10 Key learnings in designing social tokens answering the “Social token paradox”
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September 12th, 2022

History is littered with failed economies. People need more opportunities while capitalism is real. Our modern life has long become a digital display of goods, people, and information transit, where the societal value we have accumulated till now extensively relies on our relationships and connectivity. These humane values are so hard to map in our digital economies, and social tokens are precisely here to patch the gap.

Building a social network tho is difficult. As a builder in web 3 social, designing a one-fits-all economy is a fantasy. The mere thing we can do is to ask the right questions, keep our eyes and minds open, and build & iterate along the way.

What is a “social token”?

Some people talk about “Creator tokens” or “Community tokens” referring to the same thing. It can be a token referring to a particular individual/influencer, but it can be much more than that: Social token networks have the potential to represent the digital economy of us.

We at t2 are designing quite an innovative yet complex creator’s economy. Along the way, we’ve dived into deep waters and gathered great insights from brilliant peers. In this blog post, I will summarize all the learnings by ringing the bells on high-level principles without any math.

The Social Token Paradox

Gaby Goldberg defines the fundamental dilemma of social tokens:

“When the value of a token goes up, so does the value of its community. And when the token price is higher, the community naturally becomes more desirable to join. The problem here — in what I call the Social Token Paradox — is that with this mental model, tokenized communities are incentivized to uphold exclusivity. Let’s work backward: if you want your community to be valuable, you need your community’s token to go up in price. This makes sense, sure. But to make the token go up in price, you have two choices: you can either increase the price of the token, or you can decrease the number of tokens available to prospective members. Either way, this restricts access to the community and promotes exclusivity, codifying and enforcing a level of scarcity that feels almost at odds with web3’s vision of a truly open Internet.”

Social token aims to be socially scalable to make any significant impact. However, the success of the community cannot be solely represented by the price of the coin, since it would quickly start to work against the network’s social scalability and filter people out.

This sends us a reminder to rethink the value of a token from the ground up. Let’s explore together.

10 key learnings in social token design

Here I summarize all the bullet points up front:

1. Align effective altruism with self-interest in economic set-up

2. Work-in and Buy-in shall have a healthy balance

3. Social tokens can bring extra network productivity

4. Reputation’s signal is stronger when it is non-transferable

5. Maintain a healthy balance between inflation and user growth

6. Facilitate long-term participation and new demand

7. Aim at positive value accrual to escape Ponzi

8. Build a diverse community early

9. A social network shall be fun-first

10. The key logic shall be on-chain

I will explore every learning one by one. Let’s get started!

1. Align effective altruism with self-interest in economic set-up

Effective altruism is a philosophical and social movement that advocates “using evidence and reason to figure out how to benefit others as much as possible, and taking action on that basis”.

Getting back to digital economies, only when a network creates value there can be sustainable individual interests. So the economy needs to incentivize and align participants to contribute to the overall network from their actions while being true to their self motives.

In other words, the token cannot just be an isolated speculation vehicle of someone or some group before the fundamental setup for collective growth. Imagine every community as a company, where every member is a stakeholder. Holding equity means nothing if the company does not have revenue. The revenue shall be used to pay salaries who work in the company, based on how much they contribute, not how much equity they own. See the problem? In our current social networks, “salary and equity” are treated as the same asset. Then the network inevitably functions towards what we own instead of incentivizing what we do.

So what we need to solve first: there shall be fewer free riders feeding on the success of others. And the network shall be oriented more around what we do, instead of what we own.

2. Work-in and Buy-in shall have a healthy balance

Extending from the first point, many tokenized communities are centered around what members have instead of what they do within the community. How to fine-tune the healthy relationship between these two raises two fundamental questions:

What is capital’s role in tokenized ecosystems? And how to measure individual work and contribution fairly?

Let’s again take the example of running a company:

Employees take both equity and salary. Equity for the future upsides and salary as compensation for labor. Employees get cash based on their monthly contribution while holding equity as a long-term upside. Investors are there purely for the long-term upsides. They don’t need to receive a salary. Their investments even pay people salaries.

