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Original research, analysis and reports across the frontier of cryptoeconomics, blockchain technology, and digital assets.
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Analysis

October 21, 2019

Analysis

October 11, 2019

Analysis

October 4, 2019

Analysis

September 26, 2019

Analysis

September 19, 2019

Update

September 12, 2019

Cryptoasset Report

September 5, 2019

Update

August 23, 2019

Report

August 2, 2019

Cryptoasset Report

May 23, 2019

Cryptoasset Report

May 9, 2019

Cryptoasset Report

April 25, 2019

Cryptoasset Report

March 1, 2019

Quarterly Report

February 26, 2019

Cryptoasset Report

December 20, 2018

Cryptoasset Report

December 18, 2018

Quarterly Report

August 20, 2018

Analysis

June 6, 2018

Analysis

April 4, 2018

Token-based fundraising

March 6, 2018

Analysis

March 2, 2018

Token-based fundraising

February 12, 2018

Token-based fundraising

February 4, 2018

Token Sales

December 29, 2017

Introduction

August 2, 2016

Introduction

July 13, 2016

Education

July 4, 2016

Introduction

June 21, 2016

Introduction

June 14, 2016

Introduction

June 7, 2016

Introduction

March 24, 2016

Introduction

March 17, 2016

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Analysis

March 29, 2019

Cryptoeconomic Design Needs a Renaissance after the ICO Era

This article introduces key concepts in cryptoeconomic design, which will be expanded upon in an upcoming series distilling insights garnered from S+C's practice designing incentive systems.

Key Takeaways

  • Incentives help secure distributed systems
  • Incentives are instantiated in tokens
  • ICOs obscured the potential of tokenized ecosystems
  • S+C will be publishing a series on its insights into and methods for cryptoeconomic design
This piece is an adaptation of a talk Smith + Crown gave at Hong Kong Blockchain Week. The talk introduced some of the key concepts in cryptoeconomic design. This piece serves as an introduction to a more extended series exploring everything we have learned from studying this practice in the industry for over six years and explaining how we approach cryptoeconomic design problems.

The Role of Incentives

It was once commonly said that “blockchain is the technology behind Bitcoin.” The reverse is equally true: “Bitcoin is the technology behind blockchain.” This phrase highlights the role that Bitcoins themselves play in incentivizing miners to keep processing transactions: if new Bitcoin were not minted every block to reward miners, only the ideologically zealous would mine the chain itself. This would not produce sufficient hash power to secure the network. The protocol could not mint new Bitcoin to compensate miners if there were no Bitcoin.

By S+C’s estimates, the historic capital investment in mining Bitcoin is likely north of $12 billion USD throughout its history. Bitcoin did not hire these miners, form these companies, or even fund the ecosystem of services built around the core network and its mining. The large-scale economic activity emerged in response to a set of incentives that no one entity can arbitrarily change. These incentives are critical for securing distributed economic systems.

S+C calls the development of this set of incentives, “Cryptoeconomic Design.”

What is Cryptoeconomic Design?

Breaking ‘Cryptoeconomic Design’ into its constituent terms helps clarify its meaning.

Crypto

Immutable rules enforceable by participants. Cryptography enables easy verification of data changes while also removing the costs and benefits of a centralized decision-making authority.

Economic

Actors responding to incentives in the face of scarcity. The introduction of provably scarce digital artifacts is powerful at motivating people in a digital environment. This is often under-appreciated in the industry.

Design

A miniature economy intentionally made suitable for particular ends. These systems are designed to produce particular outcomes or maximize the contribution of particular resources, such as hash power. It is not just the study of distributed incentive systems (‘cryptoeconomics’) but rather the creation of previously non-existent systems.

ICOs Distorted the Purpose of Tokens

Incentives in cryptoeconomic design are instantiated in a set of rules built around a provably scarce tradeable instrument of value–that is, a cryptographic token. Bitcoin was the first ‘cryptographic token.’ Cryptoeconomic design has been part of the blockchain industry since Bitcoin, which is to say, since blockchain’s birth.

Yet the ICO era took cryptoeconomic design in a new direction. The outpouring of money invested in token projects and the (mostly true) widely held perception that one could raise capital with only a whitepaper meant everyone wanted a token. With the ERC-20 standard, everyone could readily have one.

Design in this era became conflated with a particular token variant, what S+C describes elsewhere as ‘payment tokens’—a token whose only core function (aside from supporting an ICO) is to be an application or network’s sole means of payment, akin to tradeable fair tickets or arcade-specific physical coins. This variant suffers major drawbacks, including radically complicating usability and forcing issuers to contend with price volatility, yet attracted greater attention from projects and investors than lesser known but more compelling designs. The ‘incentive systems’ payment tokens uniquely enabled seemed more like a non-equity capital raise, though as Smith + Crown has noted, there is much more complexity to ICOs (which stretch back to 2014) and tokens than fundraising.

Cryptoeconomic design can do better at creating incentives for distributed networks and communities. The end of the ICO era does not diminish the massive success of the first cryptoeconomic design project (Bitcoin), and compelling design remains a tool for projects to ensure enduring achievement. Some things that could be forgotten should not be lost.

Smith + Crown Series on Cryptoeconomic Design

Smith + Crown has been thinking deeply about cryptoeconomic design since we launched six years ago. Before Ethereum, meta-tokens, and the rise of the ICO, people were forking core cryptocurrency codebases and tinkering with key variables. This also was cryptoeconomic alchemy. Many ideas that were born in this era became much easier with Ethereum and the tools available today, and amidst the noise of the ICO era, genuinely novel experiments in incentives were being developed and launched.

S+C was part of that, working with a small select group of projects to design cryptoeconomic systems and apply the power of distributed incentives to different platforms, products, and protocols. Among these:

  • Caspian: an institution-grade asset management system.
  • Sharespost (GLASS): a network to enable compliant settlement of securities and infrastructure for liquidity sharing across DEXs and exchanges.
  • Metadium: an identity-focused smart contract platform based in Korea.

We bring to our research the insights from our practice, and we bring to our practice insights from our research.

Smith + Crown will be producing a series of memos detailing our insights into and methods of practicing cryptoeconomic design. Future series will focus on core token function, supply controls, protocol governance, how the technology architecture impacts the incentive architecture, and what’s next for cryptoeconomic design.