words written in front
- The content of this article is mainly from the perspective of reflection, around the applicability and necessity of the Token economy for Web3 applications
- The design method of the Token economic model is not within the scope of this sharing, and it is not too much design economics expertise
- The Web3 world is iterating fast, and many concepts are still in the exploration stage, please maintain the spirit of questioning and independent thinking
- This sharing only represents personal opinion and has nothing to do with Chainbase
1. What is Token Economy?
1.1 The origin of the Token economy: the initial usage scenarios of cryptocurrencies
The origin often corresponds to a history. In order to understand the original use cases of cryptocurrencies, let’s go back in time and look at those real historical fragments.
The Birth and Early Scenarios of Bitcoin
First, let’s look at the birth of Bitcoin. Bitcoin is the world’s first cryptocurrency; its white paper is less than 10 pages long, and the first sentence of the text reads: “Internet commerce has become almost entirely dependent on financial institutions as trusted third parties to process electronic payments.”
（Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments.）
This sentence clearly expresses the birth of Bitcoin, and its original intention is to solve various problems caused by centralization in financial activities.
Let’s take another look at this fragment from the ethereum biography “Ethereum Raid,” by the author, who was a Bloomberg correspondent in Buenos Aires at the time, in which he wrote: Can buy U.S. dollars. Can the government really ban people from buying U.S. dollars under an order?… The government blatantly does this, and the common people are helpless.… A colleague from a Bloomberg branch told me that there is a strange digital currency called Bitcoin coin, which the Argentines use to solve this problem.”
The background of the incident in this article is the large-scale devaluation of the Argentine peso in 2013. At that time, in order to prevent the situation from further worsening, the Argentine government adopted a one-size-fits-all measure to prohibit the exchange of peso for US dollars. So Bitcoin is used by Argentines to fight against this unreasonable policy to avoid the loss of personal property.
The original intention of Ethereum
Let’s look at Ethereum. The first sentence of the definition of “Ethereum” in the text of the Ethereum white paper is: “The purpose of Ethereum is to integrate and improve Ability to create arbitrary consensus-based, scalable, standardized, feature-complete, easy-to-develop, and collaborative applications.”
This description clearly expresses that Ethereum inherits the concept of decentralization of Bitcoin and makes up for the singleness of the Bitcoin system. Its original intention is to allow developers to use the Ethereum network to build everything and make it a “world” computer”.
These historical fragments truly reproduce the vision and usage scenarios of cryptocurrency at the beginning of its birth.
Bitcoin is a decentralization revolution in finance, designed as a weapon against centralized financial institutions. Bitcoin was initially used to minimize trade frictions between sovereign currencies.
At present, the most prosperous DeFi ecosystem of Ethereum, its original intention is not specific to the financial field, but to build everything. Therefore, from this point of view, the high concentration of encrypted economy restricts the development of other fields.
1.2 Token Economy: From Capturing Value to Wealth Cryptography
With the development of ecology, the role scenarios of cryptocurrencies have been greatly expanded; and a set of economic models designed and built around cryptocurrencies is the Token economy. Token economy belongs to the category of economics, which includes a narrow economic model:
- The design of the cryptocurrency itself
- The degree to which a cryptocurrency is related or bound to its corresponding value
- Market Feedback After Cryptocurrency Launch
The birth and landing of Ethereum is inseparable from the Token economy
In the early days of the development of the encrypted ecology, the Token economy helped many project parties to obtain valuable start-up funds.
In mid-2014, the early Ethereum team was still worried about the direction of Ethereum. At that time, there were about ten of them, who came to Switzerland from all over the world, and shared a house in the suburbs to balance work and accommodation. They have been working day and night without pay for a long time, and most members have spent almost all their savings.
In such a difficult environment, Ethereum’s early teams are still debating whether to start a traditional for-profit company or a non-profit organization. The team argued endlessly about this issue, and after a fierce quarrel, everyone handed the matter over to Buterin, who was only 20 years old at the time.
Butrin pushed out the door and sat on the balcony on the second floor of their rental house. He was alone under the starry sky of the Alps, holding the red pillow that the team had placed outside, and swaying gently back and forth. After being alone for an hour like this, he returned to the team and said, “Ethereum will be a non-profit open source project. The eight founders will always be founders, and they will get everything they deserve, including what they owe. Salary and ether.”
In fact, Buterin’s colleagues were already negotiating financing matters with investment institutions in the United States. It was the existence of the Token economy that allowed Buterin’s decision to be implemented, and Ethereum finally maintained a neutral and decentralized state.
