Intro:
The Backfeed Protocol with its Proof-of-Value (PoV) algorithm, reputation system and token mechanism, provides a comprehensive social operating system for decentralized organisations and collaborations (DCs). It is inherently designed to cooperatively create value and distribute it in the form of tokens among the different participants, according to their contribution to the overall operation.
Since the tokens issued through this process could and should be the primary means of retrieving goods and services created by the DC, they overtime develop a mixed dynamics which combine that of shareholders equity, mutual credit schemes and stable digital currencies.
These dynamics, which will be elaborated in depth hereafter, have the potential to provide the platform for a whole ecosystem of digital currencies, crypto equities and other value carrying systems (like sovereign fiat currencies) that might provide the framework for a monetary system of the decentralized age.
The token system suggested here has a lifecycle that can be broadly divided into 3 main phases which corresponded with the 3 main stages of the evolution of a DC, as envisioned by Backfeed and the DC community in general. In each of these 3 phases the tokens issued and circulating constitute a different market-role and hence behave differently:
The 3 phases suggested are as following:
Tokens as equity – Tokens are issued and transferred to contributors as a reward for their investment.
Tokens as commodity – Tokens are used to access services provided by the DC and hence gain market value.
Tokens as currency – The value of tokens is stabilized by several monetary apparatuses, elaborated hereafter, which render them suitable as a general store of value.
In the first phase, the here proposed model makes it possible for individual contributors who invest work in a DC to accumulate tokens in direct proportion to the value they’ve contributed to it. Initially, these tokens represent an equity share in the DC, whose value is inherently linked to its likelihood of success.
In the second phase, DC tokens acquire an actual market value, which ultimately depends on the perceived value of the services the DC provides. In this context, the value of the token is expected to steadily increase, as more people are lured into contributing to the DC, thereby further improving the quality of the services it provides.
Finally, in the last phase, the token value can be crystallized into a more objective value, following a decision by the DC to establish a price cap (or upper margin) at which it will start selling tokens for a fixed price, hence accumulating a DC fund. As time passes, DC tokens eventually become redeemable against a specific amount of fiat currency or digital tokens from this accumulated fund, therefore creating a shrinking price range in which the value of the token is allowed to fluctuate. The currency stage also allows for a dividend scheme to be established, which will be further elaborated later on in this post. This last phase is actually the most innovative and interesting aspect of the model, insofar as it enables digital tokens to be used as an actual store of value, just like any other currency, while creating a healthy balance between the needs of early investors, users and late contributors.
In a broader perspective, as a multiplicity of value systems emerge out of different DCs, we can envision a whole ecosystem of mutually interacting DCs, each with their own set of tokens, backing each other up monetarily. This could lead, over time, to the formation of a multilateral market for DC tokens, which might eventually evolve into a self-contained universe of economic transactions —ultimately making it possible for people to bypass fiat currency altogether.
DIGITAL TOKENS AS EQUITY
In line with the Backfeed protocol, upon the initial seeding of a DC by an individual or a group of individuals, a new type of digital tokens automatically comes into existence —which will be used to reward contributors for the value they provide to the DC.
These tokens are distributed via Backfeed’s Proof- of-Value (PoV) algorithm which could be compared to the Bitcoin Proof-of-Work (PoW) protocol, which, through a process called mining, rewards individuals according to the amount of computational resources that they have invested in the network.
The Backfeed protocol distinguishes itself from this mechanism insofar as it generalises the process of mining to anything that contributes value to a particular network or community. It relies on human judgement in order to reward individuals for actions that extend beyond what is algorithmically verifiable by a computer. If you want to learn more about the workings of the PoV algorithm and the Backfeed protocol in general, please visit our Website or read this blog post exploring the protocol in depth.
At this stage the issued tokens do not carry any value in the real world and often do not even have any tangible use in the blockchain space. As such, tokens during this phase are best described as equity —i.e. they represent a share in the DC endeavor. Their value is at this point purely speculative and ultimately depends on the future success of the DC: if the project succeeds then the tokens may obtain actual value, if not they may end up worthless.
As illustrated in Fig. 1, at this early phase, the value of DC tokens is relatively low. Starting at zero, the value gradually rises as the project materialises. The greater likelihood of success attracts new contributions who further contribute to the success of the project, thus leading to an initial growth in the perceived value of the DC tokens.
