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Social Token definition, valuation and incentives.
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TLDR below. This is not financial advice.
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Social token is a token that allows artists, musicians and social media influencers to tokenise rewards and access to their loyal followers and fans. Most of them are transferable as financial incentives.
If the social token is meant to carry a monetary value, the pricing idea can be done with a bonding curve. It helps to determine value based on supply.
We also talk about mechanisms for incentive and bad actors, how to integrate and verify off-chain data and how do we put the information of off-chain data into the Bonding Curve.
Next, we compare Social Tokens with loyalty points and NXM. And discuss the potential legal framework. Finally, we will provide advice for Social Token Designers.
What is Social Token?
The social token is a type-token that represents the reputation of an individual, community and brand. Social tokens are built on economic principles of ownership with the expectation that tomorrow's community value will be more valuable than today.
There are many use cases for social tokens. For example, a group could create them to grant access to information on a community. People who don't want to stick with this community can be transferred to someone else and lose access.
Creators can make money by creating their tokens. Or pay for people who have contributed in the form of tokenised with some community incentives as sharing financial income. Influencers can also send gifts underlying tokenized to others and can sell them to generate income for the owners.
Social Token provides sharing financial income, grant access as tokenized based on contributions.
1. Social tokens divide into two categories.
With community tokens, you need to earn the token for your participation and engagement. It's kind of an indicator for your reputation as a member of that community and you do projects together and sometimes to access products or services or to access something like exclusive content, you need to hold at least a certain amount and if you sell then you get booted out of that membership. That's the community side of it.
The personal token is a bit different and it's a bit less the crypto ethos but more the startup ethos and so the personal token is more like an accelerator that's centered around the person. In my case with the Alex token, I got funding of twenty thousand dollars initially and then people did some OTC deals meaning that I gave them some tokens so it's a bit like next-generation angel investing via crypto.
Personal and Community tokens are less liquid than Bitcoin and Ethereum. It is really hard to distribute them because there is not a deterministic objective way to quantify how work was done. With Bitcoin, there is proof of work. With Ethereum 2.0, it will be proof of stake.
So knowing those two things, how do you make it so that you distribute the tokens to the right people that would fund you, help you and contribute to your project?
Initially, back in February or March, the best practice was that you create a market on Uniswap. The problem is that you have to put 50% of ETH to create the curreny pair. That's very expensive as if we go back to business terms.
This is a very high cost per customer acquisition. Every time you create a personal token, you have to put at least five thousand dollars on the line and if people are borrowing it then you're getting some fees on the swap. But that's very tiny and it's very annoying to do market-based token price discovery.
Solution with Bonding Curve
For that reason, the best way to distribute the token is to Bonding Curves. We have seen this with Zora and Foundation.
Now, many people understand that the Bonding Curve has an advantage over the way of market creation. Compared to before making transactions, someone needs to own the tokens for the first time, which is not too fair and a lot of problems arise. Instead, making it algorithm-based with Boding Curves is better.
With this in mind, we don't need liquidity, which is like a short answer. It's very easy, we just need to create a token and then it can do the mathematically perfect distribution. It can be said, "okay, every transfer to X people or X tokens will go to the creators and token X goes to the platform, they are unlocked when everyone fixes them".
If someone wants to buy them, the token's value always reacts to real-time demand. When you sell them, it gets burned or put back into the algorithm. It may be the best way to distribute personal tokens right now.
3. How is the Math and Shape of the curve different from Uniswap?
Uniswap uses a concave curve and that's fine for most of the stuff on it. But for the Bonding Curve, it depends on the coin and purpose of the token.
You want the minimum possible slippage. For the Bonding Curves of adequate assets like social tokens, you can customize and bet them on the publisher.
For example, I'm a freelancer and I don't want to be booked more than 40 hours in my time, in the case of one token equal to one hour. So, what you can do when the price doesn’t increase inflate too much for the first 40 hours? Then, it becomes very expensive. This way makes people won't book you after 40 hours or if they do, you will make a lot of money. That's win-win and it's one of those cases of Bonding Curves.
4. Community treasury
The community treasury will hold tokens whose value is based on the Bonding Curve.
If there is some kind of money deposited into the community/ecosystem, and the token value is not responding to the Bonding Curve then it is not working as well as it used to be. That reason makes the community can vote to change to another model, maybe burn those tokens and create a new one or maybe let pull them out.
So, one of the worst things about ICOs in 2017 was inflexibility. On the white paper, it's like we're going to do x and y and like it will be the best thing ever for the next 40 years. But the truth is it never works like this and they have to constantly evolve.
