Outlier Ventures (OV) is a fast-growing venture capital fund focused on the rise of the Web3 economy and its marketplaces. Their portfolio ranges from blockchain technology startups to firms working with artificial intelligence and the Internet of Things (IoT). The investment thesis revolves around the convergence of all three of these sectors. Betting big on open source and decentralized networks, however, is much trickier than sticking together a handful of buzzwords. In a bid to hash out best practices, researchers from OV have released a comprehensive report on Token Ecosystem Creation.
The 56-page document goes over game theory, behavioral economics, consensus mechanism, token supply, and reputation mechanisms.
Identify Stakeholders and Problem Solving
Designing digital tokens that incentivize certain behaviors within a network is an incredibly complex task. Arguably, only two networks have arrived at some semblance of “success” in aligning these behaviors, and both Bitcoin and Ethereum are still wrought with problems small and large. To better navigate obstacles that could arrive down the road, OV works from first principles and provides a series of mental models for surveying a project’s participants.
For one, considering the “the 3 D’s” is a start in formalizing the myriad considerations when building a decentralized network. The “Discovery Phase,” if not immediately clear, is the process in which a diverse team sets out to identify why their ecosystem needs a token in the first place.
There is no roadmap for arriving at a good idea, but considering how a token could function within a founder’s network is backward thinking. Instead, OV recommends that a “scan” of which problems exist and their context in a grander scheme of societal and cultural structures should first be considered. Following that, these problems can then be broken down into subsets or smaller tasks to be solved.
OV defines this analysis as PEST or, “political, economic, socio-cultural and technological analysis [that] describes a framework of macro-environmental factors used in the environmental scanning component of strategic management.”
On top of that, the team proposes “logic trees” to help pare down larger issues into more digestible problems to be resolved. More than anything, these are general tools that could easily be used outside of crypto. The fact that they are iterated throughout the group’s report is a testament to the fundamental nature of building out a tokenized network.
The above image outlines how each of the three D’s can be considered regarding delivering products along with a timeline.
(Source: Outlier Ventures)
Once a team establishes a concrete problem in which a token’s necessity is valid, considering the token’s design (the second “D”) will ensure the capture of value. The report reads:
“The design phase consists of making high-level design choices including, governance structures, the (mathematical) token model and its parameters. These need to be optimized for stakeholders’ incentives and the long-term sustainability of the associated ecosystem in order to avoid value leakage.”
Establishing a Low Fault Tolerance
Another interesting trend outlined in the document is the avoidance of network forks. The argument goes that when a network forks, it loses valuable participants and “can have detrimental effects on the ecosystem.” This concern is difficult to mitigate, and may indeed not be necessary to prepare for formally.
In defense of forking, participants within a network are entitled to voice their opinions in many different ways. But as a network grows more and more valuable after accruing a larger, more robust community, the potential for forking is likely to rise. Thus, attempting to predict how each of these different groups will end up quarreling or not is next to impossible. Even the sharpest determination of a network’s potential audience will likely fall short of the reality post-deployment.
As a side note, albeit an important one, there is indeed an art to the science of Token Engineering. OV writes:
“We can say with confidence that the process outlined provides an iterative approach with feedback loops. This is likely to reduce the risk of errors to acceptable levels over time by borrowing from scientific approaches applied to engineering complex systems which demand low fault tolerance, like aerospace.”
This idea also begins creeping into the messy, non-technical world of governance. As Vlad Zamfir of Ethereum outlined in 2017, networks need to prepare flexible processes as well as establish ways in which these processes can be openly discussed. Concluding his presentation from BeyondBlock Taipei in 2017, the Ethereum developer explained in a “call to caution” that teams “shouldn’t try to institutionalize [their] favorite governance ideas without lots of help from and consideration to current participants.” Doing otherwise risks merely being wrong about the intended nature of a network and its resources down the road.
Thus the deployment stage of the three D’s process should be completed following iterative tests, optimization, and corrections.
(Source: Outlier Ventures)
The report is lengthy, and the above is far from exhaustive. Of immediate, cursory note, however, is the meta-attempt to formalize the process for creating a networked economy. As the industry matures and engineering teams become savvier as to what works, what doesn’t, and why, standardized processes will slowly emerge. It’s still very early innings, and reports like OV’s likely won’t stand the test of time, but that’s probably not a bad thing.