Author: Sunny, TechFlow of Shenzhen
Guest: Robert Koschig, Researcher at 1kx
Robert Koschig is a token economist at the crypto venture capital firm 1kx. At this year's decentralized application summit in Berlin hosted by Gnosis, Koschig summarized his token design for decentralized hardware networks. For example, he believes that Filecoin's token issuance plan based on KPI index is more scientific than a time-based token issuance plan. At the same time, Koschig also pointed out the unpredictability of token rewards in the Depin network, challenging the predictability and stability of the Bitcoin model.
Beyond decentralized hardware networks, what does token design mean overall? As the industry gradually transitions from the "wild west" to today's upcoming Ethereum ETF, reasonable and scientific token design has become an indispensable part of most decentralized protocol products. Or, as the current token designer will be the next generation of internet product managers.
So, is there a routine for token design? Is there a constant token design model in the industry for projects to emulate? Koschig pointed out several main directions for consideration: token issuance on the supply side, governance, demand-side subsidies, and venture capital investment. The conversation also compared two classic token models in the industry from the perspectives of invariability and variability: Bitcoin and Ethereum, and how projects can extract suitable design models based on local conditions.
Key points:
Token design should focus on continuous improvement, rather than being limited to the concept of "Tokenomics," as it carries the burden of past practices.
Protocols do not necessarily need to have tokens, but if used effectively, it is a very powerful tool.
Unlike traditional coupons or rewards, tokens permanently belong to you.
The commonalities of token design lie in coordination, value capture, and value transfer.
Centralized payment channels are contradictory to the purpose of decentralized infrastructure.
Having your own token can bring additional benefits, such as controlling issuance—how many tokens you mint and distribute to whom.
If you want broader community participation, governance tokens allow for this transition.
In terms of governance, tokens decide proposals and votes, but different entities are responsible for implementing decisions. This separation helps to more effectively manage the economy, staking mechanisms, and governance.
Tokenomics has not changed much: projects design it, launch it, and operate it at a fixed inflation rate.
When you see Ethereum's approach, you will find a situation where they can think, adjust, and introduce infinite economic possibilities through code.
Tokenomic Design is a New Product Design in Web3
TechFlow: Can you share why you chose to focus on the research of token economics?
Robert:
Tokenomics is still in the research stage. Typically, developers are very skilled in technology, but when it comes to economic design, this field is full of opportunities.
This field is very suitable for my background. You need to master knowledge of mathematics, game theory, and economics, while also understanding data science, such as simulation and data analysis. Combining these two parts forms a promising emerging field, which aligns with my main strengths.
TechFlow: Can you explain what Tokenomics is?
Robert:
Of course, if someone asks me, "What is Tokenomics?"
I would describe it as an initial attempt to explain how the protocol operates economically in its design.
You will always encounter technical issues, such as "What is this product?"
But once people understand the technical aspects, they will realize the power of these economic coordination mechanisms. They will focus on studying the powerful potential of tokens and what they can unleash, such as when you suddenly airdrop them.
We have seen that when projects initially do not issue tokens and then introduce them later, what happens. Tokenomics was the earliest term used to describe this process.
However, the term "Tokenomics" often carries the burden of pie charts and vesting schedules.
Real economic design is about the dynamic coordination of your product. It is not just what you do before token issuance or include in your whitepaper; it is a continuous effort, just like technical development. You start with a minimum viable product, gradually build and improve the technology—developers test it on the testnet and mainnet. Economic design should also follow the same iterative process.
Token design should focus on continuous improvement, rather than being limited to the concept of "Tokenomics," as it carries the burden of past practices.
We should consider economic design more and how it evolves over time.
Does Every Web3 Project Need Its Own Tokenomics?
TechFlow: Does every Web3 project need its own Tokenomics?
Robert:
I don't think it's necessary. If you don't need incentive mechanisms, that's naturally the best!
Even so, for projects that do not rely on incentives, experimenting may still be beneficial. Traditional economics uses methods such as cashback or Starbucks coupons, but tokens offer some new possibilities due to their immutability. For example, if I give you my tokens because you completed a specific task, I cannot take them back. Unlike traditional coupons or rewards, tokens are permanently yours.
This immutability makes tokens a powerful tool within protocols. They can provide significant incentives without the risk of revocation, unlike some potentially conditional miles or coupons.
Protocols do not necessarily need to have tokens, but if used properly, tokens are indeed a very powerful tool.
TechFlow: Why do some protocols need token design while others do not?
Robert:
This entirely depends on the goals you want to achieve as a protocol.