For example, you need to have Ether in the Compound governance module, where you can enter code, at first. Then, you propose and code it if there is enough support from that community.
5. Coordination vs Speculation Management via Treasury
To maximize coordination with the community treasury, we must reward everyone for voting, participating, proposing anything that helps the community to coordinate, and we want to encourage desirable behaviour.
We can see it in YFI's case. The actual maximum supply limits of 30,000 YFI and no inflation. I think they have eliminated the possibility of future inflation, which is very bad because I do not believe that everyone will work indefinitely for YFI. Some people will reach the point where they make so much money that now there is not much value on electricity spending in the protocol anymore. That is not ideal for coordination.
We want to encourage behaviour but the reserves of the Community Treasury are limited. So, we might want to get enough inflation like rewarding everyone involved and diluting them for those who aren't. Because through inflation, they won't gain more tokens than others, resulting in fewer participants losing value and weight in that treasury.
6. Signalling Mechanism
Signalling Mechanism is interesting for many reasons:
For example, my address on etherscan has an Alex message and Alex tokens. If someone creates a fake account but doesn't have any Alex tokens, that's strange. And if even he bought them like he is receiving an issuance of Alex tokens every month that's how the investing schedule works for his token. This is not the real Alex if they pretend to be me. We can check it easily. So, it is civil resistance.
Another great way to signal with community tokens is something called a gratitude token. If I give tokens to someone, it's the credentials I support them with. It's extremely interesting because in addition to access to my content.
For example, Vitalik Buterin is an extremely respected person in the Ether community. And he has a token called Vitalik Buterin token that represents an excellent developer. That's a great credential for that person. So it makes people an authentic person like, "oh you got this person well approved by the trustworthy association because I trust them now I trust you".
These two are quite great. Exclusives access to content also really matters. A system will ask you to keep a certain amount by holding them with proof that you can access the system. And if you sell them, you will be disqualified.
There are also things like Outpost Protocol, like Substack an email newsletter provider, but you need to keep certain pattern tokens to unlock the newsletter. Again, it's very interesting because if you sell those tokens, you lose access to the newsletter. There are a lot of different ways.
And it would probably be good to use The Bonding Curve for things like exclusive access to content because that means people are still getting utility from something like accessing a group or a discount or a product of any kind and the price fluctuates with the bonding curve depending on the demand.
7. Mechanisms to Reduce Bad Behavior
For instance, if you buy something from a Bonding Curve that is redeemable for products or services like music or discount or anything else. If you fractionalize this ownership meaning that you can purchase less than one product or something, that incentivizes speculation. Because if you buy a fraction of something, you cannot redeem the full utility, that means you must be in for the speculation 100%. So, other websites are removing right now, like Foundation, the fractionalization part. To make sure the price will dynamically change with the bonding curve and you can not purchase less than one product/service. After that, you kind of remove some people who just want to speculate and just want to hold a fraction.
It's really hard to remove all the game-theoretical halls that can be formed because there will always be some greedy people, especially, if the price goes super high. Maybe one thing is not making the Bonding Curve extremely aggressive, you make it that prices slightly go up and so that way if they can only do 10x over like a thousand firsts or ten thousand firsts of the supply then the greedy persona will flock to a more profit-maximizing protocol and so you will be left out with only the true believers
8. How to integrate and verify off-chain data?
How do you put that information of off-chain data into the bonding curve so that it also reflects what the reality is?
The short answer is extremely hard.
One way of doing this would be to scrap the Spotify listeners, scrap the Twitter followers or you try to recoup their emails, then you can email them some link but it's just extremely hard. The solution is we just need to wait a bit more for Web3 systems to emerge.
In the music example, Audious is a protocol for music that is released with the token. When you have everything on-chain about the music listeners and stuff like this, it will be much easier. As my music genre is very close to these artists and I am going to give free music coupons to everyone who at least listened to a thousand times to all of these artists, and that way as “hey you liked x artists then you will maybe like me and so that could be a great promotional thing”
Spotify is a walled garden just like any centralized services. There is moneymail.ai - a company that's trying to integrate web 2 or cctv.io on Twitter where you can give tokens to people. But infiltrating Web2 platforms is very hard because, by definition, they have API’s but they're pretty closed off and you would need oracles to listen on-chain and sometimes it's quite closed off. Or if you want to scrap the algorithms of those Web2, they will say you're bot’s and you're going to be blocked because you're searching too fast.
