The secret to great token mechanics

Last week, I talked about bad token mechanics, which is the case in many of the ICO whitepapers I’ve read. So how do you create a great token economy? Actually it’s pretty simple: create an organization that actually needs a token to function. What does that mean? The best definition I heard, not surprisingly, was from Vitalik Buterin:

1. The ecosystem should be built around something of value that doesn’t have traditional financial value today.
2. The ecosystem should need decentralization, or at the very least, benefit from decentralization and/or distributed ledger technology.

Simple, right? Easy, no.

Sometimes you can get away with one of the two, particularly when a high level of confidentiality and security is essential (need for decentralization). Sia is one of my favorites that falls into this category. Cloud storage has a market value and can be bought with fiat currency. Sia has implemented a solution that leverages DLT for security, reliability, anonymity and privacy. By creating a marketplace, they’ve also reduced the price of storage dramatically, but that’s, to some degree, a side effect of anonymizing and commoditizing storage. In other words, it’s a cheaper solution because, from the start, it is a better solution than centralized corporate management for this particular commodity. I chose Sia rather than any of the other storage companies as my favorite, by the way, because they are religious about using cryptocurrency only for payment, in order to ensure that the system is purely anonymous.

I’ve seen a large number of other organizations try to get their token economics to work properly solely on the basis of condition 2: benefit from decentralization, and it’s extremely difficult. These organization usually have to hold a large amount of token and/or fiat themselves in order to stabilize their currency, at least “at first”, until the economy gets going. For these kinds of companies and organizations, it’s pretty clear they don’t need their own specialized token, because someone could just pay with any other cryptocurrency, and they could price their services pegged to whatever currency they want. If you find yourself (or others) giving a long explanation of how they will stabilize their token vis-a-vis some fiat currency, you can be pretty sure they aren’t creating an ecosystem. An ecosystem is self-sustaining. I mean, that’s the definition of an ecosystem, right?

But let’s go back to factor 1, building an ecosystem of value around something that traditionally does not have monetary value. If you are in this space, you’re probably a bit of a do-gooder, which is, you know, a Good Thing (TM). Right now, these kinds of tokens are becoming common in two areas: content and attention. Wouldn’t you like to get some credit when you post a great blog or video? That’s what Steemit and Kik are all about. Wouldn’t it be cool if you were paid every time you watched an advertisement, instead of having Facebook or Google be paid for it? That’s what attention tokens are all about. The areas of content and attention tokens are addressing a number of painful problems in advertising, and they are generally a Good Thing, but they are still a bit limited in their thinking and their reach. We aren’t even sure where this whole thing of “Value” will take us, because it’s so new.

When we talk about “incentivizing” behavior through tokens, we are still kind of talking about selfish financial gain. We still are a bit far away from what you and I really value as human beings.

The things that humans value don’t have money labels on them. Helping a neighbor. Playing with your child. Sharing a post of a friend who is trying to build up their business. Sharing the post of a friend who is trying to help a good cause. Planting a tree. Tutoring underprivileged children. Fixing up a friend with a blind date. Giving someone a compliment. Smiling for no good reason whatsoever.

Today, there is a clear monetary value for cutting down and selling a tree, but no value for planting a tree. Yet, we all need to breathe air. Entrepreneurs work very hard to make money so they can donate it to people who don’t make money, to fix the problems that are made by the fact that our society puts money value on harmful things. Hey, let’s cut apart a mountain, dig oil out of the ground and then donate 1% of the income to saving the rainforest! Let’s give a corporate entity proprietary ownership of the natural spring, and let them bottle and sell sugar water and then donate 10% of the proceeds to dig a well in the local village! It’s kind of backwards.

When we reward the behaviors I mentioned above, we create a better society and happier people. Wouldn’t you like to get a token each time you hugged someone? OK, let’s not incentivize that. Nobody wants a fake hug. That’s creepy.

In the future, I’ll be talking more about this vision, which doesn’t have anything to do with the ICO whitepaper business, but for now, what’s important is that we know that token economies are enablers of value. We know that using tokens, we can incentivize behaviors like sharing cool content, friending people, and liking their stuff. That’s a good start. In the future, I do think we will see tokens for community service, voting in local elections, and maybe even for listening to someone else’s opinions.

Creating these kinds of tokens is going to require two things:

• A leap of imagination. How would an economy look for incentivizing good deeds, without faking it, like the hug example above. You don’t want to incentivize someone to volunteer to play chess with old folks just for the money. You don’t want to create a society where people only say good things about one another even if they aren’t true. The incentive plans (token economies) need to be very well gamified.
• A leap of faith. For a token to have value, people have to use it to trade in a variety of things. In do-gooder economy, maybe I can get tokens for helping someone with dementia do their grocery shopping, and then later cash in my coins to have someone do my gardening. But to have that economy, some cryptocurrency investors are going to have to believe that, one day in the future, there will be alignment between financial wealth and the good you do in society. We would have to believe that one day teachers and social workers will be the highest paid professions, and stock traders would be the lowest paid professions. That’s quite a leap of faith.

What do you think? What are some areas where you see that there is value without the monetary incentive to back it up? How could you create a coin that would do that?