The author, Dr. Nicholas Adams Judge, is a political economist and cofounder of the nonprofit RootProject. Cofounder, Chris Place, is a Y Combinator Fellow. Their pre-ICO achieved 512% of its initial goal. RootProject’s ICO runs from April 10–13, 2018. It is heavily over-subscribed and will be subject to an individual investor hard cap. Join the RootProject telegram group to learn about the currently going on.

What follows is a passage from our business plan. The biggest point made is that we should talk — and think — about the interaction of tokens and their ecosystems using the economic literature on monetary policy channels. It also gives an idea of the utility and role of ROOTS tokens in the decentralized ecosystem of nonprofits that RootProject is building.

The economics of decentralization differ if contribution to the system is mostly passive — mining — as opposed to active — for instance, using your local knowledge to analyze a project’s budget. RootProject’s is an active contribution system. Building systems of decentralized active contribution is a process of creating deeply incentivized ecosystem participants. Labor requires higher returns in the context of non-hierarchical institutions. Tokens bring many benefits, but their most powerful feature, economically speaking, is their capacity to reshape participants’ expected return structures.

To use a stylized example, consider a participant in a fiat ecosystem. Having previously earned $10,000, she earns $100, and expects her contributions to increase ecosystem market value by 1%. Her expected return remains $100. In a tokenized system, she earns $100 worth of tokens. She holds $10,000 worth of the token. Her expected return becomes $100 + 1% * ($10,000 + $100) = $201.This simplified example illustrates a nearly costless doubling of participant utility. Likewise, it shows how token holders are incentivized to become active ecosystem participants. Ecosystem participants need not be only individuals. Nonprofits carry greater organizational capacity than individuals but enjoy a greater tradition of collaboration than for-profits. They are therefore an ideal organizational type to scale on-the-ground services in a decentralized system. It is important when picturing ecosystem participants to think both of individuals and institutions.

Token — Ecosystem Channels

Traditional monetary economics examines how monetary policy affects the economy through various channels. For instance, monetary policy influence on growth via interest rate fluctuations is referred to as the ‘interest rate channel. Describing the role of the token in this way is useful because it grounds discussion in a pre-existing literature and forces a description of the precise mechanisms by which token design affects ecosystem growth and outcomes.

THE CURRENCY-AS-FEE CHANNEL is one of several main channels by which RootProject reduces liquid supply of its own token. It creates two distinct channels.

THE DIRECT SUPPLY REDUCTION CHANNEL is the simplest mechanism. By taking the standard crowdfunding fee but purchasing ROOTS on the open market with that fiat currency, a simple, direct connection between community crowdfunding and liquid supply reduction is established. Expectations of that reduction generate higher expected returns from token holders and ecosystem participants.

THE HYPER PRICE COMPETITIVENESS CHANNEL is another result of the currency-as-fee model. It is particularly important for early scaling of RootProject’s ecosystem and has already attracted significant attention from household name charities.

The main point of the currency-as-fee model is to reduce liquid token supply without distorting price relative to supply and demand. RootProject generally holds, as ROOTS, as much of the fee as operational expenses allow. The price-relevant point, however, is that the tokens are rendered illiquid via a smart contract, not who is holding that smart contract. Large ecosystem participants who bring exceptional value to the ecosystem can hold their own “fee” in a smart contract, released after two years. This soaks up liquid supply, supporting the value of ROOTS tokens, but allows major stakeholders to use the platform literally for free.

RootProject’s currency-as-fee model is an example of a model that not only requires a token but creates profound competitive advantages relative to non-token-based market strategies.

THE ECOSYSTEM RESERVE CHANNEL — As RootProject’s hyper price competitiveness helps carve out early market share, significant accumulated capital will be locked in smart contracts. Contract holders may, however, access that capital to use in the RootProject ecosystem. This trapped capital encourages (1) new project initiators to choose RootProject over other crowdfunding platforms; (2) successful project initiators to become donors; and (3) successful project initiators to undertake new projects.

By itself, the currency-as-fee portion of the reserve channel is significant. However, it is only one of several mechanisms that generate significant trapped capital. Combined, these sources, over time, should greatly reduce liquid supply and create overwhelming competitive advantages vis-a-vis other crowdfunding platforms.

