How to solve the problem of "social token paradox"?

Take the first step to establish a social token network.

Original title: 10 key learning points in the process of social token design, answering the question of "social token paradox" (10 Key learnings in designing social tokens answering the “Social token paradox”

By Mengyao Han

Edit: Skypiea

The development of human history is full of various failed economic attempts. When capitalism really exists, people need more opportunities. Our modern life has already become a digital display of goods, people and information transmission. The social value we have accumulated so far depends to a large extent on our relationships and contacts. These humanistic values are hard to map in our digital economy, and social tokens are just to fill this gap.

Building a social network is difficult. As the builder of Web3 social networking, it is a fantasy to design a universal economic model. The only thing we can do is to ask the right questions, keep our vision and ideas open, and build and iterate in this process.

What is a "social token"?

Some people think that "creator token" or "social token" refers to the same thing. It can refer to tokens of specific individuals/influencers, but it can go far beyond that: social token networks may represent our digital economy.

Our team is designing a rather innovative but complex creator economy. Along the way, we dived into this deep water and collected profound insights from outstanding peers. In this blog, I will sum up all the learning achievements by ringing the bell of advanced principles without any mathematical knowledge.

Social Token Paradox

Gaby Goldberg defines the basic dilemma faced by social tokens:

"When the value of contemporary coins increases, the value of their communities will also increase. And when the price of contemporary coins is higher, the community will naturally become more eager to join. The problem here - I call it the social token paradox - is to encourage the token community to maintain exclusivity through this psychological model. In general, if you want your community to be valuable, you need the community's token price to increase. This is reasonable, of course When the price of tokens increases, you have two choices: you can increase the price of tokens, or you can reduce the number of tokens available to potential members. Either way, it will limit access to the community and promote exclusivity, and compile and implement a certain degree of scarcity, which almost runs counter to Web3's vision of truly opening the Internet. "

Social tokens are designed to be socially scalable to have a significant impact. However, the success of the community cannot be represented only by the price of tokens, because it will soon start to conflict with the social scalability of the network and filter people out.

This reminds us to rethink the value of tokens from the beginning. Let's explore together.

10 key learning points of social token design

Here, I summarize all the previous points:

  1. Combine effective altruism with self-interest in the economic structure

  2. There should be a healthy balance between work in and buy in

  3. Social tokens can bring additional network productivity

  4. Non transferable reputation signal is stronger

  5. Maintain a healthy balance between inflation and user growth

  6. Promoting long-term participation and new needs

  7. Aim at positive accruals to escape the Ponzi scheme

  8. Establish diversified communities as early as possible

  9. Social networking should be fun first

  10. Key logic should be linked

I will explore each learning point one by one. Let's get started!

1. Combine effective altruism with self-interest in the economic structure

Effective altruism is a philosophical and social movement, which advocates "using evidence and reasons to figure out how to benefit others as much as possible and take action on this basis".

Back to the digital economy, only when the network creates value can there be sustainable personal interests. Therefore, the economy needs to motivate and adjust the participants, so that they can contribute to the whole network from their behaviors, and at the same time be loyal to their own motives.

In other words, before the basic setting of collective growth, tokens cannot be just an isolated speculative tool for a person or a group. Think of each community as a company in which each member is a shareholder. If the company has no income, it is meaningless to hold equity. The income will be used to pay the salary for working in the company, based on how much they contribute, rather than how much equity they own. See the problem? In our current social network, "salary and equity" are regarded as the same asset. Then, the network inevitably works on what we have, rather than what motivates us to do.

So the first problem we have to solve is that fewer and fewer people will hitchhike on the success of others. And the network will focus more on what we do than what we have.

2. There should be a healthy balance between work in and buy in

From the first point on, many token communities focus on what members have rather than what they do in the community. How to fine tune the healthy relationship between them raises two basic questions:

What is the role of capital in the token ecosystem? And how to measure the work and contribution of individuals fairly?

Let's take running a company as an example again:

Employees get both equity and wages. Equity of future earnings and wages as labor compensation. Employees receive cash based on their monthly contributions, while holding equity as long-term income. Investors are purely for long-term gains. They don't need to be paid. Their investments are even used to pay people's salaries.

The reason why the plan is so perfect is that both cash and equity serve their own purposes. They are like two "tokens" with different effects. Therefore, for social tokens, if only one asset can pay for everyone's labor and long-term benefits, there will be a social token paradox. Therefore, the conclusion is simple: labor and investment cannot be treated in the same way in this network.

Having multiple assets or mechanisms in social networks to serve this purpose difference may enable sustainable authorization and fine-tuning between work and purchase power. After knowing the "why", I will discuss more about the "how" in the next study.

3. Social tokens can bring additional network productivity

Let's step back and think about why people buy social tokens. Mario Gabriele solved this problem in his article Social Tokens: Your Economy:

"Is buying tokens a kind of sponsorship or an investment? Although not mutually exclusive, the use of these two frameworks - sponsorship and investment - illustrates the value behind tokens."