It is a paradigm innovation and a wealth code
Today, 8 years later, there are nearly 10,000 cryptocurrencies that are only included in mainstream platforms in the world, and the total market value once exceeded 20 trillion yuan. These cryptocurrencies continue to provide nutrients for the entire ecosystem, attracting a large number of talents and users. They have created hundreds of public chains with different characteristics, numerous protocols and tens of thousands of dApps.
From the perspective of the cycle, the Token economy has indeed helped countless projects solve the problem of “where does the money come from”, and to a certain extent, it has also solved the problem of “why come” for users. Token economy is a powerful tool for capturing value, but also because of people’s profit-seeking, it has gradually acquired a new identity: wealth password.
Profits and risks are always proportional, and if you get rich overnight, you must go bankrupt someday. Since the birth of Bitcoin, the cryptocurrency market has experienced ups and downs. The low threshold and high rate of return have attracted a large number of so-called plate projects and speculators to enter the market, and more and more people only focus on short-term interests without considering long-term value. Therefore, the Token economy has also laid a hidden danger for the entire Web3 ecology – this may even be a genetic defect.
1.3 What are the possibilities for the future of the Token economy
If we classify the current Tokens, we may get the following conclusions:
Governance – Token used for project governance voting (common in DAO)
Utility – As a key element of project operation, it has rights such as dividends, pledges, and income (more speculative behaviors)
Storage type – such as Bitcoin, which is slowly being used as an alternative investment asset/big category commodity (head cryptocurrency)
Under these basic types of Tokens, there are also many innovative methods that are being used by more projects.
Teams like Gitcoin, DoraHacks, and others are using quadratic voting to distribute funds for Hackathon projects.
Compared with one person, one vote, or the traditional one person who can cast multiple votes, quadratic voting allows voters to increase the cost of voting for a project continuously. Avoid excessive suppression of personal will by one person, one vote.
However, although the quadratic voting/financing method solves some of the shortcomings of the traditional scheme, it is still not perfect. For example, after the ID can be centrally occupied, the entire model may be deflected toward one person, one vote; and although the cost is high, if the rich are rich enough, they can still control the direction of voting. It looks like there is more room for creativity here.
Kevin Owocki (@Gitcoin) argues that humanity faces coordination failures on a global scale – including climate change, insecure digital infrastructure, misinformation and lack of economic prosperity – and our traditional institutions are incapable of deal with them.
Kevin believes that coordination failures occur because a group of people could have achieved the desired outcome by cooperating, but failed to do so because they did not coordinate their decisions. (Climate change in this way is indeed a very typical example)
Global failure to coordinate brings systemic risks to human prosperity, and Kevin calls it Moloch—the god of coordination failure. And the weapon to defeat Moloch is a new mechanism deployed in a decentralized blockchain network—regenerative cryptoeconomics.
Regenerative cryptoeconomics is more like a mechanism or a principle. It wants to design an Internet of Renewable Value to facilitate the prosperity of diverse global citizens. There will be decentralized infrastructure, tens of thousands of creators, and a more rational distribution of funds to get rid of the zero-sum game of capitalism and the rich get richer model.
If you are interested in these ideas, you can read Green Pilled written by him, you will definitely get a lot of inspiration.
De-financial Tokens are also one of the hot innovations that everyone pays special attention to recently. Among them, SBT proposed by Buterin is the most typical case. SBT refers to soulbound token, which is non-transferable and non-financial. This kind of Token is more like the mapping of a person’s social attributes in the blockchain network. Obviously, this is very different from Tokens with financial attributes such as speculation and profit.
SBT is just a concept, not a Token that has already been implemented. At present, many project parties are trying to implement SBT, but there are not many influential projects. At present, this concept is still very controversial.
No matter what the form of non-financialized Tokens such as SBT will be in the end, the concept of soul binding still follows the core concept of Web3. I believe that such innovative ideas and product attempts will continue.
2. The particularity of the application layer in the Web3 ecosystem
2.1 Web3 Ecological Panorama
Among the various Web3 ecosystem diagrams, this one really impressed me. It divides the entire Web3 ecosystem into 5 layers according to the concept of layers:
Layer0=Infrastructure and network layer, where 0-1 layers are on-chain ecology, and 2-4 layers are off-chain ecology
This picture clearly and comprehensively shows the whole picture of the entire Web3 ecosystem. The base of this world is supported by Layer0/1; most users can only see or touch Layer4; and Layer2/3 helps Layer4 to better link Layer1/2.
Next, we will focus on the protocol layer in Layer 1 and the application layer in Layer 4.
2.2 Web2 to Web3: The Value Reversal of Application Layer and Protocol Layer
Applications and Protocols in the Web2 Era
Apps are products that most ordinary C-end users use or touch on a daily basis, namely apps. A protocol is an agreement or a call rule designed by both parties in network communication to achieve communication, which is obviously out of reach of ordinary users.