The answer is that we need to wait for Web3 and the problem is most of these things are beyond money. It's more data because there's more data it's not possible today, we can not scale on the Ethereum. This is a reason why on Ethereum, the only thing working is DeFi right now, which is still growing because its net profit is positive despite the huge fees.
9. Reputation in Social Tokens vs Loyalty Points
The more loyalty points you have the better. Maybe, you could buy them in the crypto and secondary markets, it will always be amenable for people who are wealthy but reputation is earned. You can't fake that, you have to build relationships with people, build products over time, do good over time, and reputation is really hard to build because it's something quite subjective and tons of teams have tried to quantify reputation but it's really hard. Maybe a small reputation could be easy to do as if you've shared on Twitter or if the reputation is money-based, then it's much easier than well. Because you can't fake it otherwise you're just going to pay a ton so no one can fake it and you can give out a reputation for people who do objective work.
So, that's giving money which is one thing or it could be something very lightweight but for some more important contribution it has to be on a case-by-case basis which doesn't scale and this is why it's such a hard problem.
10. Reputation in Social Tokens vs NXM
Nexus Mutual is amazing because if you sell insurance for a protocol, you are now incentivized to protect, to audit that project, and to help out in many ways, that's very wonderful. They also introduced shield mining very recently, if you are the project owner, you can even give out NXM tokens or the tokens for incentivizing, but also that's one way to hack reputation like what incentives or tokens do you have. If they are beneficial, we can say “okay this is like a good reputation”.
That's what Aave is trying to do by giving out tokens which are a kind of reputation, but you can also buy on secondary markets. A good thing about reputation would be something that's non-transferable. So, that you cannot bribe people and this is where DAO’s are very interesting like the Moloch DAO framework. Because in the DAO framework, it is non-transferable and you have to be vetted by the community to receive X tokens. But for Nexus Mutual sometimes it doesn't matter as you still want anyone to buy it and it's okay because it fuels speculation. In the case of Nexus Mutual if you sell insurance that means your reputation is great, now you are incentivized or you're taking a risk for the project that you care about.
11. Basic Legal Framework to distribute value
Right now there are no legal templates for the personal token, and for it to scale. We need KYC as well but technically, we should not sell those in the U.S for legal reasons. We can try to do it in Europe, everything must be easier, and for it to scale.
We need a legal template that says that code is low and like someone did this like MetaCartel ventures and the legal document says "the amount of token that you own is in the code and refer to the code". Someone needs to create a legal template for people to invest in personal tokens and community tokens. But the problem is if you do a legal template that means it's only for accredited investors and then it kind of stifles innovation a little bit because there are ways fewer people.
12. Do you think there should be a legal framework for utility tokens?
I don't think so. By definition, utility token gets you access to something where there is no promise of making money purely like there's always an item to be redeemed so for Horizon foundation. These are not security tokens like the price does react to the market with a bonding curve but at the end of the day, you can still redeem it for something concrete. I'm pretty sure they did legal work beforehand to make sure this is legal and this is fine.
Because of this, I feel like you don't need a legal framework to release your utility token because it's for some utilities like accessing a telegram or something. If the prices are speculative then that's fine, because it's like the prices of shoes or whatever vary over time as well and now it's just algorithmically enforced. Sure now there's some speculation but you can also buy some sneakers and sell them later for bigger amounts.
So, I don't think there should be a legal framework for utility tokens, so that would stifle innovation, but for security tokens may be because you want to protect investors from bad deals, if you promise utility and people buy it literally for the utility, or they speculate, but they still know that there's utility at the end of it then it should be fine
13. Advice to Social Token Designers
I would recommend getting in touch with seed club which is an incubator to discover this and I would also say go on forefront.news which is a website that creates many articles and interviews about social tokens.
In November there's going to be a ton of hackathons and it's probably the next big thing. You want to experiment with it and you can be a leader of this new paradigm because it's very exciting, and we've seen community work well-even without monetary incentives like Wikipedia is an awesome community of people putting knowledge for free and maybe the community could direct public goods and public goods are some of the most important things on earth like clean air or open-source or things like this.
The social token is still evolving right now and will likely do well-later on. One problem that arises is how to make it valuable. With a Bonding Curve approach, perhaps the best way right now is to distribute social tokens. There are also mechanisms to encourage and combat bad behaviour.
We need more time to determine growth and usage for the social token. However, we can also see the same huge demand outside of crypto space.
Get smart: The idea of pricing and incentive being used in DeFi is being applied to social tokens.
Get smarter: Need to observe and evaluate more deeply in terms of pricing as well as social tokens that bring real value.