Evaluating Blockchain Projects With Token Economy Canvas
A tool to evaluate blockchain projects based on the proposed tokens and their underlying mechanics.
The evaluation of Initial Coin Offerings (ICOs) has been in the spotlight this year with cryptocurrencies and blockchain projects being more popular than ever. The question that begs answering is: “Will this ICO and the project prove to be a viable investment?”. There are blog posts like the “7 Ts” which outline thought frameworks for ICO investment decisions. There are companies and websites who exclusively evaluate ICOs for you. There are subreddits purely for ICOs. You, as the investor have to be the judge which advice to trust.
While some projects rely on an ICO to distribute their tokens and raise funds, an ICO is not a requirement for a blockchain project to be successful. Take Bitcoin as a prime example where tokens (Bitcoin) are created through mining. There was no initial offering of coins before the project started.
Regardless if ICO or not, the evaluation of a project is a combined evaluation of the team, technology, product maturity, market opportunity, and the functionality of the proposed token. One key aspect of informing the public about a blockchain product or a new coin offering is to publish a white paper. Potential investors and users read the white paper and, combined with other information they can find online, decide if they will invest in the ICO or will invest time and resources into a project. White papers vary in length and style from very short, to pretty and stylish to almost 50 pages long. They describe, in various density and detail, the proposed product, the technological details, the project background, and the proposed new token that will be created.
The actual coin or token can take many forms. There are tokens purely created as tradable assets. There are tokens that have utilitarian value within the economy of the project. Some tokens allow for distributed governance and voting within the economy, some act as payment or token for future benefits (earn-outs, buy-backs) based on the project’s performance.
In all cases, the tokens have some functionality and there are incentives for the owners of tokens to either hold or exchange them. Each project creates their own economy based on their token — that’s what we call a token economy. The token economy is at the heart of a new coin. It defines what this new project promises to do for the participants of the economy. Participants can be involved in many ways. They can be holder or trader of tokens, miners (in the case of Bitcoin) or people offering their services (like in the above-mentioned Gnosis or numer.ai examples).
ICO documents and white papers vary widely in how well they describe their token economies. There is no well-structured way to evaluate the token economies themselves in a consistent way, across ICOs and white papers. That is where Token Economy Canvas comes in. We started developing the canvas this summer when working through white papers and blockchain projects to be able to make sense of them, evaluate their approaches, similarities, and differences.
Meet Token Economy Canvas
Token Economy Canvas offers a structure to distill the parts of a proposed new coin or token down to its essentials. With the structure of the canvas, you can look at a token economy from all the important angles within a short amount of time.
Very much borrowing from the structure of Lean Canvas, Token Economy Canvas consists of nine building blocks that are filled out in a pre-defined order. Answering the questions for each building block helps gain insight into each aspect of a proposed token economy. Combined, the answers allow a holistic view of the token economy. From there you can make your own decision on the viability of a token or how it relates to a possible evaluation of an ICO.
The goal of the tool is to allow anyone to easily evaluate the tokens that are sprouting up around the web. It also helps blockchain startups and developers of new projects to evaluate and develop their own economy in a structured way.
The Components Of Token Economy Canvas
Token Economy Canvas is broken down into nine separate blocks. Each block asks a question about an important part of a token economy. Limited space to write out answers forces the distilling of answers to their simplest form.
To illustrate the use of each building blocks I walk through a simplified example. I apply the canvas’ building blocks on a fictional coin called “Hood Coin” (HDC), developed by a group of developers as an open source project. Hood Coin allows neighborhoods to share their resources. It tracks ownership, usage, current location and allows pooling of funds to make large, communal purchases.
Here are the nine building blocks of the evaluation of a token economy.
Problem
This is where you list the top problems that this new token economy proposes to solve. Be specific on which pain points are addressed. If the token doesn’t solve a real problem then it is unlikely that people will buy into the economy.
Hood Coin:
Many individual households own the same things that they use infrequently (e.g. shovel, saw, tools, food processor, baking forms,…). Items take up space, are underutilized or depreciate in value. It is impossible to know which neighbor has which item to lend to me.
Existing Alternatives
How are these problems solved today? Are there any current solutions to the listed problems? This helps to get a picture of which existing solutions the token will be compared to and who the incumbents are.
Hood Coin:
- Ask neighbors if they have item X so you can borrow it.
- Put up a list on the neighborhood forum with offers of what is available to lend.
- Co-operate with other neighbors to purchase large/costly items together.