In the era of Web1-2, most of the value is captured by the application layer, while it is difficult for the protocol layer to capture value. For example, Google, Facebook, Amazon, Ali, Tencent, etc. have gained a lot of value due to the success of some of their applications, and eventually became Web2 giants. However, the underlying protocols such as TCP/IP and HTTP that support the Internet cannot capture value, so they cannot create profits.
Why can the application layer capture value in the Web2 era, but it is difficult for the protocol layer to do so? Because the protocol layer is the underlying technical facility of the Internet, it is often open source and free, and everyone has been using these rules for many years. The protocol layer does not have a mature and implementable profit model.
The application layer faces users directly, opens the market through subsidies or experience, continuously increases user migration costs, and monopolizes a large amount of user data, and finally forms a solid user pool and product line; under the interaction of these elements, the Internet giant of Web2 has been created. .
Talent and capital must be profitable, so in the Web2 era, the volume of the application layer is much larger than that of the protocol layer.
Web3 Era: Fat Protocols, Thin Apps
In August 2016, Joel Monegro of USV, a famous American fund, published an article called “fat-protocols”, which is called “fat protocol” in the Chinese world. He advocates that the era of Web3 is the era of the rise of the protocol layer, and his views have resonated a lot, and even directly affected the capital flow of Web3.
Web3 based on blockchain technology fundamentally breaks the possibility of Web2 application layer monopolizing data, because value data is stored on the decentralized blockchain network, and each user has the right to write and query data freely . This qualification is not tied to a certain application, so the once monopolized Web2 application will degenerate into an entrance linking users and the blockchain network in the Web3 era. For users, the entrance can be changed at any time.
The protocol layer in the Web3 era has also achieved extreme value amplification because of the characteristics of the blockchain network. Blockchain networks are a zero-trust world, and there is a saying that code is law. It is the fully open source protocol layer that enables zero trust, self-governance and decentralization. It can be said that the protocol layer is the soil of the Web3 world, the operating rules, and the core cornerstone of the application layer.
Under such an ecology, the Token economy provides a perfect solution for the protocol layer that has no value acquisition method. The higher the consensus of the protocol, the higher the market value and the stronger the value capture ability. That’s why Web3 is a fat protocol, a thin application.
(currency price, followers, application growth flywheel)
Token economy is also the first choice for the application layer
Token economy has greatly promoted the prosperity of the protocol layer, and it is also the first option for most Web3 application layers to capture value. Applications have their own economic models and issuing coins has become the norm, and even super-applications have developed their own protocol layers.
But in theory, the token economy may be the only way for the protocol layer to capture value, but it must not be the only way for the application layer to capture value. The application layer has a wider user group than the protocol layer, and it is easier to build user trust. Compared with the protocol layer, which can only achieve value capture through a set of established rules, the application layer is more flexible and more user-friendly. If these advantages are to be leveraged, there must be multiple ways in which applications capture value.
Next we analyze this.
3. The chemical reaction of Token+Dapp
3.1 How to understand value capture
We know that the role of the token economy is to help achieve value capture, and we should have a proper understanding of value capture before discussing applicability and other alternatives. Value capture is not simply equal to making money, it can be understood from two levels of concept and perspective.
Outside the context of the Internet, there is a classic concept called land value capture: it refers to the process of recovering all or part of the land value appreciation attributed to the community’s contribution to the community by means of tax collection and other means.
We can imagine a real community with backward facilities in all aspects in the early stage, so the comprehensive value of the land must not be high, and it will be difficult to attract real estate, shopping malls, large companies, etc. to settle in. Later, the community infrastructure is full, and the overall supporting facilities are getting better and better, and high-value commercial entities will be attracted to settle in. This process is the appreciation of the land value contributed by the community.
The community can then obtain economic income by taxing the settled commercial entities; this process is called land value capture. Obviously, it is different from simply making money, but a process of first contributing and then recycling.
Now we can think of the community as a Web2 application. There are no users in the early stage of the application, and naturally there is no ability to capture value. At this time, it must create an increasingly rich ecology through various means, which is very similar to the behavior of various money-burning subsidies in the Web2 era. When the size of the ecology reaches a certain level, these applications begin to capture the value brought by the ecology through payment conversion, traffic conversion, building channels, etc., so as to convert them into their own cash flow income. This is the value capture of Web2.
What we mean by value capture in the Web3 context is the same as in Web2. It’s just that the value capture of Web3 is often decentralized, so the value distribution is also often decentralized.
understand from perspective
We can also combine different perspectives to understand what value capture is.
