a16z: A dual-token economic model based on reputation system

The reputation system provides an opportunity for the platform to identify and incentivize the high-quality contributions of participants, including content creation, review, community building, and gameplay. This is essential to the growth and sustainability of any web3 project. However, designing a reputation system requires complex considerations around reputation supply, distribution, and credibility.

Therefore, although many people are exploring this field-from DAOs like FWB to games like Axie Infinity earning games and new social platforms like BitClout, the builders have not yet figured out the best way to design these reputation systems. Reach an agreement.

Using our knowledge in economic theory and game design, we advocate that the reputation system design based on dual tokens can be used as a tangible representation of meaningful contributions, one of which is used to represent reputation and the other is used to provide liquidity.

The evolution of the reputation system

The basic premise behind the reputation system is not new. Since the beginning of civilization, we have invented reputation marks, such as badges for merit or service. In the corporate world, employees are assigned titles or levels to indicate their position in the hierarchy-this “mark” usually determines a person’s salary and other benefits.

For a long time, games have also pioneered digital reputation systems. The “points” accumulated by the player during the game can be converted into “currency” in the game, which can be used to purchase new skins, weapons, characters, etc.

In general, reputation tokens in the crypto world take the form of social tokens. These Tokens can be issued by various entities (including people and communities, games and applications), and can be used to obtain social capital, obtain services, and/or convert them into rewards (financial or other means).

Importantly, in an encrypted environment, social tokens can usually represent ownership and uniqueness (in the case of NFT), and due to the existence of the blockchain, social tokens are decentralized and portable, so social tokens can Use in the global Internet economy, not just limited by a single platform or decision makers.

The Paradox of Reputation Token: Is it earned or bought?

Reputation tokens on digital platforms usually have two purposes:

  • Identify and reward users who contribute value to the platform-a form of signal that these users can use to enhance public reputation.
  • Provide a form of compensation that enables contributors to liquefy some of the value they create into convertible currencies.

However, these two roles are opposed. Token needs to be exchangeable to be liquid. But the higher the liquidity of the token, the worse its effect as a pure reputation signal.

To illustrate this point, assume that reputation tokens can be freely transferred. If Token is used as a credible signal of reputation quality, then their transaction value will be very high, so that the holder is willing to trade them. But once the token starts trading, the ownership loses its signal value, destroying the reputation capital conveyed by the token nominally.

For example, charities can start to mint NFTs to reward those who have completed more than 500 hours of community service. However, if these recipients can sell their NFT to anyone they want, then whenever you meet the holder, you must want to know: “Did that person get their NFT or bought it? ?”

Even if no one publicly trades their community service NFT, the possibility of a private sale will reduce the value of the signal. In the fully liquid market of such tokens, the signal value completely disappears.

This presents a paradox: if a Token can be easily transferred, then those who have no reputation can simply buy it, which reduces the ability of the Token as a reputation signal.

Remember how easy it is for people to buy followers on Instagram? This makes followers much weaker as a measure of reputation, so that brands are starting to look for indicators of engagement that are more difficult to “buy.”

In other words, high prices will also reduce transferability. For example, buying CryptoPunk is very expensive now, and almost all holders must purchase it in advance. This seems to eliminate the paradox—to restore the reputation value of Token—but because some people are willing to buy CryptoPunks at a high price to get the appearance of reputation, the value of the signal may still decrease. Currently, the number of people entering the space also has a natural boundary. As more people accept encryption, imagine the scale of the problem.

In addition, the decline in reputation capital related to Token can be fed back into the market value of Token. If Token loses its ability to demonstrate reputation, then people’s interest in trading it will decrease. In fact, as people began to buy Instagram followers in large numbers, these fans lost their signal value, which made them less interested in buying from influencers.

Making the reputation token transferable will not only reduce its ability as a reputation signal, but also weaken its ability as a valuable compensation. Therefore, the establishment of reputation capital requires completely (or at least most) non-transferable tokens. So, the question is how to turn reputation into liquidity.

Social capital should not be purchased-but this does not mean that it cannot generate liquidity

Tokens have signal value when awarded by trusted sources (such as brands, universities, or governments). But in the encryption and blockchain environment, there may not necessarily be a centralized third-party source that grants this authority.

Therefore, if someone has certain potential characteristics, the second way to convey value is to make Tokens more accessible. For example, if you are really proficient or very hardworking, it is much easier to get a high score in a video game; therefore, a high score signifies a certain mixture of skill and effort. The high number of views on platforms such as YouTube is also instructive.

The above-mentioned paradox-easier to transfer, less signal transmission capability-arises because making reputation tokens transferable decouples them from the underlying institutions and/or efforts that are the source of signal value.

So, what if we separate transferability from the token itself? This is why many games have separated points or points from tokens. It’s easy to imagine how spending your “score” would backfire.

