Because this is Christmas week, I thought I’d deviate from the usual plan. Instead of curating today’s hottest news, I’m going to share my thoughts on creating a healthy crypto economy. Consequently, there will be no issue on Christmas day. I’ll come back to you on Thursday.
I’ve been thinking about this for some time, but I began to formulate these thoughts after the sudden and early demise of one of the nearly 50 social media sites focused on crypto. These all began popping up within the last couple of years. If you’ve been in this space long, then you likely already know about the front runner, Steemit.
I issue this post with one caveat: If you simply want to provide a platform where users can log in, post, and cash out, you can ignore these principles. But if you are trying to build a community with its own micro-economy, these are pretty sound principles based on my observations in two areas:
the real-world economy; and
playing around on Steemit and a few other crypto-based social platforms.
Now without further ado …
4 Essentials of A Healthy Crypto Economy
Steemit launched in 2016. Since then, there have been many other social blockchain projects launch attempting to compete. Some have done fairly well while others are struggling. Steemit is still the market leader.
One of the early contenders, Hyperspace, recently shut down. A more recent contender, Narrative, announced its sunset earlier this month. I expect more to follow.
If I were to start building a platform today that attempts to compete with Steemit, I’d want to make sure from the very beginning stages of planning that it has a sound economy. This is particularly important if you are creating your own cryptocurrencies, whether coins or tokens, but much of this still applies if you plan to use existing crypto. If you want your economy to thrive, you’ve got to put some thought into it.
1. Economic stability
Image by Reimund Bertrams from Pixabay
Cryptocurrencies are naturally volatile. That is the first thing you should know about any cryptocurrency. Lack of regulation makes the entire crypto market--from Bitcoin to the lowliest altcoin--highly volatile. For that reason, any attempt to build an economy around cryptocurrencies means your first step must be devising ways to affect that volatility and bring it under control as much as possible. That can happen with a well thought out monetary policy. I recommend starting with a stablecoin.
The stablecoin can be an existing coin such as USDT or TrueUSD, or it can be a proprietary cryptocurrency like Steem Dollars (SBD). In my opinion, this is one thing Steemit got right even though SBD is not 100 percent stable.
CoinSutra has an awesome post about stablecoins if you want to learn more.
2. Sinks
Most sites trying to build an economy around crypto underestimate the importance of sinks. In my mind, this is one of the most important qualities of a utility token.
Sinks are useful ways of spending a cryptocurrency that make it valuable. A utility token with no sinks is not a real utility token. In Narrative's case, the intent was there, but development was so slow that the platform never survived long enough to create more than a single sink—the ability to purchase niches (content subject silos).
Practically speaking, it doesn't matter what the sink is as long as it encourages members of the economy to keep the currency within the economy, but I recommend more than one. The more sinks you have, the more people will use your currency. The more uses a token has, more it will get used, the more value it will retain, and the longer people will keep it in your economy.
Imagine if the U.S. government encouraged everyone who earned U.S. dollars in some way to convert those dollars to another world currency rather than spend them in the U.S. economy. How much value would the U.S. dollar have?
None. Zilch. Nada. Not one iota.
This is essentially what Narrative did. Instead of creating sinks for its own token, the founders made it easy for users to cash out their platform token and convert it to fiat money. And that's precisely what a large number of users did. As a result, the token value plummeted to near zero by the end of the year where it still hovers today, unlikely to rebound.
If you want a healthy economy for your crypto project, create multiple sinks as quickly as possible.
3. Staking
Image by Lisa Johnson from Pixabay
Staking is a specific kind of sink that involves holding a cryptocurrency long-term. Staking anchors a currency to keep it from losing value too quickly, but users aren’t going to do it without incentives. Therefore, you’ve got to reward them somehow by keeping the currency on the platform.
Steemit allows users to convert STEEM, the liquid currency of the platform, into Steem Power. Steem Power translates into more voting power. It’s also an easy way to measure an account holder’s influence within the economy. This is a practical incentive that encourages users to keep their STEEM in the economy. After doing this, users can delegate it to other users, lease it to others, loan it out, and more.
The importance of staking cannot be underestimated. At the core, the idea is to encourage users to keep their currency within your platform’s economy. Whether it’s circulating, through multiple sinks, or being held in an account due to staking, keeping your coin or token within your economy strengthens your economy.
Encouraging users to stake your currency can take place any number of ways, but staking should be implemented from Day One.
