How to think about token economics for my application?

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Tokens are a powerful instrument to create economy and incentivize users of the applications.

What are main principles when launching a new token for a product or application? How to ensure that this token will have value, sustain it in long term and what are different mechanics that can be used.

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This is area of active research and experimentation. The benefit that blockchain gives us is ability to experiment with such applications relatively easily. Tokens are pretty universal instrument, and can cover anything from share of the company, to internal unit of account for a marketplace, represent physical object ownership or loyalty points.

Let's classify tokens into two classes:

  • Tokens that are used to incentivize and bootstrap a multi role interaction, like a marketplace, community-owned DAO or social network.
  • Tokens that are used for single role interactions, like loyalty points.

The second case is more straightforward usually, as it aligns with how existing businesses use loyalty points to incentivize their customers. Interesting point, that tokenizing loyalty points may allow to grow single role use case into multi-role use case over time.

In the first case of multi-role interaction, there are few principles to follow:

  1. Mint or give tokens to participants for actions that increase value of your network for other participants. For example in the case of marketplace you can incentivize listing new items, or in social network writing novel content.

  2. Coordinate this operation either with algorithm or with existing token holders. Algorithm should be evaluated to make sure there are not ways to game it (e.g. it should be more expensive to game than how much will be allocated).

For example reward for listing items in marketplace gets allocated after the lot is bought and amount is smaller than fee of the marketplace (if it's larger, people will list items and buy themself to get the reward).

Another approach is using people, who are existing token holders. This is more complex as requires careful analysis, but a good example is grants program - you want existing token holders to "vote" for interesting projects by giving tokens to them and then allocate to this projects some of the additional incentive.

  1. Tokens must capture some external or internal value generated by this product. If there is no value created by this system, this will be just circular token generation. This value can be in the future - e.g. when product increases in usage due to all the incentives and start generating more and more substantial revenue.

For example the product is capturing some form of revenue from providing it's data, liquidity, serving ads to users, fee from the marketplace, selling sticker packs to users, etc.

Token can capture this value in two different ways:

  • Users who hold token (or specifically locked), are eligible for revenue share.
  • Revenue is used to buy token back and burn it. Usually tokens have fixed supply, which means that overall token supply decreases and token becomes scarcer.

Note, that there are many aspects of this that require careful engineering, including regulatory.

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