a16z: We have designed a dual-token reputation incentive system

The reputation system can motivate participants to make high-quality contributions, including content creation, content regulation, community construction, and rule setting. This is critical to the development and sustainability of any Web 3 project.

But to design a good reputation system, you need to consider many aspects such as reputation and credibility. Although many people are exploring this field, from the DAO of FWB (a private social platform based on Discord’s private server) to “play while earning” games like Axie Infinity , the industry currently does not have the best reputation system for these The design is agreed.

Based on our economic theory and game design knowledge, we have proposed a dual-token design for the reputation system: one represents reputation and the other is used to provide liquidity, which can be used as a symbol of meaningful contribution.

The three-stage evolution of the reputation system

As early as in the early days of civilization, we would grant market credibility, such as awarding medals for certain quality services. In a company, employees also have positions, and this grade “token” determines the salary level.

The game can be regarded as a pioneer in the digital reputation system. Players can win game coins, and then can buy game skins, weapons, characters, etc.

In the crypto world, reputation mainly borrows from the form of social tokens. These tokens can be issued by various entities (individuals, communities, games, and applications) to obtain social capital, obtain services, or convert them into rewards. And in encryption currency technical support, agency account currency usually represent ownership and unique, such as NFT . Based on blockchain technology, social tokens are decentralized and mobile, so they can be used in the global Internet economy, not just within the control of a single platform or decision makers.

The paradox of reputation tokens: is it earned or bought?

Reputation tokens on digital platforms usually serve two purposes:

  • Identify and reward users who have contributed to the platform, users can use this method to gain public reputation;
  • Provide a form of compensation that enables contributors to convert part of the value they create into exchangeable currency.

However, these two functions are opposed. Tokens need to be exchangeable to be liquid. But the higher the liquidity of the token, the less effective it will be as a pure reputation signal.

For example, charities can cast NFTs to reward those who have completed more than 500 hours of community service. But if these recipients can sell their NFT to anyone they want, then whenever you meet a holder, you have to think: “Did that person earn it or buy it?” Even if not The possibility of people trading their community service NFTs publicly and selling them privately will also reduce the value of the signal. In the fully liquid market of such tokens, the signal value is completely washed away.

This creates a paradox: if a token can be easily transferred, then those who do not have credibility can simply buy it, which reduces the ability of the token as a credibility signal.

Remember how easy it is for people to buy zombie fans on Weibo? This makes followers a weak indicator of influence, making it difficult for brands to find sticky users.

At the same time, high prices will reduce transferability.

For example, CryptoPunks are now very expensive, and almost all holders must preemptively start. This seems to eliminate the paradox of restoring the credibility value of the token. But because some people are willing to buy CryptoPunks at an excessively high price to gain credibility, the value of the signal will still decline.

In addition, the decrease in the cost of reputation attached to the token will be fed back to the market value of the token. If the token loses its ability to demonstrate credibility, then people’s interest in trading it will diminish. In fact, as people began to buy Weibo followers in large numbers, these followers lost their signal value, which made people not interested in these bought followers. This opens up the market for buying other forms of reputation (such as likes).

It can be seen that the transferability of reputation tokens not only reduces their ability as reputation signals, but also reduces their ability as valuable compensation. Therefore, the establishment of reputation capital requires completely (or at least most) non-transferable tokens. Therefore, the new question is how to convert reputation into liquidity.

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

When a token is awarded by a trusted source (such as a brand, university, or government), it has signal value. But in the encryption and blockchain environment, there may not necessarily be a centralized third-party source that grants such power.

Therefore, the second way to convey the value of the signal is to make the token easier to obtain if someone has certain underlying characteristics. For example, if you are very skilled or hardworking, it is easier to get a high score in the game. A high score means a combination of skill and effort. The same is true for the high number of views on platforms such as YouTube.

Since the transferability of reputation tokens decouples them from the underlying institutions that are the source of signal value. So, what if we separate transferability from the token itself? This is why many games have separated game points from tokens.