This mechanism echoes, to some extent, the well known dynamics of contemporary startups, in which founders and co-founding employees tend to invest time, effort and capital in a venture without being immediately rewarded on a monetary basis, while counting on future returns on their investment. Although some very important differences should be emphasized:
The current state in startup funding is that there is no real market for investments i.e. there are actually too few adequate and sufficiently large investors; a situation which is being partly amended by equity crowdfunding.
The approach hereby described takes the idea of equity crowdfunding a step further by enabling also the massive and yet dynamic participation of any individual or group. This, in addition to the application of the PoV mechanism, further results in the distribution of power from founders to employees and from substantial investors to ordinary contributors.
Finally, it should be noted that whereas in regular startup companies one has to give up control of the company in order to get funding from investors, in a DC the control remains in the hands of the reputed contributors to the DC, as determined by the dynamics of the Backfeed protocol, which, again, can be explored here and here.
DIGITAL TOKENS AS COMMODITY
The commodity phase begins when the DC reaches a certain degree of maturity and starts offering a service which can be accessed using the DC tokens. While there are potentially many ways for people to pay for these services, there is an important requirement for the DC to benefit from Backfeeds economic model: access to these services must be subject to the payment of DC tokens.
In this second phase, from mere equity in a project, DC tokens acquire an actual use value —i.e. they are a commodity necessary for people to benefit from the services provided by the DC. Hence, the tokens’ value is no longer dependent on the expected success of the DC, but rather on the perceived value of the services it provides. This phase, to some extent, justifies the effort that early contributors have put into the DC at its earlier stages, since they can now enjoy the services of the DC by simply spending the tokens that they have accumulated or sell them to other interested individuals. Hence, a new market for DC tokens eventually emerges, with exchanges occurring on a peer to peer basis, granting tokens actual monetary value.
On that regard, it is worth noting that, overall, the market price of these tokens is highly volatile in this phase and likely to increase over time —since, as more people contribute to the DC, the quality of its services will also improve. At the same time, given their greater quality, more people will want to access these services, thereby creating an incentive for them to either contribute directly to the DC and receive tokens for their contribution (and, by doing so, further improving its services) or purchase tokens from others contributors (thus further encouraging them to contribute, given these new opportunities of economic rewards). A virtuous circle arises, with a growing flow of contributions leading to a growing demand for DC services and tokens, which in turn motivates more and more people to contribute to the DC.
The exponential growth in the commodity phase comes to an end as the services provided by the DC reach their full maturity and less contributions are needed —except for those necessary for maintaining these services up and running. While the demand for these services grows over time, the need for new contributions is eventually saturated. As a result, the contribution rate gradually decreases, along with the number of new tokens issued by the DC.
This can be problematic to the extent that the price of DC tokens is ultimately determined by the market demand for the DC services and the amount of tokens in circulation. Following the rules of supply and demand, in the saturation phase, the token price is likely to skyrocket, thus making it possible for early contributors to recoup their investment. However, this also makes it really costly for those who did not contribute in the early stage to actually access the service. This is the point where it becomes desirable for a DC to intervene in order to regulate the market price of its tokens, so as to avoid the risk of excessive deflation.
DIGITAL TOKENS AS CURRENCY
As explained above, when the services provided by a DC are properly deployed and reach some kind of steady-state in which there exists a stable user-base, the supply of new tokens to the system becomes very limited, rendering the token’s price highly volatile in a deflationary sense.
To stabilize the token’s market price, the DC might decide to intervene by becoming an actual issuer of its own tokens, not only in order to reward contributors but also on a purely monetary basis. We present here a model (based on the so-called partial peg mechanism) which can provide such regulation while driving DC tokens to assume a new function that is closer to that of an actual digital currency:
Based on the current market price of its tokens, the DC establishes an upper margin (UM) according to which tokens are offered to the public. Whenever the market price is higher than the specified UM, people will prefer to purchase tokens directly from the DC. The DC will issue new DC tokens, thereby increasing the amount of tokens in circulation and therefore progressively lowering the market price, until it falls back below the UM.
The funds received by the DC in exchange of its tokens are accumulated in a dedicated fund, which can be used to back existing tokens with regular fiat currencies (or other digital DC tokens), guaranteeing a minimum conversion rate for which token holders can redeem their tokens. Hence a lower margin (LM) is established organically: Whenever the market price of tokens sinks below the LM, people will prefer to redeem them against the established fund rather than selling them – eventually fixing their price above said LM.
