Economics of Tokenization Incentives | Token Value Does Not Match Stakeholders

I often hear people asserting in the blockchain space that some form of the following: If the platform creates native tokens (such as utility tokens that can be used to purchase services provided on the platform), the creation of the tokens themselves will Align with the best interests of the incentive users on the platform. For example, one might say, " Token holders will contribute to the value of building the platform so that more users want to join the ecosystem, which will drive the value of the tokens higher, so that these participants get their Proceeds from holdings. "

This article explains an overview of a pay-per-performance reward plan, in which participants are rewarded based on the performance of the token value. Choosing the right performance indicators is essential for a pay-per-action plan to perform well. Unfortunately, the token price is a poor performance indicator for the type of behavior that motivates a blockchain platform to want (and need) participants to participate.

Performance indicators need to meet two conditions to be effective:

1. They must be consistent with the goals or overall long-term value of the platform . 2. They must be functions of activities or behaviors controlled by the payee .

The token value as a performance indicator cannot meet the above two conditions.

First, the value of the tokens does not align well with the long-term value of the underlying platform. There are many types of tokens, and the value of each token depends on the basic permissions provided by the token. For example, utility tokens get their value from the goods or services that a token can buy in a single transaction, so it reflects a limited range of values. Unless your token is backed by equity, the value of the token has nothing to do with the long-term value that the platform founder is trying to maximize.

However, even if the value of the token is exactly the same as the value of the network (the way the company's stock price is consistent with the value of the shareholders), the value of the token still cannot meet the second criterion of a good performance indicator. Blockchain platforms should not rely solely on the value of tokens to generate participant incentives for the same reasons that employers cannot compensate employees based solely on the performance of the company's stock price: Blockchain platforms are very clumsy tools and will not encourage various Required activities. Create value for the entire organization or platform.

The economics literature on incentives tells us that there can be five types of problems due to choosing the wrong performance indicators (such as token value).

Harmless game

Users can take actions to increase the value of the token, but it will not have a positive impact on the value of the platform.

Even if there is no change in the development or use of the platform, speculative investment may cause the value of the token to rise. Some token holders may take action to increase the value of the token (for example, by conducting information activities) without doing any work to increase the value of the underlying platform.

2. Malicious game

Users may take actions that increase the value of the token and damage the value of the platform.

This is a more serious version of the harmless game above. For example, specific market manipulations may hurt platform value. Entities can hoard tokens and artificially limit supply, thereby increasing the price of tokens, but it will cause a shortage of liquidity, which will slow down or even stop regular business on the platform.

3. Multitasking

Users can only take actions that have the greatest impact on the value of the token, and ignore other activities that are necessary to increase the value of the platform.

There are many different activities that contribute to the value of a blockchain platform. A single reward mechanism (such as increasing the value of a token) cannot provide adequate incentives for all of them. Some activities may have a greater impact on the rewards of participants than others, and participants may focus their energy on the largest token rewards rather than the best rewards of the platform.

4. Hitchhiking

Some users may not participate in any value creation activities at all, but rely on the actions of others to increase the value of the token.

Token holders not only get a return on the value of their tokens from the value of their contributors. This creates a problem commonly referred to as hitchhiking. Each token holder wants to benefit from the contributions of others while not contributing, rather than contributing resources to the platform functions at their own expense.

5. Risk dislocation

Users may not be encouraged to participate in activities that increase the value of the platform, as these activities are not sufficient to increase the value of the token.

As I discussed above, the value of the token may not strictly increase the value of the platform. For example, if the platform's user base is no longer growing at a sufficient rate, even if the platform is improved (adding additional value to the existing user base), the demand for tokens may not increase and the token price may Unstable. In this case, if the only way to get rewards is by adding value through tokens, there will be no reason for participants to bear the costs associated with improving the platform.

What issues a particular platform will face depends on other elements of its platform, including the behaviors that the platform needs to motivate and the type of activity the user engages in.

So if native tokens cannot automatically adjust stakeholders, how should blockchain founders design incentives? The first step is to understand the activities that bring value to the platform, and then design one or more targeted reward plans that combine effective performance indicators and optimize the scale of rewards to motivate these behaviors.

Performance-based rewards are not the only mechanism that influences participant behavior and provides incentives for participants. To facilitate participation and value exchange on the platform, multiple economic structures are needed, such as reputation systems and pricing mechanisms. Learning the principles of distributed market design will help founding teams create the platforms and communities they envision.

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