We are often asked for our thoughts regarding Utility Token Economics — specifically, how we envision designing an ecosystem of crypto-consumer apps that both appeals to mainstream users and supports sustainable token-economic dynamics. The topic warrants a deep discussion. Here is a blog-sized start:

How to value a utility token

First, we need to understand the factors that contribute to the utility value of a token. Our modeling of the PROPS utility value was borrowed from the writings of crypto-economic thought leaders like Chris Burniske, Brett Winton, and Alex Felix. I recommend reading their blog posts (and relevant sample models), though I will try to summarize the general points below:

A utility token is neither equity nor a security, so a traditional DCF model predicated on future cash flows is not applicable. Instead, the utility value of a token should be considered in terms of the size of economy (or GDP) it supports. Chris Burniske framed it:

“…Each cryptoasset serves as a currency in the protocol economy it supports. Since the equation of exchange is used to understand the flow of money needed to support an economy, it becomes a cornerstone to cryptoasset valuations.

The equation of exchange is MV = PQ, and when applied to crypto my interpretation is:

M = size of the asset base

V = velocity of the asset

P = price of the digital resource being provisioned

Q = quantity of the digital resource being provisioned

A cryptoasset valuation is largely comprised of solving for M, where M = PQ / V. M is the size of the monetary base necessary to support a cryptoeconomy of size PQ, at velocity V.”

Once you solve for M, you can divide that monetary base by the supply of utility tokens in the float to get the utility value per token.

So the utility token value is U = M/S where S is the supply of utility tokens in the float. Leaving us with:

U = PQ/SV

In the end, the utility value of a token can be thought of as the dollar-value of demand (PQ) divided by the product of the supply of tokens in the utility float (S) and the rate at which those tokens are re-spent (V).

It’s important to note that PQ translates to a gross revenue figure, not to a market cap. If you imagine a tokenized ad-based digital media company, PQ would represent gross ad dollars demanded (ads served * $/ad served).

Building successful consumer apps with healthy economics in mind

As we build an ecosystem of digital media applications, the economic design of each application in it will be critical. In order to contribute to the PROPS ecosystem, any potential app must consider the demand, supply and velocity dynamics they will be introducing through their in-app economies.

Demand (PQ)

We believe two key factors are necessary for crypto-enabled consumer apps to drive demand:

a. Product appeal to mainstream users

It must provide a value, service or experience that is desired by mainstream users. A well-built product is the cornerstone for success. This may seem obvious, but we’ve seen a number of tokenized media platforms launch that continue to lack the polish and the content to attract a mass market audience. Our focus is to scale PROPS to the masses.

b. Users unfamiliar with crypto must still be able to spur demand for the token

There remains a steep learning curve and technical speed bumps in dealing with crypto-tokens for the average consumer. There is an incredible amount of friction in educating new users to the concept of crypto-wallets, account security, private keys, KYC, etc. Users should not immediately be asked to understand, hold or transact in crypto-tokens before they are allowed to participate in the economy. We believe the best way to do this is to harness existing mainstream monetization strategies as the initial key driver for token demand, which is illustrated in the diagram below. We have years of experience building, growing and sustaining a thriving two-sided marketplace that resides on this structure.

Shown are two examples, one of an app with an in-app purchase model (left) and one with an ads-based model.

The in-app purchase flows on the left of the diagram demonstrate how on Rize (the first app on the PROPS platform) in-app virtual goods sales, drive demand for PROPS.

Similar to YouNow, users will be able to purchase an in-app currency that can be used to send digital gifts. The key change is that Rize will then take that revenue and use it to purchase PROPS from the market to add to its reward pool. So mainstream users, through their fiat currency payments, and without any previous knowledge of crypto, can drive demands for PROPS. The Rize reward pool then distributes these purchased PROPS back to the network’s contributors — those driving the most spend, watchtime and user engagement.

You could imagine an ads-based network, such as Youtube, tokenized in the same manner: instead of user pay, the network sells ads on content, uses that fiat revenue to purchase PROPS, which it then uses to reward its creators fairly.

Supply (S)

The number of PROPS in the utility float will be driven by overall token supply, allocation from the PROPS Token Distribution Event (TDE), vesting schedules of TDE participants, foundation reward pool, and percentage held outside of the exchangeable float, such as those held in the app for certain incentives.

Many of these factors are out of the purview of a single blog post. However, a few are worth touching upon:

The PROPS team has been careful to align itself with strategic supporters who hold the same long term vision, by vesting its token over three years. 50% of tokens will be set aside for a reward pool (governed by a non-profit foundation). 12.5% of the remaining pool of will be released each year. A purposefully designed app impacts utility float supply if there are strong enough incentives for users to hold and accumulate token balances. For example on Rize, your balance of PROPS will factor into:

Trending Score

Curation power

Access to special features / content

Status

These areas are highly impactful to network participants. For instance, a user’s trending score will determine how easily discoverable they are, leading to more viewers, fans, engagement, and future earnings. This encourages more tokens to be held, and more supply restricted.

In addition, community members can both re-spend PROPS in the app or receive it as compensation. The latter is an important use case for our contributors and supports the long term health of ecosystem. We’ll closely monitor what percent of PROPS earned are retained in app, and aim to maintain a healthy balance. Looking at past user behavior in YouNow, we estimate it could be around 50%.

For those looking for more detail regarding token allocations, vesting and participant information, you can read more in the whitepaper.

Velocity (V)

Finally, velocity can be thought of as how many times a PROP will be re-spent in the app in the gifting gameplay. We expect the majority of PROPS earners to value the utility gained from holding balances higher than they value utility from gameplay, as they serve different motivations, but there will be some overlap. Based on YouNow earner data, we expect ~15% of earned PROPS to be re-spent in the app on gifting engagement.

Moving forward

In summary, we end up with an economy where means of payment are unbundled from token utility. The fiat-based gameplay currency allows mainstream users to transact in high volume, while creating demand for PROPS, whereas the utility of the token is derived from the user’s balance, and incentivizes users to hold it, effectively restricting supply.

It’s been a fun and fascinating challenge to incorporate this framework into our product thinking. Rize, our first app, is currently in alpha, and will launch on the day of the token sale. We’re excited to see these dynamics in action. We know there is much to learn, and we plan to be as transparent as possible in sharing our insights with the larger community.

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We’re excited to announce that we are partnering with CoinList and Republic Crypto to launch the PROPS pre-sale to accredited and non-accredited investors, respectively. We are the third token to launch on CoinList (following their successful partnerships with Filecoin and Blockstack), and we are proud to be the first to launch on Republic Crypto’s platform. Our partnership with Republic Crypto, in particular, ensures that PROPS will be widely distributed among all of our earliest supporters, all of whom are now eligible for unique pre-sale benefits.

If you’re an accredited investor, please sign up on CoinList to ensure you get regular updates ahead of registration (November 29) and the sale (December 11). If you’re an non-accredited investor, please stay tuned for information about how to sign up on Republic Crypto closer to the sale date (December 11).