Are you a consumer-facing application or a DeFi application?
Generally, common applications of tokens involve coordination, value capture, and value transfer. In these areas, tokens can be very effective tools. But the key always lies in Tokenomics and token design—the implementation depends on you.
You may have specific goals for introducing a particular token through your protocol. But if not handled properly, the results may completely deviate from expectations. This decision should be solid, ensuring that adding tokens to your protocol can truly enhance your product. Once this decision is made, it needs sufficient attention, as while tokens can bring benefits through economics and dynamics, mishandling can also cause harm.
TechFlow: Can you explain in detail the advantages and reasons for using digital tokens in decentralized infrastructure compared to traditional fiat currency?
Robert:
Of course. There are multiple reasons for needing digital tokens, even to experiment with different hardware. The typical argument for tokens is to incentivize the supply chain.
Someone needs to purchase these tokens and provide storage services. Technically, you can allow users to pay with USDC or other fiat currencies and operate outside the crypto world, even on decentralized crypto infrastructure, using centralized payment methods.
However, this is usually illogical, because centralized payment methods are contradictory to the purpose of decentralized infrastructure.
This is why it is best to stick to decentralized payment methods, such as using stablecoins. This does not necessarily mean you have to use your own token; there are other excellent payment tokens in the market. However, having your own token can bring additional benefits, such as controlling the issuance—how many tokens you mint and distribute to whom.
The beauty of token design lies in the freedom it provides. You can make any decision and even change those decisions over time. It's a powerful tool for growing your community and engagement. A simple mechanism is governance tokens. Initially, it may be the team driving the affairs, but as you grow, you will want broader community involvement. Governance tokens allow for this transition. Of course, you can also build more advanced features on top of this.
Modular Tokenomics Design
TechFlow: Can projects adopt a modular approach when designing their Tokenomics?
Robert:
Yes, ideally, you can achieve modularity. That's the ideal goal. You can set, "Okay, the supply-side incentive is one module, governance is a module, demand-side incentives are a module, and the investment speculation part is also a module."
In the end, you have only one token, and then you need to figure out how all of these are interconnected. That's why governance in DeFi becomes very interesting. For example, in the early stages, it may be necessary to cover actual costs through governance decisions. Investors want to know that if they invest in your protocol, from a rational perspective, they will get better returns.
This means you need to allocate them a significant share of your network. However, when this is combined with governance, rewards become interdependent. For example, if you allocate a certain amount to the supply side and leave the rest to be decided by governance, operators who do not sell their tokens will accumulate more voting power over time. This could lead to internal issues as they may decide their own rewards, and game theory predicts this could lead to power struggles.
You also need to consider the governance aspect, as managing different interest groups is crucial. Relying solely on token-based governance may not be enough. That's why many well-known protocols, such as MakerDAO, have established independent governance committees. Tokens are used to determine proposals and votes, but different entities are responsible for executing decisions. This separation helps to more effectively manage the economy, staking mechanisms, and governance.
Comparing Bitcoin and Ethereum Tokenomics: Invariability and Variability
TechFlow: Have you observed the evolution of Tokenomics? How do different projects adjust their Tokenomics models and what changes have been made?
Robert:
Token rewards have always made sense, right?
Early projects like Bitcoin demonstrated their powerful network effects and economic incentives. The fixed issuance plan of Bitcoin inspired many platforms to adopt similar strategies. They often emphasize the importance of a fixed issuance plan.
However, some realized that this approach might be too restrictive. Therefore, they added a second layer of more dynamic logic, although it is still fixed. From this perspective, Tokenomics has not changed much: projects design it, launch it, and operate it at a fixed inflation rate.
But adjustments have been made. For example, The Graph improved its design over time. Initially, it set up a curation function for data indexing through bonding curves. Over time, they found inefficiencies and adjusted the model.
This shows that while the initial design may be fixed, learning and adjustments are necessary. Complex token economies like DeFi require iterative learning and modifications.
It is important to allow for experimentation and learning rather than rigidly sticking to the initial design. While this approach may seem more flexible than traditional crypto narratives, it avoids getting stuck in inefficient models. The industry is rapidly evolving, and new technologies are constantly emerging. Utilizing simulation, data science, and continuous adjustments helps to design tokens correctly.
TechFlow: What are the basic components of Tokenomics design that remain unchanged over time?
Robert:
I believe the unchanged aspect is that the basic economic principles have remained consistent since the development of economics. Your token and its issuance incentives contribute, similar to early Bitcoin miner incentives. This way is more efficient than starting from scratch. The early issuance of Bitcoin was much higher than it is now.
