Why crypto-assets need effective token ecosystemsOctober 2018
by Eden Dhaliwal
Today we launch our new report on the concept and practice of developing effective tokenized crypto-assets. This is driven by our strong belief in the potential power of decentralised systems to provide a new and important evolution in how our economy and society can be organised, but in order to achieve this, effective ecosystems must be created that align the incentives of all the participants in a new model economy.
This is our first attempt at a guide to the best practices in Token Ecosystem Creation, which we are launching on Thursday 25 October tonight at the Token Engineering Global meetup in Berlin.
We welcome the contribution and feedback of the whole community, you can do that either by tagging @OVioHQ on Twitter, or using the hashtag #TokenEcosystem
Over the last few years, there has been tremendous exuberance around the potential of crypto-based tokens. The nature of these tokens has yet to be fully understood, with a wide range of thinking that defines these as either currency, securities or something uniquely different. By adding blockchain architecture to crowdfunding, it is easy to label cryptoassets as a share-like security mainly to raise capital globally.
However, as we’ve discovered, many of these cryptoassets can act as a store of value, unit of account and/or medium of exchange and can very much exhibit the characteristics of currencies, commodities, derivatives and collectibles. Most promising, however, are those tokens that offer forms of utility for users powered by intelligent and imaginative incentive systems.
Business model innovation
While it is perfectly reasonable to view tokens as an asset class for which we would like to assign a value, it would be productive for us to consider thinking of tokenised networks as ‘business models’. With every new emerging technology, comes with it, new and disruptive business models. And for blockchain technology, these are token economies. New digital business models are often met with tremendous cynicism; however, they can create new value propositions and uncover new behaviours to meet the previously unmet needs and desires of the consumers, end users and other market constituents.
Just as a freemium model was once considered to be highly questionable, risk-laden and value destructive, tokenisation will similarly generate new forms of business and social value through novel forms of economic enablement.
We need a new model to guide token innovation
From the early internet days and through the web 2.0 era, many digital business models have now been identified, ranging from two-sided marketplaces to software-as-a-service (SaaS) to data monetisation. Along the way, there have been many lessons learned, as to what works, how and why. In fact, decades of learnings (particularly from Silicon Valley) from the growing pains and failures of early-stage ventures have led to crucial understandings on how to launch effectively through methodologies like the lean startup, design thinking and the minimum viable product.
The most fundamental recognition, however, is that new ventures are not really ventures after all, but as Steve Blank uncovered, what we call ‘startups’. Furthermore, he defines a startup as a temporary organisation designed to search for a repeatable and scalable business model. Temporary, because startups have short runways due to bootstrapping and/or minimal seed capital. And considered an ‘organisation’ but not yet a fully formed business venture because startups are still seeking product-market fit in order to transition into sustainable businesses.
From digital businesses, to digital economies
As the blockchain community has ventured out to create token-based networks, we have discovered that many of the tools and methods used for launching a new digital venture do not seem to work well in this space. Tools like the business model canvas don’t capture the core components of tokenisation well (like governance for example). Developing user personas for new stakeholders like miners and curators is a challenging task. Agile methods to validate utility are far more complex with token systems. The reason why these methods are not effective is that token models are not actually digital ventures after all.
Instead, they are digital economies that reorganise and redistribute new forms of value by combining tokenised incentive systems with blockchain architecture. Launching an economy is fundamentally different from launching a venture in that an economy is a set of complex systems of governance, economics and cryptography combined into a single distributed system. Whereas web 2.0 businesses are essentially built bottom-up, token economies require a combination of both top-down and bottom-up approaches.
Defining Token Ecosystems
Early-stage web 3.0 digital economies can be realised as ‘token ecosystems’ which may later mature into stable and prosperous crypto-economies (analogous to how startups can evolve into sustainable businesses). A Token Ecosystem is a decentralised network engineered to align a secure and incentivised economic system, despite being laden with uncertainty. Until a token ecosystem can achieve economic alignment amongst network participants, confidently secure against attack vectors and demonstrate a high degree of decentralisation and token utilisation (rather than speculative trading), it can only be considered a well funded experimental distributed network. If this can all be achieved, then we can credibly consider it an established Token Economy. This may take many years to develop, and at the moment, Bitcoin and Ethereum are the only existing networks that have differentiated from other networks in terms of maturation of decentralisation, security, governance and utility; yet even they are still subject to uncertainty and volatility.
The following is a process that should provide guidance as to how to create and launch a token ecosystem. We will be launching a serialised set of articles in the coming weeks with some of the key concepts and tools, and in the meantime, you can download the full report below.