Importance of token economics and capturing value in utility tokens.

In one of the conferences Miko Matsumura, co-founder of Evercoin, has compared state of the current blockchain ecosystem with a sand pile. While you pour sand on top of the pile the lower parts will collapse and slide down giving you a wider base on which a bigger sand pile could be built.

Photo by Sam M: https://www.bescouted.com/photo/63851479/Sam-M/59716555/

While there is little to be excited about the sand pile itself it represents protocols that can facilitate sufficient amount of transactions with sophisticated consensus algorithms and working self governance. It was one of the most desired ICO opportunities for investors so far and probably will remain such for some time in the future. But how many efficient protocols with distributed architecture the ecosystem will really need?

Decentralized applications will infuse life into a boring sand pile. It will be dapps that will drive mass adoption and real world use cases that will result in new business models and new value capture and distribution mechanisms. But for the decentralized applications to function properly and in perpetuity a lot of though has to be put into a token model that provides incentives for participants and aligns interests of investors, something that majority of current projects have overlooked in a hurry to announce an ICO and that will most probably be the cause they are buried under that sand pile once it collapses in order to continue to grow.

Capturing the value created on the platform.

In traditional business models value created on the platform is captured in form of profits that can be paid out to shareholders as dividends or reinvested into company if such a decision is made by shareholders. Profits can be made by selling membership options that unlock certain features, taking transaction fees, serving adds to platform users etc.

It seems that there is nothing wrong with the company to be inserted in between the participants since the company provides valuable services and is entitled to collect fees inside the network, apart from the fact that everybody hates adds, memberships and subscriptions have extremely high churn rates and users try to transact directly, outside the platform, in order to avoid unreasonably high transaction fees that is often a result of pressure by shareholders to maximize the profits.

Photo by CloudVisual

From the moral perspective it does not seem fair that community members that create the value on the platform by sharing their content, driving traffic and increasing engagement through interactions are forced to pay for the service, consume adds and otherwise participate in unwanted activities that result in bad user experience which in turn is undesired outcome for platform creators. But is it possible to create an asset with value linked directly to the platform in order to avoid all this friction? It is. Welcome the Utility Token.

Utility Token.

In 2017 and 2018 there was a surge of utility tokens with little utility. All ICO’s were trying to position their token as such mainly due to regulatory reasons. Even Ethereum was declared not a security by SEC but it also basically has the only utility which is fundraising.

Utility token is a scarce asset that should be required for all or at least some of important internal transactions to be conducted on the platform. A carefully and well thought out token model should be implemented and designed in such a way as to tie its value to the usage and growth of the platform. If it is used only as a proprietary payment currency it will suffer from extreme token velocity and will result in downwards price pressure on the value of the token since it does not provide a reason for token holders to hold the token for any longer that is needed to facilitate the transaction.

Token Velocity.

Token velocity can be calculated by dividing Total Transaction Volume by Average Network Value. In many cases utility token holders are trying to get rid of them as soon as they can once they have been paid for the service since usually there is little incentive to hold them for other reasons than expected increase of price. But by it’s own nature that price has downwards price pressure on the value since the only incentive to hold is speculative expectations of price increase. It is obvious that we are getting trapped in a loop here and a well thought out token models need to implemented with all new emerging business models involving blockchain technology.

Token velocity can be managed and ideally brought to equilibrium by implementing some of those below mentioned means:

1. Introduction of buy-and-burn mechanism.
2. Built in staking functions that lock up the asset.
3. Gamification that encourages holding.
4. Store of value.

BeScouted Token Model.

BeScouted

Even though BeScouted has a working MVP and a growing and vibrant community of freelance content creators and various talents that already earn crypto for sharing their content, we resisted the urge to go with the first and even second waves of ICO’s simply because we wanted to build a solid token model that would benefit the community in a long term. We have put a lot of hours and effort into research and development of token model and the way it is used to interact within a freelance economy that will change how visual content is created and consumed in the whole industry.

