The model describes a three-sided market between miners (the supply side), users (the demand side), and investors (the capital side). Miners opt-in to the consensus protocol and coordinate their resources to provide the network’s service in a decentralized manner, users consume the service, and investors facilitate exchange while capitalizing the network.





These groups exchange value with each other using the network’s own scarce cryptocurrency, or token. I call these interactions the miner-user, investor-miner, and investor-user relationships. They describe abstract flows of value, which can take many forms beyond direct transactions between two people.

The circle is simple by design so that it can be extended and modified. And it is visual, rather than mathematic, so that it can be used in a brainstorming or conversational context. The goal is not to describe the nuances of every network, but rather to provide a broad framework for thinking through cryptoeconomic design and network governance models.

Miners and Users

In the miner-user relationship, miners are compensated for their work through tokens. The network’s consensus protocol standardizes the service, while the cryptoeconomic model controls when and how miners get paid – typically when the network deems their work to be ‘correct’.

Different services need different kinds of work, and users can transfer value in many ways, from direct payments to token inflation/deflation models. Bitcoin, for example, uses transaction fees and inflation to generate income for its miners. MakerDAO charges Dai users a stability fee which goes to buy-back and burn MKR, rewarding holders with increased ownership for assuming the system’s risk. Meanwhile FOAM cartographers, in a TCR model, can earn tokens for curating points on the map.

This architecture is desirable when the benefits of a distributed supply side (such as lower costs of production, higher reliability and greater user leverage) outweigh the performance losses of decentralized systems.

Investors and Miners

There are short-term investors (traders), and long term investors (holders). Traders create liquidity for the token so miners can cover operational costs, while holders capitalize the network for growth by supporting token prices. The former is a direct form of value transfer where miners sell earned tokens in the open market to cover their costs and reinvest profits, and the latter is an indirect transfer of value that shows up in miners’ balance sheets rather than their income statements.

Different capitalization levels affect how the supply side develops. A cryptonetwork is fully capitalized when the price of its token is at a level where mining is breakeven. When prices fall below this level, the network is under-capitalized, mining is unprofitable and supply contracts. When prices rise above, it’s well capitalized and supply expands as the profit opportunity for miners grows. Therefore, by supporting certain price levels, holders (which often includes early miners and users) fund the supply in an indirect, but essential way.

In the beginnings of a cryptonetwork, investor capital stands-in for user demand as a way to help bootstrap the supply-side. Of course, it is possible to over-capitalize a network, which becomes a problem when capital withdraws as user demand fails to meet investors’ expectations, and sudden price drops take miners out of business. The key is to match network capitalization to fundamentals, which is a difficult task in absence of fundamental value models.

Investors and Users

People who hold tokens as investments expect them to appreciate in value, which means demand for the scarce pool of tokens must increase over time. Generally, investors expect this to come from a growing user base in cases where tokens need to be spent to use the service. But demand can also be supply-driven, as with some proof-of-stake systems, or even investor-driven, at its most fickle. We can display these nuances by altering the direction of the arrows in the model, but in any case, investors help create long-term liquidity pools, available at different prices, from which new future demand can draw tokens.

Recycling the examples above, Bitcoin investors expect value to come from increasing demand for BTC as more people embrace the benefits of digital gold. MakerDAO investors expect growing demand for Dai to drive the value of MKR through consistent buy-back burns, and FOAM investors look to a future where the world deems it as important to be present on its map as it is to be on Google Maps, driving demand for its token (without getting into FOAM’s proof-of-location service).

Another side effect of investor participation is supporting users’ purchasing power. In cases where the cost of service is set by competition among miners (i.e. prices float around the token), higher token prices increases the purchasing power of token holders, which may lead to increased consumption and therefore greater value for the network. But whether any of this works in practice cannot be generalized, and must be debated in the context of each network’s cryptoeconomic model. Nevertheless, the principal observation about the investor-user relationship remains: token liquidity and price support is as important for the demand side as it is for the supply side, and investors who participate through the open market contribute to both.

Using the model

Isolating the different roles helps us analyze costs, incentives, and value flows for each group. It can also help us think about relative power and identify potential points of centralization, which is important to design more balanced governance and token distribution models.

If you’ve been in crypto for a bit, none of these ideas may strike you as new. But looking at networks this way has led me to a few interesting ideas I’m cataloguing under the term crypto-capitalism, which I’ll expand upon in future posts. For example, it helped me see cryptonetworks as systems for exchanging labor for capital (vs. currency), the fundamental concepts of network capital, and what the different roles are for investors like us in the development of these new economies. The circle will serve as a baseline for these explorations.