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Design Phase: Finding Token-Network Fit

December 2018

Posted by

Geoff LeFevre

Crypto-economics Analyst

Previously as a product manager at Shortest Track, he worked at the intersection of AI and blockchain designing token economies to support enterprise AI initiatives. He has also advised a number of early-stage projects on token design and ICO issuances....read more
research

Design Phase: Finding Token-Network Fit

Posted by Geoff LeFevre - December 2018

Token design is perhaps the most discussed and exciting aspect of the entire process. A huge database of cryptographic primitives have emerged, and new ones are introduced almost every week. Recently there has been a lot of discussion around cryptographic primitives like TCRs, bonding curves, staking mechanisms, continuous organisations, curation markets, and more, but very little guidance on how these primitives fit into an overall process. As a result, we’ve found that the sheer number of mechanisms being introduced can almost be paralyzing for a token team. These decisions need to be put in the context of a proper token design process to avoid unnecessary complexity and achieve the desired coordination across your ecosystem. Token design is not about designing your final token, but instead creating a minimum viable token (MVT), that can be iterated throughout its lifecycle.

 

In the second phase of token creation, token teams formulate and formalise the actual mechanisms that align incentives across their ecosystem. In the Design Phase, we propose a process and set of tools token teams can use to help design and iterate their design.

Design Phase: Finding Token-Network Fit Outlier Ventures

 

Minimum Viable Token

 

Token design is an emerging practice and an extremely complex task, comparable to designing and launching a completely new economic and governance structure. Token design requires an understanding of the incentives for each participant in the ecosystem, the associated business model, the market structure, and the network structure. The final model leads to a protocol design that should allow the network to sustain itself in a healthy manner while prioritizing system safety by correctly engineering incentivization and disincentivisation mechanisms. There may exist multiple solutions for any given problem but the goal of token design is to try to identify the optimal solution while taking associated constraints into account.

 

The key is to keep the design and the underlying token architecture as simple as possible and minimize one’s assumptions about agents’ behaviors because even very simple structures can lead to extremely complex interactions and outcomes. Accordingly, overloading models with assumptions would not only restrict their capability but also increase error and overall system fragility.

 

 

Token – Network Fit

Design Phase: Finding Token-Network Fit Outlier Ventures

The design process starts by identifying decisions regarding the entire token ecosystem and focuses on finding Token-Network Fit to inform design choices for each subsequent level. Once the requirements of network participants are determined at the ecosystem level and subsequently at the small systems level, we can start to recursively build our token infrastructure. In other words, the higher level design of the token will have to meet the needs of the market(s) it is facilitating, which in turn should fit the protocol design that is required for the network nodes to sustain the ledger in a healthy manner. However, this process may have to be re-iterated once the requirements of the subsequent levels are finalized.


This process requires a focus on Ledger-Market Fit as well. Additionally, governance structure regarding consensus mechanisms and token supply needs to be determined based on the requirements of the market and the ledger along with its associated financial necessities and constraints.

Design Phase: Finding Token-Network Fit Outlier Ventures

By focusing on Ledger-Market Fit and Token-Network Fit when designing your MVT, it ensures that your initial design is focused and avoids adding unnecessary (and untested) mechanisms to early on. The Design phase is all about designing a solution to the key problems defined in the discovery phase and formalising this design into a mathematical model which can then be tested, iterated and turned to code. This phase is the most fun, so enjoy but close attention should be paid to reducing complexity at every opportunity. The simpler and more elegant the solution, the better.

 

To learn more about the design phase of token ecosystem creation, download the full report here.