The Economy
If you tell someone about the token you need a short and clear description of how it works. This is where you write this description. Keep it simple and specific.
Hood Coin:
Hood Coin allows neighborhoods to share their resources. It tracks ownership, usage, current location and allows pooling of funds to make large, communal purchases.
Why Blockchain?
One of the key questions: Why is using blockchain and creating a token the real solution? Why create a new token instead of value exchange in an existing crypto currency? Which aspects of a blockchain really help with this token? Decentralization, shared ledger, immutability, smart contracts,…? What is really needed? Be honest, could this project be successful without blockchain?
Hood Coin:
- Decentralize tracking of resources and their usage
- Exchange of HDC for usage of other people’s items
- Public, authentic, immutable reputation system for community-based on individual contributions
- Decentralized building of ownership pools for large items bought collectively
Participants
Who are the participants in the economy? Who holds tokens, who performs actions within the economy that trade/transfer tokens? Are there any service providers and consumers/users? List them out here to be clear who you are building this economy for.
Hood Coin:
- Neighbor — Each neighbor can hold/transfer tokens based on offer/usage of items.
Incentives for Participation
Each participant will have their own motivation for joining and continuously participating in this token economy. List the incentives for the participants.
Hood Coin:
- Neighbors join to have access to shared resources, offer their items for usage, get paid in HDC
- Neighbors are able to lend items to others who they don’t know personally — escrow and previous transaction info create trust.
Governance
Who makes decisions within the economy? Is there one company who issues the coins and controls all associated contracts? Is there a consortium who makes joint decisions? Maybe there is a voting mechanism that allows token holders to make decisions jointly. List the main pieces of the governance structure.
Hood Coin:
- HDC smart contracts are developed and deployed by a group of individual developers as an open source project.
- Hood Coin allows holders of HDC to vote on larger proposed changes to the project through a majority vote system.
Outside Economy
How does the token economy interact with the outside world? What is needed for it to function? Outside data feeds, actions of outside actors, integration with other systems, trade of token on exchanges?
Hood Coin:
- HDC can be exchanged for other tokens/crypto (it is an ERC-20 token)
- Future could see a situation where HDC holders get discounts for purchases at local shops/businesses when buying items for the HDC economy
Usage Of Tokens
How exactly are tokens used within the economy? A simple exchange of value? Are they traded, staked, burned, minted, earned, paid out, …? What are the tokens used for and by whom?
Hood Coin:
- HDC is escrowed when neighbors loan each other items. Then paid out based on usage of items and their return to owner.
- HDC marks current location of an item
- HDC owners can create ownership pools to buy large items collectively
- Future HDC earnings of collectively owned items get distributed to ownership pool
Scale & Growth
List the conditions that need to be met for the economy to grow. What are the required conditions? What are the required actions of participants or outside actors? What kick-starts a network effect?
Hood Coin:
- A tight-knit neighborhood needs to be enrolled with sufficient neighbors subscribing to the HDC idea to share resources.
- Single communities can operate independently. No need to have country-wide/global user base from the get-go.
Health Indicators
What are the key metrics that indicate the health of this token economy? How do you and economy participants know that this is a flourishing environment?
Hood Coin:
- # items shared per week/month
- HDC transferred between neighbors
Token Distribution And Value
How do tokens get distributed initially? How does the value of the tokens increase over time? Why would investors buy this token? Why would users buy this token?
Hood Coin:
- Max 10 Billion HDC in circulation
- Every user receives 100 HDC from the pool when signing up and proving their address/location/identity to the HDC developers (later more decentralized).
- Registered non-profit neighborhood organizations receive additional HDC.
- HDC is not aiming to rise in value — it is community focused. A rise in value might occur due to higher usage though.
Final Thoughts
Token Economy Canvas uses a straightforward approach to combine the different aspects that influence a proposed new token economy. When evaluating the viability of a new coin or an ICO there is much more to pay attention to than only the token economy but, in my opinion, the economy itself needs to be sound and well thought out for the whole project to have long-term viability.
We are seeing the first steps to consistently evaluate ICOs and make sense of all the new projects coming out. The details of the token economy itself are an important factor. I hope the canvas will create more clarity for entrepreneurs, investors and enthusiasts alike when they look at a new token and evaluate what makes the economy of this token tick.
If you have feedback on how to evaluate tokens and their economies or if you have ideas on how to improve Token Economy Canvas, just leave a comment or reach out to me on Twitter at @pstehlik.
Thanks to Demian Brener and Markus Ament for the feedback to this post.