The fund follows a 100% reserve scheme, so that:
Whenever new tokens are purchased from the DC, the reserve fund increases by a value equal to the UM, whereas, whenever tokens are redeemed against the DC, the reserve fund decreases by a value equal to the LM (where UM > LM). It is worth noticing that redeeming tokens does not affect the value of the LM, since the ratio between funds and tokens in circulation remains constant —LM only decreases when new contributions are being rewarded with newly minted DC tokens.
Following this logic, once the upper and lower margins exist, the market price is constrained to fluctuate between these two margins: whenever the market price rises over the UM, people will purchase directly from the DC, whereas, whenever the market price drops under the LM, people will sell (or redeem) their tokens directly against the DC.
As the product reaches its full maturity, tokens’ purchase at the UM becomes the dominant source of new tokens (because less contributions are needed), while token issuance as a result of contributions drops. Over time, as more and more tokens are purchased directly from the DC, the DC accumulates a larger amount of funds within its reserve, and the value of the LM progressively approaches that of the UM – further narrowing the range in which the token value is allowed to fluctuate. At this point, DC tokens can no longer be used as a speculative investment, as they gradually adopt the properties of a stable digital currency, which can be redeemed at a fixed price. It should be further mentioned that the 100% reserve scheme maintained by the DC insures it against a “bank run”.
The Dividend Mechanism
In order to further enhance the stability of the tokens as a digital currency as well as incentivize early contributors, the partial peg system can be augmented with a dividend mechanism. In general, incorporating a dividend in to the currency can be achieved in a number of variants. For simplicity, we consider here one such mechanism.
Assume that the DC has arrived at the digital currency phase and has established upper and lower margins as elaborated above. In order to gradually minimize volatility in token price, which now only fluctuates between upper and lower margins, the DC can decide on an actual peg value which derives a dividend from the UM purchases as follows:
Above it was mentioned that new tokens are minted with each purchase at UM price. Once a peg has been specified, tokens are issued during each purchase based on the peg price rather than the UM, but sold at the UM value, extracting a dividend from the delta between the UM and the set peg.
For example, assume a DC has decided on an UM of 1.25$ while the peg is set on 1$. Under these circumstances, if someone purchases 400 tokens at UM (i.e. pays the UM price of 500$) then 500 tokens are created (at the peg value of tokens). 400 out of the 500 are delivered to the purchaser and the excess 100 resulting from the difference between the peg and UM are distributed as dividend to all token holders in proportion to their holdings.
This simple dividend mechanism serves to compensate early contributors for the increasing “would be market rate” which is artificially capped by the upper margin. Moreover, the value of the lower margin approaches the peg as time passes and more tokens are issued and purchased.
It should be noted, however, that the model presented here is more a suggestion than a general and systematic modus operandi for DC. Typically, a DC will start with the equity phase, and will eventually reach the commodity phase, once it starts providing services to the public. Only a few will actually reach a sufficient degree of maturity to enter into the last phase, where the token is turned into a (more or less stable) digital currency.
Addendum
In the past few years, we have witnessed a significant amount of innovation in the financial sector, mainly as a result of the rising popularity of Bitcoin, the first decentralized cryptocurrency.
The advent of Bitcoin has put into question traditional conceptions of value and has opened the door to a great deal of experimentation in the context of monetary creation and exchange. People began to understand that the monolithic vision of money as a ‘creature of the State’ might no longer apply, as alternative currencies can now easily be deployed by anyone, and designed to better accommodate their own conception of value.
Bitcoin’s innovation over the traditional monetary system was limited to the introduction of a decentralized currency and payment system that is not governed by any state or government. The value system encoded into the Bitcoin network is, however, very similar to that of the traditional market system.
In the model we propose, every DC can set up their own tokens to represent the specific value system of their choice. While some DC might value efficiency over creativity or innovation, others might favor fairness or equality over productivity —though most DC will feature a mixture of many different conceptions of values, combined into a specific value system.
In this sense, every set of DC tokens is an expression of at least two things:
(1) the specific conception(s) of value that characterises the DC —which will determine the amount of tokens that the DC will issue, and to whom; and –
(2) the value provided by the DC within the broader ecosystem —which will determine the exchange rate between the DC token and fiat currency or other digital tokens.
The emergence of such an integrated market system will provide, for the first time, a valid alternative to the current monetary system, which quite frankly, bitcoin alone could not deliver. The model suggested here does much more than decentralizing the minting of currency and its instillation to the market, but provides a, on future value based, funding scheme for economic ventures, while, for the first time, suggesting a decentralized mechanism of currency regulation and the application of monetary policy.
Cross-posted from Backfeed Magazine