A conceptual framework. Pt I
In designing the dexFreight token model, we have taken a business model first approach. First design our business model, that is how we are going to create and capture value. Then design a high-level token model and finally design the specific mechanisms to implement the design.
This article sets out the first two stages of this process: the dexFreight platform business model and high-level token model design. In subsequent posts we will detail the token model and specific mechanism designs.
dexFreight is a decentralized platform for the logistics industry. It provides stakeholders with an end-to-end solution to book, contract, move loads locally and globally within a community-owned marketplace powered by an ecosystem of open source protocols using smart contracts, blockchain technology, and machine learning.
dexFreight is a multi-sided platform comprising:
- Shippers- who send freight
- Brokers- intermediaries who connect carriers with shippers
- Carriers- who deliver freight
- Consignees- who receive freight
Our approach is to design token-powered, network-effects business models which combine the now traditional science of platform, loyalty and gamified business models with the emerging field of cryptoeconomics and mechanism design.
1 Web 2.0 saw the rise of the platform as the dominant business model. However, the biggest challenge when building a platform is overcoming the bootstrapping problem. Since, the value of a network typically rises in accordance with nlogn, where n is the number of users; when n is low, the network utility and incentive to join is also low.
Web 3.0 introduces a powerful new tool for bootstrapping networks: tokens. As Chris Dixon points out, by rewarding early users, crypto-networks can net-off the initial lack of network value with an early adoption bonus.
2 Whereas cryptoeconomics assumes that actors behave in an economically rational way. Loyalty business models rely on providing customers with high-perceived value versus low actual cost. Instead of discounting a $100 product by $1, a loyalty program might reward with 100 loyalty points each worth a cent. These points can then be used to redeem products and services- giving a much higher perceived value to the customer than discounting.
Thus our approach is closely allied with the nascent field of behavioural cryptoeconomics which proposes to extend cryptoeconomics’ assumptions of economic rationality to:
“an understanding of the complex, nuanced, illogical ways in which humans actually behave “ [Behavioral cryptoeconomics, Elad Verbin]
The vision for dexFreight is to become the decentralized platform that powers global freight. Our goals for this break down into:
- increase adoption- key to this is overcoming the chicken-and-egg problem
- increase engagement- in order to drive retention, usage and virality
- increase usage- in order to increase transaction and network value
- attract investment- to fund development of platform
- decentralize ownership- in order to create a community-owned network
In order to achieve the platform goals, we have formulated the following strategies:
- Incentivize early adoption of brokers- as brokers bring concentration of volume of shippers, carriers and transactions.
- Reward early users- to overcome the chicken-and-egg problem.
- Partner with load boards as concentrated sources of supply.
- Seed platform via broker standalone mode — ‘come for the tool, stay for the network’ strategy, (Chris Dixon).
- Distribute via widgets and integrations- with transportation and fleet management systems.
- Create a goldrush effect — by rewarding brokers, who refer high transaction volumes, with equity.
Business model strategies
- Freemium business model- to drive usage of the platform via ‘free’ and then upgrade to ‘’core’ premium services provided by dexFreight.
- App store business model, where third parties build ‘non-core’ apps on dexFreight platform- captures value from external innovation.
- end goal: become a fully decentralized organization
- start in God-mode, and distribute control
Triple token model
The dexFreight token model is designed to optimise for our goals and to synergise with our platform strategy. The token model comprises three tokens:
- a stable coin, dexFuel
- a utility rewards token, dexMiles
- an equity token, dexCoin
One potential disadvantage of a triple token model is complexity, we would have preferred to have one, maximum two, tokens. However, all three tokens perform a necessary and distinct function within the network, and also interact with each other as an integrated system. So we take the view that our token model is necessarily complex, and therefore our job is to hide this complexity from our users in much the same way that complex, tiered loyalty programs do.
We provide below, a high-level description of functions and desired attributes of each token. A detailed specification of each token will be provided in subsequent posts.
dexCoin security token
The benefits of the dexCoin security token include:
- access to global pool of investors via emerging security token exchanges.
- rewards investors & founders with equity in the underlying company and captures value from company profits, rather than just a portion of network value as for utility tokens
- grants voting and dividend rights to holders
- provides increased liquidity from secondary markets and 24/7 trading
- provides automated compliance, e.g. to ensure that KYC/AML is followed and that investors are accredited (where appropriate)
- can be an interoperable redemption item for the dexMiles loyalty program, whilst decentralizing ownership.
dexFuel stable coin
As a global logistics platform, dexFreight needs a mechanism for enabling cross-border transactions which supports fast settlement and low transaction fees, and which is stable against fiat for the duration of a freight transaction.
We are researching a number of stable coin options including implementing an external stable coin, as well as the development of our own stable coin. Our preference is to focus on our strategic objectives of building and scaling the platform, whilst partnering with experts in this complex field, rather than building a stable coin ourselves. We are in conversation with a number of teams including MakerDAO and MoneyOnChain and will provide more detail on our stable coin in a subsequent post.