4. Security
Image by Reimund Bertrams from Pixabay
No one wants to participate in an economy that isn't secure. If users are afraid their accounts will be hacked or they could lose their hard-earned cryptocurrency, they will not stick around long. So you've got to ensure your platform and each user's wallet has maximum security.
This security must take place at multiple levels.
The user level - If you issue wallets, each wallet must be secure using cryptographic encryption. User account data should be secure, as well.
Platform level - The platform itself must be secure from hacking and other bad actors.
Server level - Your servers must also be secure. Whether you host them yourself or you host them with a third party, you must lock down all data and prevent your system from being hacked, cracked, and jacked.
Blockchain level - Whether your entire system exists on a blockchain or you use a ledger simply for transactional data, you've got to ensure the blockchain is secure.
It doesn't matter how much else you get right, if users can’t feel secure in using your platform, your economy will suffer.
3 More Ways To Keep Your Economy Healthy
Beyond the above essential elements, you need to figure out other ways to improve your platform’s economy and ensure it is healthy. The following three elements are not as essential as the above four but are helpful.
1. Monetary scarcity
This is a basic economic principle. One of the things that drives Bitcoin's value--in fact, one of the most important drivers of BTC value--is its built in scarcity. By design, Bitcoin will only ever have 21 million BTC mined. For an interesting read, learn what will happen after those are all mined.
When you limit an asset’s supply, you increase its value. If the asset has intrinsic value to begin with, its intrinsic value will be greater when you limit how many can be in circulation at any given time.
Scarcity can be achieved in a number of ways. Programming an upper limit is the most obvious. That's not a perfect solution because programmers can always change code. If you're the programmer, I strongly encourage you to pick a reasonable number, and don't change it.
Another way to build monetary scarcity is with a token burn.
With a token burn, anyone in the economy (a miner, minter, user, etc.) sends a designated number of coins or tokens to an inaccessible wallet address. The keys to the wallet must be destroyed so that no one--not even the wallet's creator--can access it. All burned tokens go to that wallet address never to be seen again.
2. Incentives and disincentives
Image by Gerd Altmann from Pixabay
You can’t have a rosy attitude toward user behavior. Some users will rise to be pillars of the community. Others are there to troll, spread FUD, or take advantage of an opportunity to spoil, destroy, or exploit for personal gain.
As important as incentivizing and disincentivizing behavior is, it's easy to get wrong. You'll likely end up spending a lot of time experimenting, because translating code into something that can regulate human behavior is not an exact science. Neverthless, you have to give it an old college try.
Incentivizing good citizenship - Start by describing the ideal citizen. What would he do or not do in order to make the platform good for everyone involved? Make a list of those activities and assign a value based on level of importance to each one. Incentives should be tied to those actions. Not only is it important to identify good behaviors and reward those actions, but it’s important to reward each action based on how important it is to contributing to a healthy economy, and this is where you’ll likely spend a lot of time tinkering with weighted incentives.
Disincentivizing bad behavior - Just as important is what you disincentivize. It's natural for people to behave in such a way to maximize benefits in their favor, and if they can get away with it, they'll rig the system to work against others--especially if there is an equal and opposite benefit to themselves. To create a platform that doesn't account for this seedy side of human nature is irresponsible. People will, in general, put in the minimum effort to get the maximum reward. You want to create an economy that is fair to all users. That means dealing harshly with the seedy elements: Spam, low-quality content, and plagiarism. If you allow the bad actors to take over, they’ll run your good users off and the platform’s death is imminent.
3. User feedback
This may seem essential, but if you get user feedback right and everything else wrong, it just means you know how to relate to your community. That doesn’t necessarily transfer to success. Still, it is helpful to get feedback from the community about what is working and what isn’t, so build that into your community features. More important is acting on that feedback. Don’t ask for it then do nothing with it.
Conclusion
Crypto economies are still in the experimental stage. There's no such thing as the perfect economy—even in the real world. You can have a healthy economy, but it requires forethought and planning. It won’t just fall together on its own.
As much as I believe in Libertarian ideals, I’m also practical. Human behavior must be regulated. In a perfect world, people will regulate themselves. But they don’t. Central governments came about because of this realization. If you’re committed to decentralization, you must solve the problem of human behavior in a way that incentivizes self-regulation or, at the very least, with community governance. A lollipop attitude toward human nature will only lead to a weak and unhealthy economy.
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Allen Taylor is a veteran award-winning journalist and former newspaper editor. He is a freelance writer focused on fintech, including blockchain and crypto projects, and manages crypto blogs through CryptoBloggers. Follow me on Twitter and Steemit.