Several Key Issues in Token Economy Design |Founder of Octopus Network Louis

Several Key Issues in Token Economy Design |Founder of Octopus Network Louis

By @MixWeb3, Organized and created based on @Louis speech content

On February 10th, Beijing time, Louis, the founder of Octopus Network, was invited to participate in the “New Narrative of Token Economics” offline closed-door communication meeting hosted by Chain Teahouse. Over 20 crypto entrepreneurs and investors discussed from different dimensions, and the collision on-site was very exciting.

Louis believes that Web3 and tokenization are two related but different concepts. Based on the value scenarios of tokens, he raised multiple key questions for discussion, which is highly inspiring.

The following is the content of the live sharing, enjoy~

As a crypto entrepreneur, I am interested in token economics because I am designing a token economics model for Octopus Network. Additionally, as an infrastructure project, Octopus Network offers courses on token economics in our Web3 incubator program.

Communicating on a research level in blockchain can be difficult because many fundamental concepts are not agreed upon. Therefore, I would like to clarify that my definition of Web3 may exclude many projects, and this is solely my opinion.

Web3 is an extension of Web2. The core of Web2 is the platform economy, which is dominated by various internet platforms that bring great convenience and create significant value.

However, companies that create and operate internet platforms always have an unstoppable tendency to move from competition to monopoly and from monopoly to rent-seeking. Rent-seeking refers to using a dominant position to increase one’s share of economic activity without creating new value and to the detriment of other participants.

In Web3, the platform economy is not controlled by companies, but by cryptographic protocols, and therefore, no single party can engage in rent-seeking, thereby avoiding the efficiency and fairness suppression caused by rent-seeking in Web2 platforms.

From the perspective of platform economy, most blockchain games currently focus on tokenization rather than Web3. This is because they have not replaced the platform with a protocol, but simply issued tokens (whether by turning coins into fungible tokens or items into non-fungible tokens).

However, these games are unable to measure the value of a player’s actions to the entire game (especially the improved gaming experience for other players), and thus cannot reward corresponding tokens. Therefore, issuing tokens does not provide significant help to the core network effect. For example, most X-to-Earn mechanisms attract users who contribute little to others’ gaming experience, and the token rewards cannot form a sustainable development cycle.

Of course, tokenizing game assets has great value. It allows game assets to enter the global encrypted market and trade on the chain, obtaining better liquidity premiums. However, we need to be clear that this is value brought by tokenization, not Web3.

Octopus Network is primarily focused on providing non-financial applications such as storage, communication, and computing services, and coordinating markets through encryption protocols. When designing a token economy, we must first answer several questions: What is the business? What is the network effect? Who are the core contributors? And the most difficult question: How do we quantify contributions on-chain?

Quantifying participants’ contributions to the network effect and rewarding the corresponding tokens is the core of the encryption protocol. For example, Proof-of-Work (PoW), Proof-of-Stake (PoS), Proof-of-Coverage (PoC), Proof-of-Relay (PoR), etc. Once innovative contribution proofs emerge, the boundaries of Web3 expand. If a game invents a proof of increased gaming experience value, Web3 is truly expanding into the gaming field.

Token rewards in the DeFi field are typically awarded to liquidity providers, but there are certainly other contributors such as developers, early investors, etc. who should also be rewarded based on their relative contributions.

If a developer forks another project without actual contribution, it is fair not to receive tokens. However, if the protocol is complex and requires continuous evolution, developers should be allocated a certain percentage of tokens to ensure fairness and sustainability. The goal of token economics design is to achieve incentive compatibility, where token allocation is determined by contributions from all parties.

In addition, protocol governance must shift from the core team to the community, and application layer protocols should be governed on-chain, which currently seems to only be possible with tokens as the foundation.

After solving the above problems, it is important to examine whether this token economic system can withstand the volatile fluctuations of token prices.

Token prices are highly correlated with the overall market and a good project doesn’t necessarily mean a consistently upward trajectory. Therefore, it is necessary to check whether in the event of a sharp decline, there will be a significant increase in transaction costs for protocol participants or even the potential for a death spiral. Ideally, a sudden surge should attract speculators and convert some of them into protocol participants. Similarly, during a sharp downturn, the token’s intrinsic value should provide support for the price.

There are already some methods and tools for token economics, and a systematic methodology is emerging. However, many researchers are beginning to question whether token economics has been overly emphasized at the expense of the protocol’s intrinsic value.

For entrepreneurs, learning about token economics is not cost-effective, as the learning curve is steep and it is not frequently applicable. The best approach is for entrepreneurs to focus on their business, while leaving token design to investment firm researchers.

中文版:章鱼网络 Louis|通证经济设计的几个核心问题

Disclaimer: This article is for reference only and should not be used as legal, tax, investment, financial or any other advice.

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