The basic concept remains that if you have a well-functioning supply system, your protocol works as expected and provides a good user experience, revenue will naturally come. Then these revenues can support the system. This principle is foundational and always relevant.
You can cover certain reward amounts by issuing additional incentives or adjusting income streams to ensure that even if rewards do not decrease, the overall rewards are sustainable.
TechFlow: Besides Bitcoin, other cryptocurrencies seem to be more complex in some aspects. Do you think Tokenomics or Web3 protocols will become as composable as smart contracts, given the complexity involved? Are there ways to simplify these theories?
Robert:
Indeed, it's very difficult, but that's also the beauty of Bitcoin. It adopted a simple mechanism. On the other hand, when you see Ethereum's approach, you will find a situation where they can think, adjust, and introduce infinite economic possibilities through code.
If mistakes are made, then offline discussions come into play. People understand new dynamics, different committees emerge, leading to proposals for separation or collaboration. This is a challenging process, but it allows for adaptation and optimization.
Complexity is a huge challenge, and even the smartest minds in the industry are solving these problems rather than seeing every dynamic. Predicting behavior is extremely difficult.
In short, yes, it's complex, and it may never become simpler. The simplest and most effective models already exist and can be replicated. Today, new projects tend to be more complex and adjustable rather than static and rigid. This is often the way of technological evolution.
Think of bicycles: they have been around for a long time and were once the fastest mode of transportation. The basic concept remains the same, but they are no longer the best choice to meet all modern needs. People keep adding new features, creating new problems, and solving them. This evolution makes Tokenomics more complex but also more reliable.
The goal is to reach a stage where people can understand what is happening. If understanding is lost, trust is lost. Balancing the need for invariability and adaptability is crucial, ensuring that the majority of owners can vote for necessary changes while maintaining stability.
Common Pitfalls to Watch Out for in Tokenomics Design
TechFlow: What common pitfalls have you observed in Tokenomics design that could harm a project? Does Tokenomics design help or hinder a project's growth?
Robert:
It's easy to fall into the trap of treating tokens as candy. When you dip into the token pool, it's like getting a reward. People can get addicted to this, without realizing that the more they do this, the more the project focuses only on the token. This is why we are facing issues such as misleading metrics, high total value locked (TVL), and low market cap.
We have overlooked the fundamental purpose of tokens. Tokens are not just rewards; they are powerful tools for coordination, growth, and accelerating the development of your project. However, tokens should not overshadow the core product. Ultimately, you still need to build a solid product. Tokens will eventually become a part of your product, but they should not be the sole focus.
Initially, you may feel that you have a certain budget and standards, but eventually, you will find that if there is no real revenue, usage, or commercialization, you have spent all incentives on short-term attractiveness and speculation. This often leads to rapid collapse when market conditions change.
This is why I spend a lot of time doing simple simulations, analyzing the basic mechanisms of supply and sales pressure, ignoring any narrative content. I would pose questions like, "Do you think these participants will hold or sell tokens?" How will this affect the market when tokens unlock? Understanding these dynamics is crucial to avoiding the pitfalls of short-term incentives and building a sustainable project.
Case Study: Safe's Tokenomics Design
TechFlow: I'd like to talk about Safe's Tokenomics design. Do you have any insights into Safe's design and evolution? (Note: Safe is a company invested in by 1KX)
Robert:
Two years ago, Safe launched their token, initially as a pure governance token that was non-transferable. I really appreciated its community-centric nature. At that time, I had not yet joined 1KX, so I didn't follow it very closely. Because the governance was running smoothly, I didn't have much to do.
They established a good governance structure, with another team member providing assistance in this area. They developed a clear communication plan, detailing the steps needed to make the token transferable. One key step involved the utility of the token, for which they obtained government approval. Now, the token is tradable.
This demonstrates a well-designed governance token. Initially non-transferable, it served its purpose well. They distributed the token to the target audience and maintained this status. However, the community eventually decided to make it transferable.
It will be interesting to see how this unfolds. Safe is very driven, with a clear vision for value capture and potential partnerships. They recently discussed plans to successfully monetize and build an economic model around this. Safe is an excellent product, and there is a reason we invested in it.
They now also have a reward program, which I think is a trend, and there will be more similar programs in the future. For example, I've heard of similar initiatives in the DeFi space. These programs are transitioning from purely mining activities to focus more on genuine product engagement. Users provide feedback because they genuinely like the product, not just to earn rewards.
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