This scheme works so perfectly because both cash and equity serve their own purposes. They are like two “tokens” with different utilities. So for social tokens, if there is only one type of asset paying everyone both labor and long-term upside, the social token paradox emerges. Thus the conclusion can be simple: Labor and investment cannot be treated the same way within the network.

Having multiple assets or mechanisms in the social network serving this difference in purposes might empower and fine-tune between work-in and buy-in powers sustainably. After knowing the “why”, I’ll explore more on the “how” in the coming learnings.

3. Social tokens can bring extra network productivity

Let’s take a step back and think about why would people purchase social tokens. Mario Gabriele addressed this question in his article Social Tokens: The Economy of You :

Is buying a token a form of patronage or an investment? Though not mutually exclusive, using these two frameworks — patronage and investing — articulates the value behind tokens.”

Patronage: “Access and exclusivity.” Tokens need to have emotional value.

Investing: It is “access” after all — it functions similarly to a dividend. Collectors pay a nominal fee to participate, getting a potentially much greater value.”

On the patronage side, ownership becomes part of our identity, thus exclusivity becomes a foreseeable dynamic. Unfortunately, this reveals the social token paradox and prevents a community from getting mass adoption.

Investing mindset has its cons too. Being there early is expected with a first-mover advantage to sit there and do nothing. For a social economy, this mindset decreases the attractiveness of providing actual work and eventually will harm the community’s long-term growth.

So, besides patronage and investing, social tokens shall also bring productivity to the network, and aligns our self motive in providing work to the network’s long-term growth.

This helps the social network to incentivize positive engagements among its members, allowing individuals to do hands-on contributions with their own skills, and ultimately achieve effective altruism to make the network’s growth a positive cycle.

4. Reputation’s signal is stronger when it is non-transferable

Once the social token economy is not dependent on exclusivity (status) only, capital will no longer be the primary symbol of the network. Instead, how community members contribute value to the network becomes an important metric for network coordination. These actions represent reputation within the social network, and this can be a stronger drive than pure economic incentives.

Realizing that social networks’ long-term prosperity is heavily reliant on their cultural precipitation, network reputation needs to play this role in representing and perpetuating the community’s early culture for the network’s cultural growth.

Reputation’s value

We all know reputation is valuable, but how much does it worth? Here’s another interesting observation to help us understand the common contradiction in reputation social networks:

“This presents a paradox: if a token can be transferred easily, then those without reputation can simply purchase it, which reduces the token’s ability to serve as a reputation signal.” — — Jad Esber & Scott Kominers @ A Novel Framework for Reputation-Based Systems

That means if reputation can be bought, the signal of it reduces. But what exactly is the value of reputation if it cannot be traded? Users still need to have a certain benefit and quantify it in some form.

Here we think out loud one alternative: Reputation (Non-transferable) has its own matric of measurement designed with the user’s positive impact within the network. And there can be another token (Transferable) linking with the reputation system, the reputation points can be used to bootstrap liquid value in the form of this token, and their dividends will be based on their applied work which will further nurture their network credibility while keeping the reputation unbiased and on-chain source of truth.

Vitalik Buterin wrote about Soulbound Tokens (SBT) in his blog. He explores how non-transferable NFT could represent identity and one’s commitments, credentials, and affiliations in a Decentralized Society (DeSoc). You can think of SBTs as an extended CV in your blockchain wallet. And the key innovation here is to make our digital identity non-transferable, so we can nurture it for the long-term and grow our own network value further.

5. Maintain a healthy balance between inflation and user growth

Inflation for a social network can be healthy. New users entering the network have plenty of incentives to bootstrap at the beginning, but this can also negatively affect the interests of the existing users if inflation is less rewarding for the internal contributors to do their continuous work.

Having fixed inflation is not ideal either. It is like running a start-up as a well-established company. Losing flexibility and neglecting the market’s feedback in this hyper-volatile context is a common start-up trap.

