Alberto Cuesta Cañada

Hello. I design and build blockchain solutions. I like to make the complex simple.

What is a Token Economy and How to Design a Thriving Cryptocurrency

Do you want to design a token economy? Start by having a goal that makes sense.

Bitcoin took a life of its own once released into the wild, your token should do the same.
As a Blockchain Architect, designing cryptocurrency tokens is my bread and butter. After going through the process quite a few times here I want to give some ideas for those doing it for the first time.
Designing a token economy requires several steps, between them identifying stakeholders, designing incentives, developing a go-to market strategy and implementing monetary mechanisms, but it all starts with one critical step - Having a goal that makes sense.
Let’s get started.

Introduction

When you meet your token for the first time you should ask yourself a question: “Why would anyone want to use this token?”.
Through history there is a clear search for more and more convenient forms of money. The basic bartering of my hunting for your gathering was replaced by prehistoric tokens such as cowry shells, salt or cereals that were easier to transport and store than the goods that were being exchanged in trade.
A big component of convenience was how many people would accept your coins, and that led us to replace those basic tokens by precious metals and then standardized metallic coins. A couple more steps took us through asset-backed currencies to the floating currencies that exist today only as ones and zeros somewhere in a database.
Ask yourself a question: “Why would anyone want to use this token?”.
Cryptocurrencies are a new form of money, but a your token will only be successful if it manages to be convenient enough. To achieve this must consider the path taken by all currencies through convenience and scalability. Start by finding the answer to one question: What is this token economy trying to achieve?
Do you have a good answer to this question? If not you might be building technology for technology's sake, and you will fail to raise funds or achieve profitability.

A Growing and Healthy Economy

Now you know that your first task in any given Token Economy is to find out what it is trying to achieve.
Building a Token Economy and giving it a purpose is not the same as building any old software product. A thriving economy must allow innovation coming from its participants. When designing an economy you don't tell everyone what to do, you only give them the tools to participate, and they will do so in ways you couldn't predict.
People will take part in your economy only if they get any value out of it, and providing this value to your economy participants should be the first facet of your economy goal.
The value inherent to your token economy is directly related to the number of participants in it. In other words, the network effect. When your economy is small it won't produce enough value for participants and you will need to compensate them in some other way, usually out of your investors' pockets (Hello, Uber!).
When designing an economy you don't tell everyone what to do, you only give them the tools to participate, and they will do so in ways you couldn't predict.
As the economy grows it should produce more value by itself and return it to the participants, eventually reaching a critical mass point where you can stop burning money. I say "it should" because this is not a given, it is a design.
You will have noticed that I talked about providing value to your economy participants, but not about providing value for yourself. Maybe you just want to make the world better and don't expect anything in exchange (awesome!) but probably you will also like to profit from your efforts (it's ok, I also do).
It's customary to charge a fee on transactions which can be more than substantial as the market grows, but be conscious that by doing so you are introducing friction into the system which will put you at a disadvantage against fee-free solutions. This is the reason that fees are always as low as possible in all markets with an adequate competition.
Building value for your economy participants and building value for yourself are competing goals and you need to find an optimal compromise. I've got no easy answers for this, you should ask your market research team for them.
By now you should know what will your token economy offer to participants. You should know as well that for your economy to be sustainable needs to reach a certain size. Your business development plan will do the heavy lifting on bringing in more users, but with your token economy being a software product, how will you prevent it from bursting at the seams with all those new users?
You will need to fight the growing complexity of the economy and for that you will add two operational goals to your business goal: Automation and Decentralization.

A Frictionless and Decentralized Economy

Once a few million users are part of your economy any non-automated tasks will be a huge drag in efficiency, causing the users to migrate somewhere more comfortable. Your economy needs to be able to run by itself with minimal supervision.
In traditional software products this means going heavy on your cloud architecture. Autoscaling groups of servers, load balancers, containerization, fancy infrastructure stuff.
In the blockchain world this means thinking differently. You are already running on a decentralized platform with its own reliability and performance properties. Unless you build your own network there is not much you can do to change those.
When you are designing a token economy automation means having deterministic functionality in the shape of smart contracts. It also means thinking carefully what goes in the smart contracts and what goes in some frontend, considering that in the public blockchain anyone might build a frontend for your smart contracts. Fun times.
Your economy needs to be able to run by itself with minimal supervision. In the blockchain world this means thinking differently.
Ultimately, automation in a token economy is an exercise in releasing most of the control in exchange for a self-sustaining sytstem. Nurturing and monetizing something that you barely control is a challenge to say the least, but that is what you are going to get.
Decentralization can be seen as a way of parallelizing your economy and promoting innovation at the same time. The value produced by your economy is the result of the many ways in which its participants can use it. The inventiveness of your million users will always surpass yours by the force of numbers alone. You need to let them decide what to do as freely as possible.
Decentralization goes hand in hand with automation. In a way they are both the same, releasing as much control as you can will allow you to leave the decentralized blockchain work and scale at no cost to you. In a blockchain that can scale, of course.
Now, please don't run to build a fully automated and decentralized system. Stop and consider that automation and decentralization are not preconditions that you need to meet before you do anything else. They are goals the same as your business goal, and you work towards them in the same way.
Centralized systems with a degree of human oversight are much easier to control and may be appropriate for a starting token economy. Maybe you just need to have some triggers in your roadmap for increasing the automation and decentralization as your economy grows.
Your mileage might vary, but the road is the same for everyone. Providing value to your customers and reducing friction has always been the goal of any business.

Conclusion

Through history we have seen that the evolution of currencies is always about transitioning to more convenient currency forms, including currencies that are accepted in wider and wider networks.
You should design a cryptocurrency as an economy, which needs to provide value and scale into larger and larger sizes.
When designing a cryptocurrency token you should always aim for it to be convenient for enough users and enough use cases, but ultimately you will need to accept that your users will decide how to use your product, and that you need to empower them to do so.
You should design a cryptocurrency as an economy, which needs to provide value and scale into larger and larger sizes. This will only be possible by having automation and decentralization as part of your objectives. In a way both concepts are the same in a blockchain environment.
The reward for the effort of creating a successful token economy is immense. In the financial sense, of course, but also in the pleasure of creating something that lives and evolves by itself after giving it the spark of life. Few things can compare.

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