Introduction

The increasing market expansion and progression of cryptocurrencies has spawned a number of interesting and beneficial ideas and applications to a myriad of industries. These developments only continue to grow in potential and actuality with each passing day. The introduction of the token economy, and more importantly different incentive models, are the most important steps to this progression. Their disruptive philosophy is becoming a necessary component of the highly anticipated blockchain revolution.

Crypto economy — the dream and reality

Cryptocurrency and blockchain technology as a whole represents a gargantuan challenge to a variety of existing industries. However, before such a revolution can begin to form, much higher levels of adoption must take place. Despite the numerous superiorities argued by cryptocurrency enthusiasts such as individual empowerment, freedom of capital, maximized efficiency and productivity, the reality of blockchain technology can only be as strong as the network of individuals that indulge it.

Years ago, much of the crypto community argued in favor of an inevitable, immediate future where the role of Bitcoin replaces that of everyday currency. They argued that if only merchants began to adopt Bitcoin and other cryptocurrencies, surely individuals would ditch their worthless fiat in favor of a independent, sovereign alternative. But, as we all know, merchant adoption has not spawned such a revolution…yet.

The blockchain revolution has also been missing another ingredient — revolutionaries. The mass of individuals worldwide that pledge participation to this emerging economic system, from college students to grandmothers, have yet to surface. Why? Because they require that incentive — the reward for participation — to hop on the warship. The normalization and proliferation of the token economy is the final and inevitable development required by the cryptocurrency space to see massive mobilization.

The Token Incentives

At its core, the token incentive model represents a relationship between different parties in which good behavior is rewarded, or incentivized.

In other words, individuals within a network or system receive compensation for positive participation. These rewards take the form of tokens- some value that can be exchanged for other rewards provided by the supplier of the tokens. This can be as simple as students receiving gold stars for good behavior, which can be exchanged for candy at the end of each week.

In certain settings, this token economy model is very beneficial for all parties, as it promotes active, purposeful, and recurring participation from individuals who may not otherwise feel so inclined to do so. This system has been previously implemented in a number of different consumer-producer relationships within the traditional markets: Coke rewards, airline miles, and credit card points, to name a few.

Current and Future Examples

As it stands, perhaps the most prominent example of a incentives based consensus token economy is the Steemit platform. Steemit represents a blogging platform built on top of the Steem blockchain. A large portion of each mining reward on the Steem blockchain is split among users on the platform. Users vote up and down content as they best see fit.

Content creators are rewarded in the three native currencies to the platform Steem, Steem Power (SP) and Steem Dollars (SBD) based on the votes they receive. Users that vote “well” — both early and in congruence with other voters, also receive curation rewards. Everyone involved in such an economy is inclined to participate in the layer he finds most suitable, and get rewarded even if they are not creating content or promoting it. This is a novelty compared to blogging platforms like Tumblr or Medium.

With Steem and sister cryptocurrencies, users can earn higher voting and publication weights. They can also earn interest on their coins and exchange them for other cryptocurrency. When the Steem ecosystem first launched in 2016, it saw immediate attention from crypto enthusiasts and the general public alike, as first and top contributors were seeing upwards of thousands of dollars in participation awards. Mothers, makeup enthusiasts, travel vloggers, and more all flocked to the platform to take a stab at this token economy approach to blogging.

Steemit continues to see huge popularity and attract a wide variety of content. Trending posts currently include urban photography, video game reviews, lifestyle blogs, and even a couple taking a trip to the zoo. While Steemit hasn’t yet displaced sites like Tumblr or Medium, it does see more activity than Bitcointalk as well as legacy social media sites like Reddit predecessor, Digg, it’s censorship-resistant alternative Voat, and social media pioneer MySpace.

Steem has certainly maintained success with a token economy and incentives approach thus far, but there are also other successful examples. Cryptocurrency exchanges like Binance and KuCoin award their users with exchange tokens that can be used for reduction of trading fees, voting privileges, and even regular dividends. Wabi pays users that verify authenticity of eligible products with tokens, which can be used to purchase those products.

In the future, it is plausible that individuals could be rewarded for creating and executing smart contracts on the Ethereum blockchain. Supply chain cryptocurrencies like VeChain and Ambrosus could reward the workers that handle transported commodities. Participants in decentralized micro-lending programs who both provide and request loans could receive karma tokens for positive interactions. In the case of MARKET Protocol, we could see a situation where participants in the protocol have chances to receive MKT, which could be used for voting privileges, transaction fees, contract creation, and more.

How incentives affect the value of the network

As it currently stands, token economies are crippled by their independence from one another and illiquid nature of tokens rewarded. In other words, a participant fundamentally can’t use airline mileage to buy a coffee, pay rent in credit card points, and most importantly, attach a value to reward tokens via exchange for real world currency.

Cryptocurrency coins and tokens that act as the fuel behind token economies are not inhibited in the same ways as their legacy counterparts. The liquidity associated with cryptocurrency allows for each coin to carry an attached price. This price is derived from a number of variables. The rate of inflation, model of distribution, and total supply all heavily influence the price of a coin. The utility of the token, or the functions it encapsulates, will also affect the price.

One thing holding back the usability of utility tokens is the price volatility. High price volatility disincentives users to hold the tokens while consuming the associated utility. Imaging wanting to consume the utility of an orange, the wonderful taste and nutrition, every day, but the price fluctuates from $.50 to $500. It would be impossible to rely on being able to buy and utilize oranges. Hedging with derivatives allows you to disassociate the price volatility and the utility. MARKET Protocol is working diligently to create stronger incentives for utility token holders by allowing them to hedge their price exposure, by enabling them to use stablecoins like DAI, Havven or DGX to peg the value of their holdings to USD or gold. By choosing the appropriate position on the derivatives market, utility token holders would have an opportunity to protect from market volatility and that way avoid potential losses associated with consuming the utility of a token.

By far the biggest role that affects the price of a cryptocurrency is the community that backs it. Because token economy participants accumulate holdings of relevant tokens, they have a never-before-seen incentive to guide their further participation and interactions — price appreciation. When individuals and communities contribute positively to different cryptocurrencies, they affect the price valuation of that coin.

By combining the concepts of rewards tokens and price incentives, individuals are empowered as a type of micro-shareholder. Their participation affects their own holdings because they have skin in the game. As a result, we see new levels of cooperation among communities that never could have previously existed. Individuals work together in supplying capital and labor in a completely decentralized manner.

Perhaps the best example of this is the DogeCoin community, that has grown a meme coin into a US$500 million monster. The community achieved this through a series of initiatives: seeing DOGE penetrate NASCAR, the Olympics, a multitude of merchants, video game economies, and so much more. Elastic is another great example. The decentralized supercomputer launched its blockchain network over a year after the founder ran off with the entirety of the ICO funds. Thanks to community members believing in the vision, they worked to build the project from ground zero in order to appreciate the price of their previously worthless holdings.

The way we see the future

The fusion of blockchain technology, token economies, and associated incentives models present a system of relationships unlike what has never been previously seen. As these components continue to grow in adoption and develop alongside each other, it will become more clear what the exact role that cryptocurrencies will play in the global future. Although how that will look down the road is currently unknown, what is known is that this concept represents a wildly disruptive approach with huge potential for revolution.

To learn more about MARKET Protocol, visit marketprotocol.io, read our whitepaper, and join the ongoing discussion on Telegram.