With billions of dollars of transactions projected to flow through the platform, one research area for our economists is the use of freight invoices as collateral for dexFuel. A number of protocols have emerged which are doing similar things. For example, the integration between Dharma and Centrifuge protocols is enabling off-chain invoices to be tokenised by Centrifuge, and then used as collateral for onchain loans within Dharma, as an alternative to invoice factoring and trade finance.
dexMiles, rewards token
The dexMiles token is a utility token that aligns the incentives of the platform and its participants, by creating a vested interest through decentralising network ownership and rewarding target behaviour. As Chris Dixon points out in his seminal article ‘Why decentralization matters’, platforms tend to start-out cooperating with their network participants, but invariably they move to a zero-sum game of competition.
However, Dixon asserts that by providing a vested interest in the form of a utility token: “cryptonetworks align network participants to work together toward a common goal — the growth of the network and the appreciation of the token”.
Why rewards tokens?
Rewards tokens are an abstraction mechanism that removes the need to set and describe the reward for every action. For example: instead of the offer ‘If you onboard a shipper, for their first transaction you receive a month of free insurance benefit’, we can simply assign a dexMiles value to the earn activity and then separately assign rewards for the burn side.
dexMiles will leverage the RSK equivalent of ERC-20 tokens, and will have the following advantages over standard loyalty points:
- enable earning, holding and trading of reward currency
- capture and potentially appreciate with network value
- gain increased utility from use outside of the ecosystem
- do not no expire
- have a fixed monetary policy, preventing devaluation
- value increases when demand exceeds supply
The earning of rewards tokens is mapped against the target behaviours of the system, and also the the platform tactics and strategies. Below is a draft of the rewards points to activity map.
The rewards token also enables us to tune and control the flow of value in order to overcome the chicken-and-egg problem.
dexFreight Triple Token Network effects
The chart below maps the expected value to users versus number of users for the dexFreight triple token model. The red line, dexFreight platform utility, is an nlogn curve that shows the delayed onset of user value as per the Chris Dixon chart above. The green line shows the value of dexMiles kicking-in before platform utility, as we reward early users with dexMiles. However, the value of dexMiles will primarily be derived from accessing premium services on the platform. These services will go-live over a 6 month period after platform launch, and the value of services such as machine learning and load optimization depends on data, which is correlated with the number of users. Therefore, the onset of user value for dexMiles will also be delayed . This is where the dexCoin redemption path comes into play.
The dexMiles system will be constructed to create a goldrush mechanism for early adopters. The primary target for this redemption mechanism will be brokers, due to their role as mavens within the freight network, however key shippers and carriers will also be targeted. Brokers who join early, and bring shippers and carriers who then transact on the platform, will be rewarded via a redemption path to dexCoin equity tokens. A detailed description and specific mechanism for the dexMiles token model will be provided in a subsequent post. An overview of the equity redemption path is provided below:
- join the platform early
- refer many shippers and carriers, who then make transactions (referred transactions)
- earn dexMiles for actions and referred transactions
- are promoted through rewards tiers
- earn rate is multiplied in higher tiers (positive feedback)
- earn dexMiles at an accelerated rate
- exhaust their supply of new shippers and carriers
- rate of earning dexMiles subsides (negative feedback)
Brokers who have reached the top tier of the rewards program, will be able to redeem their large balances of dexMiles for equity tokens via a reg-compliant process (note: this process and the interchangeability between rewards and security tokens is subject to final legal and regulatory approval.) Thus we meet two key objectives of overcoming the chicken-and-egg problem and decentralizing ownership of the platform to its users.
System-level view: how the three tokens interact
As we stated above, as well as an individual function, the three tokens each play a role in an overall system. The diagram below depicts the standard interactions between tokens (the goldrush equity redemption path should be viewed as a special process used to jump-start the network).
- Fiat is deposited.
- Fiat may be exchanged for dexFuel stable coin
- dexFuel may be used to transact on the platform
- Transacting with dexFuel earns dexMiles
- dexMiles may be redeemed for premium platform services
- dexMiles may be redeemed for dexCoin equity token
The above design follows a business model first approach and uses tokens as a powerful tool to tune and operationalise well-established platform and loyalty business model mechanisms. We have shown that the additional complexity due to three tokens is justified. Each token has a necessary and distinct role to play, as well as a role within an overall system.Through tokenising platform and loyalty business models we intend to capture the power of network effects, whilst overcoming the chicken-and-egg problem by rewarding early users with a goldrush mechanism for earning equity. In so doing we also meet a core philosophical objective of decentralizing ownership to platform participants.
Subsequent posts will dive deeper into the specifics of the token models and their mechanism designs.
About the author: As well as being an integral member of the dexFreight leadership team, Justin Banon is CEO and Founder of meltfactory, a blockchain venture architecture and strategy consultancy specialising in the design of token-powered, network-effects business models and ventures. Having previously built and led a billion dollar global rewards business, Justin is also an academic and researcher in the area of token-powered network effects business models.
Previous posts by Justin Banon: https://hackernoon.com/the-nature-of-the-crypto-technological-revolution-4eb883c54d56