Two Questions:
- Token economics, and how to create incentivization across different platforms.
- Consensus and decentralized governance.
Token Economics & Incentivization:
- Fair method of coin distribution
- Coin incentive for devs
- Smaller premine/founders share
- Additional use cases
Proposal: In order to increase the use of a token economy, the ecosystem must make sure to have multiple use cases, fair (re)distribution of their coin — particularly to devs, and have a small premine/share of coins for the founders.
Fair Coin Distribution — Increasing the amount of coins rewarded to devs will incentivize stronger programmers to join the project. Similarly, investors/users will be drawn to the coin for its active user base, raising the value on multiple fronts.
Coin incentive for devs — As it stands on most chains miners/stakeholders receive the block reward, but that de-incentivizes developers from improving the code. If they choose to, they will likely fork. By implementing a developer block reward system, the core development team will continue to be prolific, and the chain will attract high level programmers.
Note: This is not a “founders fee” or “genius tax.” The system would have to award active developers, or award proportionally.
Multiple Use Cases — The coin cannot simply be for financial backing. The demand for such coins is too elastic.
Smaller Premine/Founder Share — A major deterrent to a network is when the creators own a large percentage of coins. It screams centralization and ponzi scheme, which will limit adoption. The users should maintain most of the coins. 5–10% share for founders at most.
The way to consider which token economies work, is to analyze the actual behaviors we engage in.
The tokens that get used the most in day-to-day life are exchange tokens and Tether. The other commonly used type of token would be in-game/in-app tokens, but those tend to have lower marketcaps.
If you consider actual use, currently, the most valuable tokens are used as a method to raise capital on their way towards creating their own blockchain (EOS, TRX, VEN, etc.).
If we abstract a bit, we can see the two current active use-cases for token economies would be fundraising and liquidity. The former camp has limited use right now given the issues with the SEC and elastic demand.
Liquidity tokens would be your exchange tokens/Tether (which is its own form of exchange token, but one tied to USD) and interoperability tokens — cross chain connectivity. The former are used to increase liquidity on your larger exchanges. Interoperability tokens, work with much of the same idea, but they’re facilitating cross chain interaction.
If we abstract a bit, we can see the two current active use-cases for token economies would be fundraising and liquidity. The former camp has limited use right now given the issues with the SEC and elastic demand.
Interoperability tokens, do not require explicit incentivization to use, but require attention and exposure to the network. The more partnerships and the networks this network is connected with, the more users will flock to it. Should it fulfill its promises, then it will maintain and generate use.
Potential Use case: Object-tokens.
Given the ease of creating tokens, a company could create 10–20 tokens (to maintain separate valuations) representing different objects. The valuation would be secondary, not traded directly, but still representative of the object-token in question.
Conclusion: Token economies are currently most effective as a means to save the user time (Tether or an interoperability coin) or money (exchange token or liquidity token), and/or provide the possibility of funding (most ERC20 tokens). Given the current logistical concerns regarding fundraising, I would suggest widening an industry specific bottleneck for business. Specifically, a cross-chain/business facing interoperability coin, with a small/negligent premine, with large incentivization for developers.
Consensus & Decentralized Governance
- Guards against over-centralization
- Fair representation of user interests
- Byzantine Fault Tolerant
- Limits hyper partisanship and forks
Problem: Scaling Proof of Work is a major problem, the energy expenditure is a massive issue, and limits profitability and incentive for miners after the difficulty gets to be too high.
My claim: The best form of governance would be one that most closely matches the learned successes of history. So a Delegated Proof of Stake model (akin to representative democracy) is the most effective governance algorithm that exists.
Centralization — as complexity of the space increases — will arise naturally, and it is required to some degree, but we must impose limitations to it.
If a system is too decentralized, it falls victim to the problems of absolute democracy. Every decision splits the network into factions (Bitcoin has this issue currently). This is great for the overall market, but not great for investors or development teams.
If a system is too centralized, the head of the system can behave tyrannically, or be compromised, thus destroying the network.
Proof of Stake solves the energy expenditure problem of PoW, but it will necessarily accumulate power into the hands of the top members of the ecosystem. This can be positive, if these parties are incentivized to promote the good of the network — as they should because it increases the value of their investment, but there can be major drawbacks. I would argue PoS operates much like an oligarchy or China’s government. A small council will have unilateral control over the direction of the network.
Delegated Proof of Stake solves this problem because delegates are chosen based on their reputation in the network as well as their stake in it. These delegates could/should also be voted in and out depending on their fealty to the network. This would solve the problem of tyrannical actors. This operates more like a representative democracy. This comes with the benefits of quantifiable knowledge of Byzantine Fault Tolerance, efficiency, and scaling because the number of delegates can be chosen beforehand and deliberately altered for efficiency.
Suggested improvement: I would take DPoS a step further, and make sure to set regulations around the voting structure. Duverger’s Law states, that single majority ballots (one vote, winner-takes-all) push a system towards a two-party system. In order to prevent this partisanship, you need to implement double ballot majority — two rounds of voting occur if no party reaches appropriate number of votes — or proportional representation in the voting system.
Alternative Improvement: Alternatively, if you do not want to centralize credible authorities in a chain. A Random Evenly Distributed Stakeholder method would work well. Selection based on an even distribution of coins at stake. Thus, a party with a larger stake has a higher probability of being chosen, but it also provides opportunities for smaller players.
Read more: https://bitcointalk.org/index.php?topic=102355.0
Potential Investments:
Ark Ecosystem
If you assume that the above analysis is correct with respect to both the token economy and the governance of the ecosystem, the best chain is the ARK ecosystem (ARK). Ark provides Interoperability between chains, a delegated proof of stake ecosystem, with an active developer base.
Decred
Due to its strong redistribution of coins, incredibly fair and decentralized governance — via a randomized PoS algorithm, and strong incentive for users, another strong chain is Decred (DCR).
Note: Neither of these chains implement developer block rewards