We propose a dual Token reputation system, in which one Token, which we call points, serves as a non-transferable reputation signal. The second Token is a transferable asset that is regularly distributed to point holders. In effect, the points split dividends in a form that can be used as a tradable currency. In addition, since tokens are accumulated by point holders, tokens are also related to potential reputation.

At a high level, this design promotes a feedback loop where users can earn points from high-quality contributions on the platform (such as contributing content, reviewing, or winning gameplay). Then, when users with points receive tokens, they can be used as currency for transactions. The user’s demand for Token drives the need to earn points, which in turn encourages high-quality contributions.

Please note that although we use points as an irreplaceable language and Token as an alternative language, the exact implementation may vary from application to application. The key is that the contributor will receive a non-tradable Token, which will derive a tradable Token.

Points should reward contributions

In order for the points to maintain signal value and incentivize high-quality participation, they must be related to the user’s contribution in some way. In the context of games, scores may simply be rewarded through algorithms as a function of performance. On creator platforms such as YouTube or TikTok, points may be a direct function of how people interact with the content of a particular creator. In other cases, such as publishing platforms like Mirror, there may be a group of users who have been given the ability to reward points, or the governance/voting process that determines the distribution of points.

It is important that points must reliably link their holders to the source of reputation (or driving factor). In addition, the reward points rate as a contribution function needs to be well understood, so users can understand how much effort they need to put in to reach a given point level. In other words: Participants need to understand the rules of the game before starting to play the game.

In many cases, points need not be scarce. For example, Discord has no upper limit on the number of badges that can be granted to moderators. However, scarcity can increase or strengthen the reputation value of the system. For example, the role of “moderator” on the Discord server is only granted to a few people, so those with the moderator badge are considered to have a higher reputation on the server. If the server starts to let too many people become moderators at the same time, then the perceived meaning and value of the role will decrease.

Scale matters: the importance of dividends, supply and distribution

In order to create a kind of reputation-related liquid value, Token should be accumulated to point holders through a series of bonuses, and each point holder gets Token based on the number of points they own.

When designing such a system, there are three key issues:

1. Scale: How big should the dividend be?

The total size of each bonus—that is, how many tokens are allocated each time a bonus is issued—depends on the macroeconomic goals of the system.

Unlike points, the important thing is that Tokens are relatively scarce to give them value as currency. Many cryptocurrencies (such as BTC ) benefit from long-term restrictions on the supply of tokens-only so many of them can be minted. In this case, the average total dividend must decrease over time, unless there is some mechanism to absorb the token back into the system (for example, through payment within the platform).

Even so-contrary to some standard intuition-Token supply does not necessarily have to be restricted. For example, if Tokens can be exchanged as part of the platform’s treasury, then the total Token supply can expand as the treasury grows. In these cases, the total size of dividends may be the same, or even grow over time, as long as the dividends are spaced far enough apart, they will not exceed the growth of the treasury.

2. Supply: How often should dividends be paid?

For platforms with participation functions such as employment, such as performance or creator platforms, the best strategy is to distribute Tokens to point holders regularly: for example, monthly or even daily. This means that users who make valuable contributions can maintain a certain level of points and obtain stable income.

Dividends that are not regularly or irregularly arranged are more suitable for platforms with less regular contributions, such as in some DAOs. For example, when members contribute articles or participate in coding projects, Forefront will issue their FF Token. Another option is to issue tokens only when platform participation, productivity, or funding exceeds a threshold. This is similar to the dividends of listed companies, and we have also seen this in the case of Mirror’s WRITE Token airdrop.

3. Distribution: How should the size of the dividend be related to the score?

Perhaps the easiest way to link tokens with points is through linear dividends, that is, each point entitles the user to receive an equal share of each bonus. But this is not the only option.

a16z: A dual-token economic model based on reputation system

Under the convex dividend rate, the share of each dividend will be distributed disproportionately to users who have more points. That is, the bonus increase from 1 to 2 points is higher than the increase from 0 to 1. The convex rate rewards users who have participated in the system for a long time, and provides more motivation to maintain the state.

a16z: A dual-token economic model based on reputation system

The opposite method is the concave dividend rate, in which points from 0 to 1 are more valuable than points from 1 to 2. This method is great for attracting new users because it rewards more initial contributions than later contributions, whether you are the second, third, or 27th. That is, if the user is anonymous, then a concave rate system like this is more difficult to maintain, because in this case, the user can create many accounts and earn early points through each account.  

a16z: A dual-token economic model based on reputation system

Financial rewards should be aligned with contributions

Three bonus design features-size, supply, and distribution-determine the number of tokens received by point holders in each time period. This relationship directly affects the motivation to earn points.

