Token ecosystem creation requires a phased strategic process in order to navigate its complexities. To learn more about our full process for token ecosystem creation, please download the full report here.
In our previous post, we discussed the importance of problem structuring when designing your token ecosystem. Once you have your problem structured the next step is to turn your attention toward the actual participants of the network and how value flows around the ecosystem. This step should be rooted in user research. These systems can be very complex so knowing who your users really are can help you map out user-focused roles that achieve the desired value flow mechanics of your system. Designing the experience of how people will actually interact with these systems is an ongoing area of focus, but the starting point should be strong user research and functional definitions of key roles in the network.
A critical component of planning the foundations of any new ecosystem is understanding the key stakeholders involved and how value flows between them. Where possible, it is useful to examine current or analogous markets to understand the relationships between their various layers while taking system safety requirements into account.
Defining prospective stakeholders and differentiating the archetypes within each, as well as understanding the corresponding value exchange is important in creating a Taxonomy of Actors. This step is critical in token design and used to justify and evaluate design parameters as well as determine ways to test and validate underlying assumptions regarding user behavior. Defining user taxonomies is critical to extract who the participants are in the network. The aim is to understand with great detail every role in the network that needs to be properly incentivized.
The best methods to gain these insights is through Stakeholder Mapping and Value Exchange Mapping.
TAXONOMY OF ACTORS CASE STUDY: MAKERDAO KEEPERS
As a case study, we will focus on MakerDao. The value proposition of MakerDao is to create stability for anyone holding a volatile asset. This stabilizing mechanism is the Dai stable coin which is stabilized by a smart contract platform that manages collateralised debt positions (CDPs), autonomous feedback mechanisms, and creates incentives for external actors to manage the network. A full break down of MakerDao is beyond the scope of this article, so for more details check out their whitepaper and Github repository.
At first pass, the key users appear to be those who lock up their collateral in exchange for newly minted Dai, which they receive as a debt obligation. However diving deeper into the network there are more crucial roles that have been mapped out and designed for that are critical to creating the stability of Dai. One grouping of roles in this network that we will focus on in this post are Keepers. Keepers are independent, usually automated, decentralized agents that through their competition for profit opportunities created by the Maker system end up performing key network operations, and are essential for system stability.
In the Maker system they have mapped out 5 Keeper Archetypes:
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PETH: Pooled Eth
W-ETH: Wrapped Eth
STAKEHOLDER MAPPING: KEEPERS
Stakeholder mapping is used to identify the actors involved in an economy and how they relate to one another. This exercise defines stakeholder roles and illustrates the relationship between them in the system. An in-depth analysis creates a clear illustration of the dynamics at work and this tool serves to frame these relationships in the context of the primary problem we are trying to solve and optimize subject to associated constraints. This increases the chances of finding a solution that will remove unneeded intermediaries and address as many important stakeholder needs as possible for a win-win outcome. This is critical when trying to retain the majority of participants to reduce the fragility of a system and the possibility of value leakage or worse a value-destroying fork.
STAKEHOLDER MAPPING: MAKERDAO CASE STUDY
Continuing to focus on the role of Keepers in the Maker system the below diagram gives a high-level view of the role the Keepers play in the System. In Flow 1, Pooled ETH is either locked up in a CDP as collateral or sold off in a CDP and returned back to the Pooled ETH stock. Flow 2 captures the burning and minting of Dai, where it is minted when PooledETH is locked up in a CDP, and burned when the collateral is sold off. Each of the Keepers below plays a crucial role in monitoring and automating many of the key processes that keep the Maker system stable.
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Within this Stakeholder Map it is also critical to map out key interaction patterns for stakeholders on the network. Getting a clear definition of the incentives, and local constraints for each role is an important step in designing mechanisms for global optimisation.
For example, the MakerSystem has mapped out a complete list of interaction patterns required in their system to ensure stability, and each keeper has their own unique combination interaction patterns defined by the Maker system. For example, the Arbitrage Keeper’s high-level key interaction patterns in the Maker System are:
- Join & Exit
- Join: Deposit ETH in exchange for PETH
- Exit: Return PETH in exchange for ETH
- Boom & Bust
- Boom: Buy Dai, and sell for PETH (Buy and Burn)
- Bust: Sell Dai, (which can either be a collateral sell-off or be used to reduce bad debt, depending on CDP conditions).
VALUE EXCHANGE MAPPING
After Stakeholder Mapping, creating a value-exchange system among stakeholders will help us synthesize value formation and, importantly reveals opportunities to generate revenue streams, cost savings, and other incentives by finding the most effective and efficient ways to deliver it.
The stakeholder map is a helpful reference to eventually deliver value to key stakeholders — the end user in particular. Identifying capability requirements and designing the future activity system are interrelated exercises that together will shape the strategy. This is an iterative process; stakeholders and elements can and should be rearranged to reveal different models of value exchange. Using tools such as sticky notes and a whiteboard is a helpful visualization tool. Consider ways to refine the system and improve both viability and efficiency by looking to external partners and technology. Imagine all possible partners who could help deliver the proposed idea, and how they could deliver and receive value.
VALUE EXCHANGE MAPPING: MAKERDAO CASE STUDY
Below is a starting point for a Keeper centric Value Exchange Map for the MakerDao system. Overlapping it with the diagram above will provide an initial arrangement of how key network KPIs affect Keeper activities, but also captures key system mechanisms that drive the stability of Dai. For example, if the Dai/USD rate is less then the Target Rate, then the system will automatically increase the Target Rate, causing the supply of Dai to decrease, resulting in the increase of the Dai/USD rate (thus Demand for Dai increases). This is a key mechanic of the MakerDao system, but this system does not stabilise itself because CDP holders are actively managing their CDPs. It happens, largely because acting behind the scenes are Keepers, who are properly incentivized to perform key network operations.
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Debt Ceiling: The max amount of debt a CDP can create
Liquidation Ratio: Collateral to debt ratio where a CDP becomes vulnerable to liquidation
Collateralised Ratio: The maximum amount of Dai issued per unit of collateral deposited into a CDP. Currently, the ratio is 2:3 (loan of Dai must remain under ⅔ of the value of the locked collateral)
Target Rate: Adjusts dynamically to maintain the stability of the Dai market price
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 disincentivization mechanisms.
To learn more about our phased strategic process for token ecosystem creation, please download the full report.
Disclaimer: Outlier Ventures was not involved in MakerDao’s token design, and is currently not affiliated with the project.