The Top 5 Benefits of Good DLT Token Ecosystem Design
by Brian Tinsman
When creating a network based on a blockchain or other DLT system, you’ll face questions about tokenomics. Tokens can be used for many types of data, including identity documents, voting records, contracts, game characters, stock ownership, usage rights, and more. If you’re looking at a blockchain project as a potential manager, developer, or investor, you’ll need to understand how the token ecosystem design can affect the success of your tokens and your overall application.
A good DLT token ecosystem provides a way to transfer value between users, but it also sets up self-balancing behavioral incentives - rewards for behaviors that help the network and penalties for actions that harm it. These incentives work across every part of the system.
For example, Sia is a decentralized data storage network that competes with Amazon’s cloud storage services and Dropbox. Here are some of the incentives they use:
Renters pay an up-front stake of tokens to hosts as incentive to provide storage services.
To collect these fees, hosts provide hashed proof of storage and burn a small amount of tokens to let the system know they aren’t cheating.
To collect fees, hosts put up tokens as collateral against excessive downtime.
Users can mine tokens, providing hash power and increasing token supply.
Hosts compete with each other to offer the best prices to renters.
All these incentives combine to create a balance between parties in which it’s in every party’s best interest to act in each others’ best interests.
These rules do come with compromises. Blockchain technology doesn’t solve all problems, and often involves trade-offs. However, if you design a system that’s right for your business, here are the top 5 potential benefits of an incentive-based token ecosystem:
Once it’s up and running, a well-balanced tokenomic system does not need ongoing funding. It can operate revenue-neutral, or generate income for the developer. Consumers will usually create demand for tokens by buying them with fiat currency, and providers will sell the tokens for fiat to pay their bills. The developer can collect fees or sell a pre-existing stake into the market if they need to pay bills with fiat. Ultimately, once users become comfortable with cryptocurrencies, balanced token ecosystems may even operate independently of fiat currencies.
Predictability via Testing and Tuning
A token ecosystem allows developers to make predictions and adjust to user behavior. In the example of Sia, the developers could change the amount of collateral required of hosts, change the required burn amount, change the required levels of uptime, and change the fees collected in the marketplace. All these parameters let the developers run tests on the system before a full launch. Early in development, they can run automated tests, with algorithms modeling user behavior, to see how to tune those parameters to maximize growth, security, reliability, revenue, and so forth. During a user testing phase, they can vary those tuning parameters to see if their models were correct and further optimize tuning. Developers can continue tuning throughout the life of the project.
Better Revenue Models and Growth
A good tokenomic system ensures each party in the system is getting the value they need. For example, one party may need a high-quality, affordable service, while the other needs a good revenue stream. If a company is generating revenue from the system, they can carefully develop the revenue model that provides the best results. Good prices for service or good opportunities to make money can make awareness spread quickly, leading to rapid growth.
Most ecosystems are affected by their token price. Some want the token price to grow as a way to generate income or attract investors. Others want a stable-priced currency so their users and service providers have reliable costs and income. In either case, good token ecosystem design allows developers to choose the level of price controls they need and then build the ecosystem to support the desired price stability or volatility.
By nature of the incentives of the ecosystem, tokens can bring stability and legitimacy. Investors, employees, customers, partners, and anyone else with a stake in the system needs to feel confident the system is secure and sustainable. Most of us have seen systems fail due to exploitable or unbalanced systems. A balanced token ecosystem created by the appropriate incentives sits at the core of confidence for each stakeholder.