Since rewarding users for the content that they share requires some level of inflation and having in mind that it will be a utility token with many actual utilities, we have developed various mechanisms that will bring token velocity to equilibrium and in later stages might even result in our token being a deflationary coin despite decreasing but ongoing inflation.

1.Buy-and-burn mechanism:

Initially all the initiative and role of leadership will be undertaken by BeScouted since in early days all projects need a party that drives initiative to move fast and funds provided by early contributors will be used to assure accelerated growth and development.

There will be a small fee on all transactions on BeScouted, it will be in magnitude lower than usual fees taken on different marketplaces available today and 50% of that fee will be burned. The rest will be used to support innovations at later stages in order to provide incentives for the community members once BeScouted becomes totally decentralized with tools implemented for the community to self govern.

BeScouted will have opt-in advertising functionality, where community will be receiving 40% of the tokens spent by publishers, 10% will go to BeScouted to incentivize and support innovations at later stages and 50% of tokens will be burned. Knowing how much revenue advertising drives to current platforms it alone could make BeScouted token a deflationary coin provided platform has good adoption and users have right incentives to consume those adds and interact on the platform.

2.Staking functions:

Right incentives to stake the coin can drastically reduce token velocity. Locking up coins can serve many other purposes apart from this feature. No more paid memberships on the platform to unlock additional features.

While basic functionality is available for free to anyone and at all times, staking earned coins can add additional benefits such as better exposure, additional features available to good actors of the community, improved reputation and other. The platform is created by developers and the team, value of the platform however is created by people interacting on it, hence we want community members to be able to earn their benefits by interaction instead paying for it the second time. It does not seem fair that people who create the value still have to pay for the very same service that they brought up to life.

Curation rewards were first introduced by Dan Larimer when working on Steem blockchain. The concept is that utility token circulating in a content creation platform captures the value created through “proof of brain” process when the community is creating content. All that value captured in a token is then distributed back to the community through utilization of a rewards pool where authors receive 65% of that value while people discovering and voting for that content (“liking” the images for example) receive another 25%. The total payout for curation depends on the amount of staked coins as staking tokens increases ones influence on the platform and decides how much of the reward pool such a member can redistribute.

Incentives for staking coins in order to be entitled for the “curation rewards” on Steem was so high that in fact it has broken the reward system itself since the token distribution became very “top heavy” and basically it is whales who control how reward pool is distributed on Steem which often leads to bad user experiences if such wales are bad actors. In order to prevent this scenario repeating itself, certain adjustments will be made to algorithm originally introduced by Steem. Such as but not limited to progressive curation rewards payout structure that will incentivize staking the token, but the payouts will decrease with the amount staked hence it will not be linear.

3.Gamification:

There will be different contests on the platform, established by the platform and community members themselves where users will be entitled for participation and winning prizes and tokens if they have a certain amount of coins staked. Ability to create such contests and benefit from them in various ways will also be dependent on the amount of staked tokens.

4.Store of value:

When token velocity is reduced and managed to equilibrium there is a much higher chance for the token to become a store of value that reduces token velocity even further.

All the above mentioned and other incetivizing mechanisms added in the future will help to reduce token velocity and make the economy work in perpetuity. It will result in a token that actually has utility and can be used to power the freelance economy of visual content creation that will dis-intermediate currently broken infrastructure that intentionally builds high entry barriers for new and creative talents and robs them of their revenue. Creating artificial obstacles for fresh talent participation in the ecosystem will eventually fail and power over their careers will be brought back to the community. Those very people are powering today’s social media worth hundreds of billions of dollars and get nothing back in return and still have to pay for additional exposure and different features to be used on those numerous platforms.

If you support us on our mission you are welcome to create your account on www.bescouted.com and join tens of thousands of creative people who is already earning for the content that they share and does not need middlemen to decide for them and take major cut from their pay.

Originally posted on Medium by BeScouted

David