Explore Work Token: What is token economics? (Part1)
Work Token ("Working Token") has emerged as a new type of interaction and is applied to decentralized applications (dApps).
Before we get a deeper understanding of the concrete examples of work-based tokens, we must first understand the early model of the token economy.
Problems in the early token economic model
Financing tools : Many projects create tokens just to use it as a financing tool to replace fiat currency or ETH (without maturity considerations). For these projects, it is better to issue a new type of token than to finance through traditional equity or existing tokens. Therefore, even if these projects complete their technical route in the future, they still can't solve the problem of product and token disconnection.
Medium of Exchange (MoE) model : “Utility Token” does not automatically increase network value due to increased usage. Even after the product is released, it is difficult for the network with a proprietary payment system to motivate participants to hold their tokens. Both the supplier and the buyer can buy tokens, use their services, and buy the tokens after the service is completed. Due to the existence of inflation, selling pressure will further lower the price of tokens.
Both Vitalik Buterin (Ethereum) and Kyle Samani (Multicoin Capital) have conducted in-depth discussions on the issue rate of tokens:
“Now, let's look at an example of a 'exchange medium' token. Suppose there are N people who value a product in a decentralized network for $x; the product is sold at w < x. Each of them In the token sale, a token worth $w was purchased. After the developer set up the network, some sellers came in and offered the product at the price of w. The buyer used their token to buy the item and spent it. The token worth $w has gotten the utility of $x. The seller invested $v in resources to produce the merchandise, and ended up with only tokens worth w.
A continuous flow of buying and selling transactions is required to maintain the price of the token. ”
——Vitalik Buterin Airdrop : We believe that airdrop is a novel way of value distribution. However, it did not really arouse people's recognition and acceptance of tokens. Sending tokens to "interesting" addresses is a blind, wide-spread mode. In this mode, there are many addresses that even if they are aware of these airdrop tokens, they will only discard these tokens or provide almost zero value to the protocol.
Speculation : Speculation has also led to many projects in 2017 ignoring the economics of tokens, and there are still many projects that are avoiding this, focusing on “practicality” rather than economic incentives. This has led to some projects failing to develop technical products and even failing. Even if they improved the token economic mechanism, they were eventually speculated to undermine the market balance.
Due to the above problems, some projects focus on token economics from the beginning to better coordinate the participants of both supply and demand.
The emergence of work-type tokens (Work Token)
Exchange media tokens have spawned the problem of Free Rider, a problem that some market participants get for nothing. Because there is no interest binding relationship, some token holders do not actively participate in online activities, but can share the benefits created by active token holders. As the incentive to hold tokens is relatively weak, the continued selling pressure from external market/speculative behavior will further depress the token price.
Work-based tokens introduce a new approach to organizing network participants. In theory, appropriate incentives can motivate participants to make a positive contribution to the network.
In a work-based token system, network participants need to pledge a certain amount of tokens in advance to provide services on the network and obtain corresponding benefits. This model is similar to a taxi license. Individuals have to pay a high upfront cost to obtain a taxi license, and then have the right to obtain additional income by driving a taxi/rental taxi license.
– Image source: https://medium.com/@patrickmayr/improving-network-incentives-through-work-tokens-94193b0dd922 –
Work-type token instance
Augur Augur is a decentralized predictive market agreement that allows anyone to create predictive markets anytime, anywhere.
Service: In the forecasting market, participants need to use REP tokens to participate in the broadcast of relevant facts, to determine the outcome of the forecasting market or to object to the outcome. Token holders can bet on the results they believe are correct and can also object to the results.
Incentives: The correct token holder will receive a gain proportional to the number of REP tokens bet. Token holders who make a mistake will be punished.
Livepeer Livepeer provides a decentralized transcoding service that creates a lower cost solution for real-time streaming in the Web3 stack.
Service : The node performs the transcoding work by mortgage LPT tokens. The process involves converting the video input into a format suitable for different end user devices and applications. Token holders who do not want to provide a transcoding service can entrust their tokens to the transcoding service provider. Service providers compete based on rates and past performance.
Incentive mechanism: The node collects the fee by providing the transcoding service, and the entrusting party obtains a certain proportion of the income from the respective transcoded service provider. The network participation rate directly affects the inflation rate of the token and provides economic incentives to the network participants from another level. Transcoding nodes that do not provide services are deducted from the deposit and replaced by other nodes that are willing to provide transcoding services.
In addition, the team introduced the concept of MerkleMine, which miners will win LPT by participating in a race to calculate Merkle's proof. Although the distribution of tokens is relatively concentrated in this mode, it is more effective than the traditional airdrop mode. Token holders are eligible to become Livepeer's transcoding service provider nodes only if they have the technical ability to calculate Merkle certification.
The Graph Graph is building a decentralized query protocol designed to allow dApps to get data from the blockchain in a faster and more secure way than centralized indexing services.
Service: A node can become a service provider in the network by pleasing the Graph token. Provides the following services for dApps that want to query data on the blockchain: create indexes for related blockchain data, filter out data of interest, validate indexing services, and more.
Incentives: Nodes charge fees by providing indexing, filtering, and verification services, which are obtained by Graph nodes that provide accurate indexing and query capabilities.
FOAM FOAM is creating a decentralized location service platform.
Services: Nodes can add, manage, and label new geographic coordinates by pleasing FOAM tokens, and launch dynamic proofs of geographic coordinates.
Incentives: Holders of TCR tokens can verify or challenge location information added to the network. In addition, holders of FOAM tokens can obtain certain benefits by pledge tokens to obtain the right to provide location verification services.
NuCypher NuCypher is building a proxy re-encryption network that focuses on solving privacy protection issues in decentralized systems.
Service: The node provides a secondary encryption service that enables multiple users to share private data on the public chain.
Incentive mechanism: The node obtains revenue by providing a secondary encryption service. NuCypher extends the traditional work-type token and proposes a WorkLock model. In this model, participants lock ETH into a WorkLock contract in exchange for the corresponding token, and then provide network services. If they use the token correctly, they can retrieve the previously locked ETH. Conversely, the ETH they locked will be destroyed.
– Image source: https://blog.nucypher.com/the-worklock/ –
This is a very interesting pledge mode, but we must first figure out how the benefits of the secondary cryptographic service affect the willingness of the node to lock ETH. If the node must lock ETH before providing the service, they have to give up other opportunities (for example: through a Compound or Dharma loan).
(To be continued)
Author: Anjan Vinod
Translation & proofreading: stormpang & Min Min