THE “PENSION FUND” CHANNEL — Workers earn wages or salary in local currency. On top of that, though, is RootProject’s generous pension fund-like entity. Day labor workers may use a limited portion of their holdings to donate to local projects. All other employees may participate in the ecosystem with whatever portion they choose.

THE LARGE FUND PURCHASE CHANNEL — Negotiated large fund donation token purchase hybrid that is made possible by RootProject’s introduction of a token into a community crowdfunding model.

Such donation — token purchase hybrids can be negotiated using several “carrots,” including a small discount from market rates to entice volume purchases or major donor-fueled projects. RootProject will insist in such cases that a small portion of purchased tokens will be locked until used in the ecosystem.

THE ON-THE-GROUND CHANNEL — As RootProject grows its institutional capacities, it can offer partnerships and services that other nonprofits will find attractive. By negotiating the purchase and use of its token as one part of these partnerships, RootProject’s on-the-ground nonprofit becomes a tool of its monetary policy, as well.

Through the currency-as-fee, pension and large fund purchase, and on-the-ground channels, RootProject creates a set of policy mechanisms by which its ecosystem reserve channel should generate powerful market advantages relative to its crowdfunding competitors.

THE ECOSYSTEM PARTICIPANT CHANNEL — RootProject reserves a portion of its token stock to reward ecosystem participants such as professional project initiators, economic researchers, project reviewers and major partner nonprofits. By tweaking these compensation structures as appropriate, RootProject can “pump the gas” or “pump the breaks” on ecosystem growth and the correlated expected value of ROOTS tokens.

INTEREST ALIGNMENT — One of the most expansive, powerful arguments for ecosystem-specific tokens in the context of community-related organization involve coalition building, which happens primarily through the alignment of economic interests.

Creating an asset that is shared across class and group alignments in an historically novel manner is an important economic development. It is an application of the most basic consensuses of political science into token economic modeling.

The above channels bear almost no resemblance to the policy tools of a central bank. However, like a well-run central bank’s policy tools, they amount to powerful, credible mechanisms by which to grow a token’s ecosystem and defend its value. They are far from omnipotent, but if deployed prudently, they are capable of generating real value in its ecosystem.

Token Functions in the Ecosystem

The above is the economic substance of the token’s effects on the RootProject ecosystem. The actual token functions are below. They are explained in more detail elsewhere in the business plan but gathered here with short for clarity.

“PENSION FUND” — Instead of exporting value generated in the ecosystem to other financial assets, RootProject accomplishes a number of goals by keeping day worker and employee medium term pension fund-like compensation in ROOTS tokens.

For day workers, the system of smart contracts disburse payments conditional on individualized goals being met; e.g. substance abuse seminars being attended.

STAKE TO FLAG — Decentralized curation of local community projects is vital. The reason that a crowdfunding platform combined with an on-the-ground organization has not already become a successful business model is the cost of information about local conditions; e.g. material costs and permitting requirements. Such high information costs prevent scaling, as it is expensive to aggregate and subject to frequent change.

By incentivizing those who already have such knowledge off the top of their heads — e.g. the local contractor — to participate in the system, the cost of that information drops from very high to very low. Creating a small cost to flag a project and giving rewards for correctly-flagged projects requires a token, and it is a very efficient way to create a community review system.

NONPROFIT COORDINATION — Voting on coordinated projects cannot proceed on a one-organization-one-vote principal. Involvement in projects must have some economically relevant measure. Weighting by the portion of ROOTS tokens within a community is an ideal way to measure degree of stakeholding among participants.

COMMUNITY CROWDFUNDING VOTING — Among individuals, voting on local ecosystem governance and project agendas also must be weighted by the degree of activity and buy-in in a system. In the absence of such weighting, free rider and other classic collective action problems arise. By rewarding ecosystem participation, deeply incentivized participants are created, while the decentralized nature of the system allows it to be adaptive to very different community settings.

TOKEN PURCHASE — DONATION HYBRIDS — As a crypto asset that, while having the potential to appreciate in value, is directly associated with the well-being of a city’s most vulnerable, ROOTS is designed to bring value from those that would not typically participate in nonprofit endeavors.

In short, tokens are an ideal tool for community-focused ecosystems. While novel at first glance, the design of RootProject ecosystem is actually just an extension of some of the very most basic consensuses of mainstream political science and economics into the world of crypto assets.