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By Eden Dhaliwal
Every new technology brings with it new and disruptive business models. And for blockchain technology, these are tokenised ecosystems. Blockchains represent a shift in how value will be created and distributed. For this shift to occur the underlying fundamentals of new emerging business models need to be explored. Tokens are the atomic elements of these new business models, and a powerful mechanism, that when designed correctly, can help drive economic alignment across a network.
After several iterations we have begun to develop an agile process to serve a tokenized system to the point of Network Equilibrium: one where its utility is fully optimized and the network is in balance. Obviously, this end-state will not be achieved in a few months or even a few years. This is an ongoing process. After all, it has yet to be achieved in the nascent ‘blockchain’ space and even in the case of Bitcoin after ten years of existence.
Because token ecosystem creation is so new, and stakeholders involved are destined to make what retrospectively will seem obvious and naive mistakes, we suggest everything stated in this document is taken as a starting principle for debate rather than a rule or law. Until there are appropriate amounts of empirical data, we simply cannot guarantee that outcomes derived from the early design stages of this process will be perfect. But we can say with confidence that the process outlined provides an iterative approach with feedback loops. This is likely to reduce the risk of errors to acceptable levels over time by borrowing from scientific approaches applied to engineering complex systems which demand low fault tolerance, like aerospace. This is why elements of this process have been referred to as Token Engineering, an area first coined by Trent McConaghy, Co-founder of Ocean Protocol and BigchainDB.
It is also important to point out that while much of this work is principally derived from first-hand experience, it has been developed from a vibrant and growing ecosystem of partners, collaborators and thought leaders. This includes people we know and engage with personally and those from whom we learn from afar, including Vitalik Buterin (Co-founder of Ethereum), Chris Burniske (Founding Partner of Placeholder.vc), and Michael Zargham (Founder of BlockScience).
The intention for any tokenized system should be to ultimately achieve high degrees of decentralization and automation so that the system can realise its full technological potential to become more resilient, less fragile and, from a design perspective, suffer less value leakage*. However, the topic of decentralization in the blockchain space is often approached with dogmatism about early design choices that are hardcoded into systems before they have been properly validated, which achieves the very opposite effect: fragile systems which are prone to constitutional conflict and the possibility of network forks. Therefore we propose a ‘pathway to decentralization’ that is pragmatic, evidence-based and flexible for different use-cases.
*That is to retain economic value within the system.
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The 3 Ds of Token Ecosystem Creation
(detailed below) broadly operates within four parallel activities including:
A series of 1) workshops that inform outputs for the 2) token roadmap as well as 3) technical specifications and documentation run concurrent to 4) fundraising activities of a project.
The latter point is of critical importance because often early adopters and users can also be seen as early financiers and a new form of ‘shareholder’. Therefore, understanding who can and should participate in these economic systems and when, has regulatory consequences creators need to be aware of.
– Discovery Phase
The discovery phase is to determine the particular characteristics of the business model or ecosystem and why a token is needed in the first place.
– Design Phase
The design phase consists of making high-level design choices including, governance structures, the (mathematical) token model and its parameters. These need to be optimized for stakeholders’ incentives and the long-term sustainability of the associated ecosystem in order to avoid value leakage.
– Deployment Phase
Finally, the deployment phase comprises of validating and stress-testing the parameters that were defined during the design phase, before fully integrating into the network.
This is only the beginning of a whole new world of economic systems where value will be more optimally distributed and many ecosystems can co-exist symbiotically. But first, in order to design, build, and invest in this space, an understanding of the fundamentals of token and network design is imperative. Our phased process is designed to provide a framework for beginners and an order of operations for experts to help token teams stay focused and on track.
To learn more about our phased strategic process for token ecosystem creation, download the full report.
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