- Project side: The ability to ultimately obtain funding through project “features” and specific methods
- Investor: the ability of the invested project party to bring the return on capital
- User: the ability of the project party to cut leeks or create value together
Combining the above two perspectives, we should have a very clear understanding of value capture. If realizing value capture is the purpose, is the token economy suitable for all application scenarios? Next, let’s try to analyze the advantages and disadvantages of the Token economy for Web3 applications.
3.2 Advantages and Disadvantages of Token Economy for Web3 Applications
We can analyze it from the perspective of the project party and the entire Web3 ecosystem by combining the history and the current situation.
Pros: Token Economy
- It is a great incentive for Web3 projects to achieve a cold start
- It is a decentralized voting and benefit distribution method
- It is a way for the project party to independently finance
- It is a good way for the capital side to achieve a quick exit
Disadvantages: Token Economy
- It may lead to short-sightedness caused by interests of many parties, doing things without doing things
- Causes the project party to be overly dependent and does not explore other value capture methods
- Market value management will increase more costs, consume more resources, and also raise the threshold for entrepreneurship in disguise
- Good projects forced to close due to collapse of token value
Pros: Token Economy
- In the short term, it will stimulate a large number of users to enter the market with a speculative mentality (and also leave because there is no room for speculation)
- A large inflow of funds can promote the rapid development of the Web3 ecosystem
- Provides tools for new production collaboration and benefit distribution models
Disadvantages: Token Economy
- Decentralized way of operation allows hackers to take advantage
- Deception and pyramid schemes prevail, causing Web2 users to stay away
- The proportion of Web3 core believers has been seriously diluted, and Web3 application types are single or even completely financialized
Whether it is from the micro perspective of the project party or the macro perspective of the overall Web3 ecology, the Token economy is a double-edged sword. But Token is neutral, and who will use it and how it will be used are the key factors that determine the outcome.
3.3 What if there is no Token economy for Web3 applications?
The pros and cons of using the Token economy have been analyzed in the previous article. Finally, let’s take a look at what kind of scenarios are suitable for the Token economy and what are its alternatives.
Applicability of Token Economy
- Projects that have a weak ability to capture value but have commercial appeals should consider using the Token economy more
The project itself does not have a mature business model, but it needs to rely on the project itself to realize commercial value; in this case, the introduction of the Token economy can provide a new way of income; such as open source projects, DAO, underlying infrastructure, etc.
- For projects with strong ability to capture value, Token economy is not a must
The application layer itself has a variety of methods to generate revenue, which mainly come from product value and user stickiness. Regardless of Web2 or Web3, it is still the most valuable to have a solid user pool. The number of users and the flexibility of the application itself can support various monetization methods. On the contrary, if the application rashly introduces the Token economy, it is easy to cause problems such as team focus and resource dispersion.
- For projects without decentralized elements in product features, it is difficult to directly utilize the Token economy
If the product form is biased towards centralization, then the Token economy is difficult to integrate with the product itself; without a healthy ecological support, the value of Token is difficult to achieve. At this time, the Token and the product are in a state of separation. It is difficult for this type of project to establish a sufficient consensus, and it is naturally difficult to support the value of the Token.
Alternatives to Token Economy
When the token economy is not applicable, or is not a necessary option, we can openly imagine what alternatives are available. E.g:
- Better token economic model (such as quadratic voting/financing)
- Tokens and related incentive systems (such as SBT) that are less liquid and difficult to speculate
- Traditional value capture methods (e.g. user subscriptions, ad revenue, platform economics, etc.)
- Introduce digital currency with sovereign endorsement (such as digital renminbi?)
4. Write at the end
Outside our Hangzhou office, a bayberry tree was planted. Every time it bears fruit in late spring, this tree becomes the focus of many people. They first tried to pick one or two, and then they picked them one by one, and then they developed to the point where they stepped on stools and picked boxes in large batches. After a commotion, the branches were torn off, the leaves were scattered all over the place, and the shrubs planted around the tree were trampled into a mess; and the bayberry tree that had been plucked from its fruit was never seen again.
This bayberry tree is very similar to the current Web3 ecology, bustling and profitable.
If everyone only pays attention to short-term interests, and no one is a long-term builder, it is like a bayberry tree that no one fertilizes and waters, and no one maintains insecticides. In the end, the last trace of nutrients will be drained and it will never bear fruit again. . In the ecology of Web3, nutrient is faith, and faith is hope. The nutrients are finally drained, which is the starting point of ecological collapse.
This deserves serious consideration by each of us Web3 practitioners.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/the-chemical-reaction-of-tokendapp-web3-is-inseparable-from-the-token-economy/
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