Part I: What is Token Economics?
Part II: Top Token Economic Models
Part III: Systematic Token Economic Issues
Part IV: A Guide to Creating a Token Incentives
The goal of this post is to walk you through an example of how to create token incentives with the desired end goal of initiating specific behaviors. In the previous posts, I provided a basic framework of how to conceptualize token incentive models to drive specific behaviors. In general, an incentive that makes your token as necessary to using your platform makes it a utility and any incentive that hints at an increase long-term value make your token a security. One security incentive can make your utility token a security in the eyes of the SEC. The SEC views most tokens as “penny stocks” which makes it illegal to pay any American in your token as a form of compensation.
Let’s drive into creating a token incentive for ending homelessness. We are calling this token the “H” token.
Step 1: Determine each party who would benefit from using your token.
The key stakeholders here involved in homelessness are the homelessness population, land developers, politicians, tourists, and local residents (with housing).
Step 2: Determine each parties’ self-interest which would drive to use your token.
Homelessness — Consistent food, shelter, and personal dignity
Land Developers — Turn a profit on flipping land and real estate properties
Politicians — Re-election and positive recognition
Local Residents — Cleaner streets.
Tourists — Have a fun and safe experience
Step 3: Determine how you would align each parties’ interest.
This is the tricky part. How do you align self-interests of two (or multiple) parties which are dynamically opposed to each other. Give them an extra reason to agree and it will be easier for them to align their interest.
If the token increases in value, the homeless population will have more money to spend to take care of their basic needs.
Land Developers can receive payment in the H coin and wait for the value to increase for later day cash out as well as save in transaction fees for using a digital currency.
Politicians can show that their efforts to get specific bills passed have helped provide the local government with an effective ROI in regards to reducing the homeless population.
Local Residents will have cleaner streets because the homeless population now has an asset they can leverage to lift themselves out of poverty
Tourists want to be able to keep collectible items from places they’ve traveled.
Step 4: Determine potential bad token behaviors
A “bad” token behavior is one that is opposite of your desired token incentive. The goal of the H coin is to end homelessness. Potential bad behaviors would be pumping and dumping schemes, and collusion between parties to manipulate token prices.
Local residents, politicians, land developers, tourists may work against the homeless and make it harder for them to gain tokens and lift themselves out of poverty.
Step 5: Determine how to disincentivize bad token behaviors
One way to beat this is to provide reverse lock-up periods for token-holders. A reverse lock-up incentive is when you reward token holders for holding on to your token for specified periods of time. It’s called a “reverse” lock-up period because token holders aren’t required to hold on to your token.
We could create a NEOgas inspired incentive which gives token holders more tokens on at daily accrual basis with monthly payout (last day of the month) to stop any collusion among different stakeholders.
Local residents, politicians, tourists, and land developers could receive extra tokens because the overall network becomes more efficient at lifting people out of poverty. The would be a “collective” network bonus.
Step 6: Determine how a blockchain (distributed ledger) or smart contract could be used.
A distributed ledger could be used to record how many homeless people were able to lift themselves out of poverty by recording their tokens awarded for meeting various benchmarks set by local residents, land developers, and politicians. Smart contracts can use to automate payouts to specific parties for meeting various benchmarks. For example, if a homeless person lands a job, they could unlock a token bonus.
Step 7: What is the current state of the crypto market?
In a bull market, we can create incentives to boost the top of the “marketing funnel” to attract retail investors. For example: If you tweet or share our article, we’ll give you some tokens.
In a bear market, we would create incentives to attract stakeholders who would be lower in our marketing funnel-i.e more likely to be loyal and retain H tokens for extended periods of time. For example: If you able to attract more homeless people to use our token and they use our service actively for 3 months, we’ll give you a payout as a referral fee.
Your token incentive plan should work in a bull or bear market. In a bear market, a majority of crypto retail (or hype) investors have left the scene because short-term gains cannot be realized. In bull markets, like in 2017, ICO bounty programs were geared for “attracting” more hype around their tokens. These types of incentives do not work in a bear market. The good news is that in bear markets, the people interested in using distributed network technology-dApp developers, enterprise companies, strategic institutional investors are still interested in using this type of technology because they see the long-term potential. With this in mind, your token incentives must emulate the current state of the market and move downstream on your marketing funnel and focus on creating incentives to drive long-term adoption and loyalty.
See the difference?
Step 8: Is my token a utility or a security?
This is a very sticky question. A Utility token is integral to using your platform. For example, Bitcoin is a utility token because it is a “monetary currency” and is used to settle payments between parties. It’s wasn’t a security because it wasn’t issued like a typical ICO token and it was released after or at it’s Token Generated Event.
A Security token is a token whose current value is not realized or whose value is based on another asset. It may not be realized because it’s valued represents a physical asset or the token generated event hasn’t occurred yet. For example, EOS was a security token prior to its main net launch because you couldn’t use it’s token to process transactions on the EOS network.
Step 9: Respect the SEC
I strongly advise reading SEC filings against suspected scam tokens to learn how the SEC is defining the space. The goal should be to stay out of jail first and make money later. :-)
Suggested SEC readings:
Tomahawk Cease & Desist Order
Not an SEC reading but also suggested:
Civil ICO Launch
In most cases, blockchain foundations, are going the route of avoiding the security classification at any cost because it lowers their liability and legal fees. The SEC hasn’t provided a clear “blueprint” to how they are governing token assets.
This was the last post in my four-part series and I want to thank you for taking the time to read each article. If you have any recommendations on my analysis, feel free to share. I am not a financial advisor, and this is not investment advice. If you are interested in learning more about crypto.
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