Tracer Drop Episode #05: Tokenomics

Tokenomics

Agenda

  • Introduction
  • Privatisation
  • Airdropping Tokens
  • Token Allocation
  • Approaches to Tokenomics
  • Privatising Public Goods
  • Multi-Objective Optimisation

Call Recording Link: here

Call Notes

Introduction

  • Mycelium, alongside RMIT, have been considering the idea of tokenomics and, specifically, token allocation

Privatisation

  • Privatisation has been common government policy over the last 40 years whereby the government de-nationalises various industries and companies it once held
  • Spinoffs occur in the private sector - one big company is broken into smaller companies where new shares of the ‘new company’ are issued to either existing shareholders or other people
  • Distribution can be seen along the lines of privatisation and spinoffs
  • The notion of privatisation (in this context) is similar to the privatisation process that occurred in the former USSR and China
    • These nations transformed from non-market economies to market economies very rapidly
    • There was a simultaneous adoption of a market economy and private ownership
    • During this time there was a large learning process - previously there was no institutional framework or established formal market to trade things like shares which arose from the privatisation process
  • This is similar to the crypto space which is rife with questions - what is this new environment; what is this new product; and what is this new business model?
  • This is a transition from an industrial economy with known information (shares, bonds etc.) into a crypto economy where it is unclear how these will function

Airdropping Tokens

  • The privatisation of the USSR offers key insights into airdropping as a method of decentralisation
    • A centrally owned asset was divided amongst the population through shares - essentially airdropping
    • However, most people did not know/understand what they received and most ‘tokens’ were captured by a few individuals in the secondary market
    • Post-Soviet airdrops occurred in underdeveloped markets with unclear property rights
    • Consequently, the resulting post-Soviet economy was dominated by oligarchs
  • Airdropping is an effective decentralisation mechanism if:
    • The population is well informed
    • The institutions are of a very high quality
  • The crypto space is currently a combination of both scenarios

Token Allocation

  • Token allocation can be seen as a mechanism design problem
  • Mechanism design - a field in economics and game theory, close to computer science, where economic mechanisms and incentives are designed based on an objective
  • Objectives are dependent upon the situation - eg: in an auction the objective is to maximise revenue
  • The Tracer system can be seen as decentralised trade or a decentralised mechanism where token allocation can be based off an objective
    • For example - initially the objective could be to increase the number of users; or to spread tokens amongst the community
    • It does not need to be an economic objective (i.e. maximise revenue)
  • Objectives do not need to be unique, but can be multifaceted - both spread of allocation and revenue maximisation may be important
    • The mechanism could have several stages to prioritise different objectives
    • For example - the first stage tokens are given out for free to more participants to increase value; second stage tokens are allocated through an auction etc.
  • Supply makes this issue more complicated - at each stage there needs to be a decision on the optimal number of tokens to reach a certain objective
  • This problem is not unique to the crypto space
    • Allocation of emission permits - they initially had no value so they were given out for free (similar to airdropping)
    • Later on, researchers demonstrated this was an inefficient method - an auction would have been a preferable method to both increase the spread of permits and raise revenue simultaneously

Approaches to Tokenomics

  • Experimentation and innovation is really the only viable approach
  • The current process is to take an adaptive approach and learn from the experiences of previous companies
  • Allocations are not occurring independently but rather in a more sequential process - which is likely the quickest way in which the optimal process can be found
  • This highlights the importance of paying attention to the ecosystem at large

Privatising Public Goods

  • The key question with distribution - who should you distribute to?
  • The answer is those who are most likely to get the ball rolling, and keep it rolling - those are the people that need to be incentivised
    • Sometimes it is investors, or consumers etc.
  • The airdrop should be targeted towards those most inclined to participate
    • Participation can be voting, it can be buying or selling
    • Whatever form of participation is the most integral should be incentivised

Multi-Objective Optimisation

  • Choices need to made about what needs to be optimised - revenue generation or community participation etc.
  • However it is possible, and important, to have multiple objectives
    • This is highlighted in the emissions example above - whilst distributing permits revenue could also have simultaneously been raised
  • This is particularly important for the private sector
  • The uncertainty surrounding much of the crypto space, as previously mentioned, necessitates much trial and error in order to reach an unknown optimal ‘point’
  • Mechanism design allows you to get as close as possible to this point by having multiple objectives - focusing on only one may lead you in the wrong direction, wasting time and money
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