So, social networks have to pay close attention to their monetary policies. The key is to find the right balance between user growth and token inflation to incentivize the desired user behavior.

Let’s dive a bit deeper to understand further the difference between new users and existing users within a network:

  • Demand from new users: Expansionary stage can create excessive demand for network tokens. It’s healthy to answer high demand with higher inflation, but protocols need to keep in check the dynamics between internal participation and reasonable token purchasing power (price) to not create debts of growth and blast.

  • Network participation from existing users: This is the domestic labor drive. When the token price is appreciated, it further incentivizes community members to provide work. Meanwhile, newly minted tokens (from the community’s value generation) reduce the upwards pressure on the token price, and a lower token price might decrease internal motivation to contribute to the network.

Thus, having a flexible issuance plan to constantly keep the above dynamics in check can make the social network more anti-fragile. This decision can also be combined with community governance, as many big protocols already do.

6. Facilitate long-term participation and new demand

The difficult parts of managing social tokens are their thin liquidity and fragile nature in the market movements. Projects often do liquidity mining to reward holders, but this cannot solve the lack of liquidity completely due to a lack of social demand and the right toolings facilitating them. Here is some thinking on how to grow a bigger pie:

Explore new demand

Social tokens have the potential to be integrated into the crypto economy at large. It might be utilized to pay services, rent assets, stake into different protocols to earn yields, or lock to increase our social signals further in our friend circles and propagate our beliefs. Builders can constantly explore facilitating the social token’s new utilities, and provide the tech and infrastructure supporting them.

Combine with Defi-toolings to expand the network capacity

Social tokens are rather fragmented. They are on different networks and hard to communicate with each other. We need better platforms to connect these micro-economies so that our communities can be part of a larger ecosystem. This can create value discovery and exchange across projects, forming a more multi-disciplinary market of social interests, and potentially we can all utilize this joined liquidity to patch the thin liquidity gap and grow the space as a whole. If we dive deeper here, the intersection of Defi and social tokens has the potential to unlock entirely new assets and mechanisms that do not exist yet. Even developing some proper governance mechanisms based on locking and staking for social governance, can already generate additional long-term incentives for social token holders if they wish to align with the network deeper.

NFTs can help to generate network revenue

NFTs are different kinds of animals representing our social identity, ownership, and reputation. They can also bring additional revenue for creators and pour their revenue inside social networks in the early bootstrapping stage. This can bring some extra rewards for token holders and expand the network’s scope and interactions in a beneficial way. From the user’s perspective, owning NFT brings them ownership and extra fun, trading them builds their broader social connectivity, and all of these are healthy dynamics for the network.

7. Aim at positive value accrual to escape Ponzi

Now we are already in the deep water of the social token economy. Things are properly set up, we gained our first users, tokens launched, and things are getting more exciting, or scary at the same time. How can we validate if we are doing the right things and continue to patch the gap for mass adoption?

Network value accrual helps to validate a social network’s lifespan

The simple answer, networks need to accrual value in time. This value here is a broader concept than revenue itself. Does the network bring value to people? Does the world become more colorful from the existence of these communities? Do people have better services with better ownership and aligned morals? Does the network have an internal free market in place to accommodate people’s nature of value exchange? Printing more tokens as the only way to present the economy’s growth is definitely not a sustainable way. Here are my thoughts on how to validate the network value accrual:

Value accrual validations:

  • A meaningful purpose

What’s the ultimate success of the network? More content created for the public? A stronger community built with reputation? Does information get more accessible with proper ownership? Are people getting more connected? These answers might set the ceiling of the social network’s upper potential and we do not want to neglect them.

  • Positive externality

To distinguish whether a project is a Ponzi, we just need to validate whether it has or will produce a “positive externality” in its foreseeable future. If a system does not create new value, then all value inside has the risk of being a zero-sum game and merely redistributions between stakeholders. But this external value can be much broader than pure financial income. If we think about what is bitcoin’s external value, it is openness, freedom, undisputed ownership, and absolute trust in its consensus.