We propose a dual-token reputation system: one of the tokens, which we call “points”, serves as a non-transferable reputation signal; the second type of token is a transferable asset that is allocated to point holders in a regular cycle. Yes. In fact, points will generate dividends in the form of tokens, which can be used as tradable currencies. In addition, since tokens are accumulated by those who hold points, tokens are also related to potential reputation.

This design promotes a feedback loop, where users earn points through high-quality contributions to the platform (such as contribution content, review, or winning gameplay). Then, when users with points get tokens, they can be traded as currency. The user’s demand for currency promotes the acquisition of points, thereby incentivizing high-quality contributions.

Please note that although the points we use are not fungible and the tokens are fungible, the more precise landing may vary depending on the application. The key is that the contributor receives a non-tradable token, which derives a tradable token.

Points should be rewarded for contribution behavior

In order for points (points) to maintain signal value and incentivize high-quality participation, they must be linked to the user’s contribution in some way. In a gaming environment, scores may be rewarded only based on algorithms. On creator platforms such as YouTube or Douyin, points may be a direct function of people interacting with the content of a given creator. In other cases, such as publishing platforms like Mirror, there may be a group of users who are given the ability to reward points, or there may be a governance/voting process that determines the distribution of points.

It is important that the points must reliably link the holder to the source (or driving factor) of the reputation. In addition, the score reward rate should be used as a contribution indicator, so that users can know how much effort they need to make to reach a given score level. In other words: Participants need to know the rules of the game before starting the game.

In many cases, there is no upper limit to the score. For example, there is no upper limit on the number of badges Discord can give to the host. However, scarcity can increase or strengthen the reputation value of the system. For example, the “host” role on the Discord server is only assigned to a small number of people, so the person with the host badge has a higher reputation on the server. If the server starts to let too many people serve as moderators at the same time, then the significance and value of this role will be reduced. Things are precious.

Scale is important, pay attention to dividends, supply and distribution

In order to create a kind of credibility-related liquid value, point holders should obtain tokens through a series of dividends, that is, each point holder can get token rewards based on the number of points he owns.

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

  1. Scale: How much is the dividend?

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

    Unlike points, in order for them to have monetary value, this currency must be relatively scarce. Many currencies (such as Bitcoin ) benefit from long-term restrictions on the supply of tokens, and there is a limited amount of currency that can be minted. In this case, the average total dividend will definitely decrease over time, unless there is some mechanism for the tokens to be absorbed back into the system (for example, through payment within the platform).

    Even so, the supply of tokens is not necessarily limited. For example, if tokens can be redeemed for a portion of the platform’s fund pool, then the total token supply can expand as the fund pool grows. In these cases, the total scale of dividends can be the same, or even grow over time, as long as the dividend interval is large enough to not exceed the growth rate of the fund pool.

  2. Supply: How often should dividends be paid?

    For platforms with similar employment functions, such as gig or creator platforms, the best strategy is to distribute tokens to point holders regularly: for example, monthly or even daily. This means that users make valuable contributions, thereby maintaining a certain level of points, thereby obtaining a stable income.

    Arranging dividends irregularly or irregularly is more suitable for platforms that contribute irregularly, such as in some DAOs. For example, when a member contributes an article or participates in a coding project, the front end will issue its $FF token. Another option is to issue tokens only when platform participation, productivity, or funding exceeds a certain threshold. This is similar to the dividends of listed companies, and we have also seen this in Mirror’s $WRITE airdrop.

  3. Allocation: How should the size of the dividend be related to the amount of points held?

    Perhaps the easiest way to associate tokens with points is through linear dividends, that is, each point allows users to receive the same share of dividends. But this is not the only option.

a16z: We have designed a dual-token reputation incentive system

Under the convex function, the higher the score, the greater the dividend share of the user. In other words, the bonus increase from 1 to 2 points is greater than the bonus increase from 0 to 1. Such a curve rewards users who have participated in the system for a long time and provides more motivation to maintain the state.

a16z: We have designed a dual-token reputation incentive system

The opposite method is a concave function, from 0 to 1 is more valuable than from 1 to 2. This is an ideal way to attract new users because it rewards the initial contribution more than the subsequent contribution (whether it is the second, third, or 27th). But if the user is anonymous, such a curve is difficult to maintain, because in this case, the user can create many accounts and earn “early” points on each account.

a16z: We have designed a dual-token reputation incentive system

Economic rewards should be consistent with contributions

The three characteristics of dividend design are: size, supply and distribution. This determines the number of tokens received by the point holder 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 on points earned by users corresponds to the marginal benefit of the platform’s point generation activities. People should earn points based on the value he creates for the platform.