Sponsorship: "Access and exclusivity." Tokens need to have emotional value.

Investment: After all, it is "entry" - its function is similar to dividend. Collectors pay a symbolic fee to participate and gain potential greater value.

In terms of sponsorship, ownership becomes part of our identity, so exclusivity becomes a predictable dynamic. Unfortunately, this reveals the social token paradox and prevents the community from gaining large-scale adoption.

Investment mentality also has its drawbacks. Arriving there early is expected to gain the first mover advantage, that is, sitting there doing nothing. For the social economy, this mentality will reduce the attractiveness of providing practical work, and ultimately damage the long-term development of the community.

Therefore, in addition to sponsorship and investment, social tokens should also bring productivity to the network and align our motivation to provide work for the long-term growth of the network.

This will help social networks stimulate the active participation of their members, allow individuals to contribute with their own skills, and ultimately achieve effective altruism, making the growth of the network a virtuous circle.

4. The non transferable reputation signal is stronger

Once the social token economy is no longer dependent on exclusivity (status), capital will no longer be the main symbol of the network. On the contrary, how community members contribute value to the network has become an important indicator of network coordination. These behaviors represent reputation in social networks, which may be more powerful than pure economic incentives.

Aware that the long-term prosperity of social networks largely depends on their cultural precipitation, the network reputation needs to play this role in representing and continuing the early culture of the community to promote the development of network culture.

Value of reputation

We all know that reputation is precious, but how much is it worth? This is another interesting observation, which can help us understand the common contradictions in reputation social networks:

"This raises a paradox: if tokens can be easily transferred, people without reputation can simply buy them, which reduces the ability of tokens as a reputation signal." From A New Framework for Reputation Based Systems written by Jad Esber and Scott Kominers.

This means that if reputation can be bought, its signal will be reduced. But what is the value of reputation if it cannot be traded? Users still need to have certain benefits and quantify them in some form.

Here, we think aloud about an alternative: reputation (non transferable) has its own measurement standard, which is designed for the positive impact of users in the network. In addition, another token (transferable) can be linked to the reputation system. Reputation points can be used to guide the liquidity value in the form of this token. Their dividends will be based on their application work, which will further cultivate their network reputation while maintaining their reputation and the truth source on the chain.

Vitalik Buterin wrote about the soul bound token (SBT) in his blog. He explored how the nontransferable NFT represents identity and a person's commitment, credentials, and affiliation in a decentralized society (DeSoc). You can think of SBT as an extended CV in the blockchain wallet. The key innovation here is to make our digital identity non transferable, so that we can cultivate it for a long time and further increase our own network value.

5. Maintain a healthy balance between inflation and user growth

Social network inflation may be healthy. There are many incentives for new users to enter the network at the beginning, but if inflation returns less to internal contributors for continuous work, it will also have a negative impact on the interests of existing users.

Fixed inflation is also not ideal. It's like running a startup as a mature company. It is a common entrepreneurial trap to lose flexibility and ignore market feedback in this highly volatile environment.

Therefore, social networks must pay close attention to their monetary policies. The key is to find an appropriate balance between user growth and token inflation to stimulate the required user behavior.

Let's have a deeper understanding of the differences between new users and existing users in the network:

  • Demand of new users: In the expansion stage, there will be excessive demand for network tokens. It is healthy to use higher inflation to meet high demand, but the agreement needs to check the dynamics between internal participation and reasonable token purchasing power (price), so as to avoid increasing and exploding debt.

  • Network participation of existing users: it is driven by internal labor force. When the contemporary currency price rises, it will further encourage community members to provide work. At the same time, newly minted tokens (value generation from the community) reduce the upward pressure on token prices, while lower token prices may reduce the internal motivation to contribute to the network.

Therefore, having flexible distribution plans to constantly control the above dynamics can make social networks more vulnerable. This decision can also be combined with community governance, as many large agreements have already done.

6. Promoting long-term participation and new needs

The difficulty in managing social tokens lies in their thin liquidity and vulnerability to market trends. The project often carries out liquidity mining to reward the holders, but this cannot completely solve the problem of insufficient liquidity, because there is a lack of social needs and appropriate tools to promote them. Here are some thoughts on how to make it bigger:

Explore new needs

Social tokens may be integrated into the entire crypto economy. It can be used for payment services, leasing assets, participating in different agreements to earn income, or locking to further increase our social signals in our circle of friends and spread our beliefs. Builders can continue to explore new utilities that promote social tokens and provide the technology and infrastructure to support them.

Combine Defi tools to expand network capacity

Social tokens are quite fragmented. It is difficult for them to communicate with each other on different networks. We need better platforms to connect these microeconomics so that our communities can become part of a larger ecosystem. This can create cross project value discovery and exchange, form a more multidisciplinary social interest market, and we can use this joint liquidity to fill the liquidity gap and expand the overall space. If we conduct in-depth research here, the intersection of DeFi and social tokens may unlock new assets and mechanisms that do not yet exist. Even if some appropriate governance mechanisms based on locking and pledge are developed for social governance, if they want to be more deeply integrated with the network, they can already generate additional long-term incentives for social token holders.

