15/11/2018 Update: I changed a “Supply Structure” to “Token Structure” in the pillar of Token Design.
Lastly, we have token design. Token design is the last step that gels everything together: the incentives. Token design is everything that involves the token, for example, how are the tokens used to incentivise specific behaviour, total supply, and token governance.
I’ve written an imaginary example of token design. Note: every token ecosystem is different. There is no fixed rule or formula for token design. This is just an imaginary example with random numbers.
LISA token has an unlimited supply. But, the system will automatically increase 20% of supply every 4 years. That means if we started with 100,000 LISA, at the end of Year 4, there will be 120,000 LISA tokens. Users can earn LISA token and spend them in other ways. Because there is only a 20% increase in supply, there is a possibility of inflation of LISA token. The system will automatically increase reserve LISA tokens to combat inflation rates when it is above 5% for a period of time and burn reserve tokens when there are too many in the network.
Why should I care? Is this even important?
Token design is everything about the token. As mentioned, token is the incentive that gels the network together. We spent the last 3 articles talking about designing a network and now this is the last piece of the puzzle to put them together. It is important because token design is one of the main incentivisation tools in the network.
What should I take note of?
There is no formula (unlike customer analysis or market design), but there are some things you should take note of. Later, we will focus more on case studies and examples.
How do I get started?
What is the true purpose of a token?
Why do you need a decentralised network for your product/project?
(From previous mechanism design) What incentives are you giving to the users?
What is the ideal token design structure you’d like? You can reference physical world rates like inflation rate, allocation (% in banks, % in households, % in reserve, etc), distribution schemes (via earning, via dividends, via charity, taxes & reallocation, etc), and total supply.
- (Might not be applicable to everyone) Are you pegging your token valuation to a real currency? What is the possible limitation to that?