In addition, the principle of marginal benefit = marginal benefit means that the point distribution rules may have to be adjusted. This allows the platform to give early contributors a disproportionate share, which is commensurate with the importance of their contributions to the system, while these contributions have not yet been confirmed. In other words, the platform may not have a clear understanding of the value of contributions, especially in the early stages, so there needs to be a mechanism to experiment and recalibrate around the distribution of tokens.

The link between points and tokens provides a natural mechanism to reward users who make high-quality contributions. But because the points are not transferable, there is a lagging factor: those who accumulate points in advance may end up with a disproportionate share of dividends, especially when the gradual supply of tokens is fixed.

In many crypto projects, the largest holders are ultimately only those who know the project first. But those early adopters are not necessarily the most valuable in the future ecosystem. Therefore, maintaining an incentive mechanism for continued contribution and participation is crucial. A natural way to achieve this in a dual-token framework is to let the points decrease or depreciate over time. This can be achieved by reducing dividends. But a simpler approach is to let the total number of user points drop, or change over time or user stickiness level.

Reputation incentives must continue

This is also similar to the situation in games: if players do not maintain their contributions, they will eventually lose their status because other players will overtake them. This is also true on the creation platform, where consumers’ attention is gained through competition to motivate players to continue participating in the game.

But even if the point pool itself is growing, mechanically lowering points just to create motivation for participation may be valuable because it can help users optimize their contribution levels.

Declining points means that token dividends, like stock dividends, will automatically dilute over time, just like traditional listed companies dilute their equity by issuing new shares when they need new investment to increase their value. In this sense, the decline in points reflects the user’s demand for continued investment in the platform.

Of course, as with any currency system, the actual value of a token depends on the community’s perception of its value. Therefore, the community’s awareness of the value of tokens needs to be at least high enough to support the total number of tokens in circulation.

This means that the platform may need to adjust monetary policy , such as adjusting the money supply through repurchase or temporary transaction restrictions. For example, in the first few weeks after the issuance, the decentralized social platform BitClout does not allow BitClout to be exchanged for other tokens. The dual-token system we described provides a simple alternative: adjusting the scoring rate or dividend flow rate. For example, the committee that manages the game can make the game slightly more difficult, which is a way to slow down the accumulation of points, or it can reduce the total dividend scale, which is a way to reduce the long-term supply of tokens.

But builders must be cautious of such interventions, because every change in the overall incentive structure of contributors will affect the behavior of contributors. In particular, anything that accidentally reduces the point value may damage the trust of users.

Don’t squeeze value too much!

We have outlined some of the core principles of social token design, but it is also important to integrate these designs with the product market to essentially motivate users. For example, if a game focuses on profiting users, but does not correctly grasp the “how to play”, then it ignores an important point, that is, the game should be played for fun in the first place.

If a product is started around a reputation system, but lacks the true fit between the product and the market, then it may create a group of speculators instead of real users.

But once the product meets the market, the incentive mechanism will work. If a platform cannot give users appropriate rewards, it will be difficult to scale up. In order to make the incentive mechanism work, the reputation system should separate social capital from financial capital, especially the current one provides a clear development path for the latter.

There are many factors to be considered in the design, such as the relationship between governance and reputation; making the reputation system respond to the development of the contributor community; allowing all types of contributors to establish their own reputation. But we believe that if the builders accept the dual-token system design at a high level, they will be able to reward contributors with real reputation signals, even while generating liquidity while maintaining its value. This is exactly what these projects need to drive growth.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/a16z-we-have-designed-a-dual-token-reputation-incentive-system/
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