Ideally, the distribution of Tokens should be calibrated so that the marginal return for users to earn points corresponds to the marginal return for the platform’s activities to generate points. How do you view this marginal benefit depends on the way the contribution creates the value of the platform. In other words, you should earn points based on the value you create for the platform.

For example, on platforms such as YouTube, the score will reflect the number of video views-the platform can accurately estimate the contribution of a given number of views to the engagement and bottom line of the platform. Then, the platform should issue tokens to each creator based on the marginal value of their opinions. Here, the convex bonus may make sense, because top YouTubers are more likely to drive long-term participation than less popular people.

YouTube has gone through several iterations like this-initially linking spend with the number of views, then with the viewing time, and more recently, with the engagement metric they named “YouTube Time”, which considers more than just Time spent watching content on the platform.

YouTube constantly adjusts its payment amount. This creates income uncertainty for YouTube creators who pay their bills through advertising revenue. Ideally, the platform will make the contribution income of participants more transparent so that contributors can evaluate the value of the points earned (and avoid frustration and burnout).

In addition, the principle of marginal revenue = marginal revenue means that the rules for the distribution of points may need to be adjusted. This allows the platform to provide early contributors with a disproportionate share, commensurate with the importance of their contribution to the system, but with less contribution. In other words, the platform may not have a clear understanding of the value of the contribution, especially in the early stage, so there needs to be a mechanism for experimentation and recalibration around Token distribution.

Reputational incentives must continue

The connection between points and tokens provides a natural mechanism to reward users who make high-quality contributions. However, because the points are not transferable, there is a lagging factor: those who accumulate points earlier may end up receiving disproportionate dividends, especially when the Token supply is gradually fixed.

In many crypto projects, the largest holder is ultimately just the person who knew the project first. But those early adopters are not necessarily the most valuable to the future of the ecosystem. Therefore, maintaining incentives for continued contribution and participation is essential.

A natural way to achieve this goal in the dual Token framework is to let the points downgrade or devalue over time. This can be achieved by reducing the bonus as a function of the user’s accumulated age. But a simpler implementation is to simply let the user’s total points drop, either mechanically over time or as a function of the user’s participation relative to others.

This is again similar to what happens in the game: in absolute leaderboards, the points are zero-sum-if players do not keep their contributions, then when other players surpass them, they will eventually lose their status. This is also true on creator platforms, where competition for consumer attention motivates continued participation.

But even if the point pool itself is growing, rather than zero-sum, it may be valuable to mechanically degrade points just to create incentives for participation. It may also be valuable to clearly specify the speed and reason for the decline in points, as it can help users optimize their contribution levels.

Declining points means that token dividends are like stock dividends that automatically dilute over time, just like traditional listed companies diluting their equity by issuing new shares when they need new investment to increase value. In this sense, the decline in points reflects the need for users to continue to invest in the platform.

Of course, like any currency system, the actual value of Token depends on the community’s perception of that value. This means that the value of points depends to a large extent on the perceived value of Token. Therefore, the community’s view on the value of Tokens needs to be high enough to support the total Tokens allocated.

This means that the platform may need to adopt a monetary policy-possibly through repurchase or temporary transaction restrictions to adjust the total Token supply. For example, in the first few weeks after launch, BitClout does not allow BitClout to be exchanged for other currencies.

The dual Token system we describe provides a simple alternative: adjusting the accumulation rate of points or the flow of dividends. For example, the committee that manages the game can make the game slightly more difficult as a way to slow the accumulation of points, or it can reduce the total dividend scale as a way to reduce the long-term supply of tokens.

But builders must be careful with these types of interventions, because every change in the overall incentive structure of contributors will affect the behavior of contributors. In particular, any behavior that accidentally reduces the point value may damage user trust.

Don’t over-financialize

We have outlined some core principles of social token design, but it is also important to supplement these designs with product market fit, so as to stimulate the internal motivation of users. For example, a money-making game that focuses on profiting users but does not correctly grasp the “play” element ignores this point: the game should first be played for fun.

Products that are bootstrapped around reputation systems but lack true product market fit may create a community of speculators rather than actual users.

However, once the product is matched with the market, the incentive mechanism will take over. If the platform cannot properly reward users, it will be difficult for the platform to scale and achieve mass adoption. In order for incentives to work, the reputation system should separate social capital from financial capital, especially if the former provides a clear path for the latter.

There are still many issues that need to be considered, such as the relationship between governance and reputation; enabling the reputation system to respond to the development of the contributor community; and enabling all types of contributors to build reputation. But we believe that if the builders adopt the dual Token system design at a high level, they will be able to reward contributors with real reputation signals, and maintain their value even when generating liquidity. This is exactly what these projects need to drive growth.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/a16z-a-dual-token-economic-model-based-on-reputation-system/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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