca7

[2] https://blog.digipulse.io/important-dgpt-holder-update-2ed185a459d8

[3] https://blog.cofound.it/closing-cofound-it-as-crowdfunding-market-disappears-and-presenting-good-practice-for-icos-796db5e001b8

[4] https://news.bitcoin.com/automated-telegram-bots-are-swamping-crypto-groups-and-taking-tokens/

[5]https://www.reddit.com/r/EtherDelta/comments/7odsni/i_forked_etherdelta_forkdelta/

[6] https://www.theatlantic.com/technology/archive/2018/05/charging-electric-scooters-is-a-cutthroat-business/560747/

[7] https://www.cnbc.com/2018/10/16/lyft-is-rolling-out-a-new-30-day-ride-subscription-for-299.html

 

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This document is intended for informational purposes only. The views expressed in this document are not, and should not be construed as, investment advice or recommendations.