  • Internal value consumption

Value consumption within the network is mandatory for the network’s vitality. It helps the economy to achieve sufficient externality and accrue network revenue. So users do not enter just with one purpose to exist as a speculator, instead, value is changing hands, being paid for utilities, recognizing others, and users never need to exchange back once everything can be done within the ecosystem with its native currency.

  • Be careful of the debt of growth

There might be a possibility to use the Ponzi model to increase the number of users in the early stage and give the project some more time to create a real economy. But the fine line here is to accrue revenue in time, so the network can counter the debts from the early user growth, and eventually create income and be a net positive.

8. Build a diverse community early

Go to market in web 3 is go to communities. Having an authentic community is the best counterforce to the crypto’s volatile nature. Understanding the community’s strengths can nurture the social network with tremendous power.

There cannot be only one type of stakeholder within the community as well. The diversity of interests is crucial to accommodate future economic activities. Only when everyone needs something from others, the economy can be validated as sustainable. For example, creators, consumers, and governors. Each of them can have a set of interests and unique economic behaviors within the network and needs something from the others, while the network just needs to curate their interest and align the stakeholders’ incentives in a positive way.

Again, reputation can encourage positive engagement

Money is not the ultimate drive for social networks, reputation is. Instead of creating investors that only have the purpose to exit, having a reputation backing their activities can keep users stay in the network for a much longer term. The easy solution here is to make a user’s reputation score a multiplier of their final rewards when they have a positive impact on governance or community works, so even without monetizing it directly, it does have an impact on further incentivization for good deeds.

9. A social network shall be fun-first

Never forget that a social network is emotional, functional, and altruistic. Its strength lies in all the emotional values it brings to its users in their daily lives. In social networks, the network value relies on user-to-user instead of user-to-platform. And this emotional value shall be put ahead of any monetization goals as a higher mission. Because without a proper “Why”, the “How“ and “What” will inevitably be shaking in the wind.

The key value here is about people. Blockchain offers better instruments to fulfill this peer-to-peer relationship. And this does not limit to pure financial rewards. Delivering a fun and meaningful social experience while providing true ownership of data and value is why so many of us fall in love with web 3 social.

10. The key logic shall be on-chain

It is understandable that in order to get the expected user experiences, the current social networks have to leverage the centralized backend or cache layers to get things going first. But what needs to be addressed is that such compromises might decrease the transparency and trust of the network, and might put a threat to the project’s business model. Thus, the network’s core functionality and economy logic shall be on-chain.

The risk here is to hide a web 2 business model behind a web 3 curtain without a real decentralized economy. For example, user identity, reputation, content, user data, value generation and distribution, if those elements’ core logic is not on-chain, then we risk building a web 2 platform with a coin.

Of course, it is a compromised decision for social networks to use centralized servers to run their partial logic, since the performances and costs of the Layer 1s at this stage cannot meet their full potential. But things will change.The best web 3 application has not yet been built, so let’s build together with the growth of web 3 techs, with the right genes.

It’s a great time to be a creator in Web 3

Web 3 technology offers unprecedented creativity and flexibility for all sovereign individuals. For the first time in history, we have a promising future with fair ownership, openness, and composability. And we have merely taken the first steps of building social token networks.

As a builder, being part of this emerging exciting space is already a joy and I’m keen to learn more. For this article, I would like to thank Gaby Goldberg, Mario Gabriele, Chris Dixon, Patrick Woods, Vitalik Buterin, Jad Esber, Scott Kominers, and many more, for their amazing works while I was exploring the social token space. We are building on top of your insights.

What is t2?

t2 is a decentralized publisher and a social network around what we read. It is a world of narratives where your attention nurtures creators and subcultures and helps them grow. It restores the beneficial relationships between readers, authors, and communities and makes us more connected through what we love.

Author:

Mengyao Han, Founder @ t2.world

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