NFT can help generate network revenue

NFT is a different kind of animal that represents our social identity, ownership and reputation. They can also generate additional income for creators and inject income into social networks at the early guidance stage. This can bring some additional rewards to token holders and expand the scope and interaction of the network in a beneficial way. From the perspective of users, owning NFT brings them ownership and extra fun, and trading them establishes a wider range of social contacts, all of which are the healthy motivation of the network.

7. Aim at positive accruals to avoid Ponzi schemes

Now we are in the deep water of social token economy. Everything was set up properly. We got the first batch of users and introduced tokens. At the same time, things became more exciting or scary. How can we verify that we are doing the right thing and continue to close the gap to achieve large-scale adoption?

Network value accumulation helps to verify the life cycle of social networks

The answer is simple. The network needs to add value in time. The value here is a broader concept than income itself. Can the Internet bring value to people? Is the world richer because of these communities? Do people have better service, better ownership and unified morality? Does the network have an internal free market to adapt to the essence of people's value exchange? Printing more tokens as the only way to present economic growth is definitely not a sustainable way. Here are my thoughts on how to verify the accumulation of network value:

Verification of value accruals:

Meaningful purpose

What is the ultimate success of this network? Create more content for the public? Build a stronger community based on reputation? Is information easier to obtain if you have proper ownership? Are people getting closer? These answers may set the maximum potential of social networks, and we don't want to ignore them.

Positive externality

To distinguish whether a project is a Ponzi scheme, we only need to verify whether it has or will have a "positive externality" in the foreseeable future. If a system does not create new value, then all the values in it have zero sum game risk, which is just a redistribution among stakeholders. But this external value may be much broader than pure financial income. If we consider what the external value of Bitcoin is, it is open, free, undisputed ownership and absolute trust in its consensus.

Internal value consumption

The value consumption within the network is essential to the vitality of the network. It helps the economy achieve sufficient externalities and increase network income. Therefore, the purpose of user entry is not just to be a speculator, on the contrary, the value is to change hands, pay utility fees, and recognize others. Once everything in the ecosystem can be completed in its local currency, users do not need to exchange it back.

Beware of growing debt

It may be possible to use the Ponzi model in the early stage to increase the number of users and give the project more time to create the real economy. But the important thing is to accumulate income in time, so that the network can offset the debt of early user growth, and ultimately create income and become a net positive number.

8. Establish a diversified community as early as possible

Entering the market in Web 3 is entering the community. Having a real community is the best strength against the volatility of cryptocurrencies. Understanding the advantages of a community can foster a powerful social network.

There cannot be only one type of stakeholders in the community. The diversity of interests is essential to adapt to future economic activities. Only when everyone needs something from others can the economy be proved to be sustainable. For example, creators, consumers, and managers. Each of them can have a group of interests and unique economic behavior in the network, and need something from others. The network only needs to manage their interests and adjust the incentives of stakeholders in a positive way.

Similarly, reputation can encourage active participation

Money is not the ultimate driving force of social networks, reputation is. Rather than creating investors who only want to exit, having a reputation that supports their activities allows users to stay on the network longer. The simple solution here is to multiply the user's reputation score by the final reward when the user has a positive impact on governance or community work. Therefore, even if it is not directly monetized, it will also have an impact on further encouraging good deeds.

9. Social networks should put fun first

Never forget that social networks are emotional, functional, and selfless. Its advantage lies in all the emotional values it brings to users in daily life. In social networks, network value depends on user to user rather than user to platform. This emotional value should be placed before any monetization goal as a higher mission. Because without the right "why", "how" and "what" will inevitably sway in the wind.

The key value here is people. Blockchain provides a better tool to achieve this point-to-point relationship. This is not limited to purely economic returns. Providing an interesting and meaningful social experience while providing real ownership of data and value is the reason why so many of us love Web3 social networking.

10. Key logic should be linked

Understandably, in order to obtain the expected user experience, the current social network must use a centralized backend or cache layer to let things run first. But what needs to be resolved is that this compromise may reduce the transparency and trust of the network, and may pose a threat to the business model of the project. Therefore, the core functions and economic logic of the network should be on the chain.

The risk here is to hide the Web 2 business model behind the Web 3 curtain without a truly decentralized economy. For example, if the core logic of user identity, reputation, content, user data, value generation and distribution is not on the chain, we will risk building a Web 2 platform with tokens.

Of course, it is a compromise decision for social networks to use a centralized server to run part of their logic, because the performance and cost of Layer 1 at this stage cannot fully realize its potential. But things will change. The best Web3 application has not been built yet, so let's build the growth of Web3 technology with the right genes.

Now is a good time to become the creator of Web3

Web3 technology provides unprecedented creativity and flexibility for all sovereign individuals. For the first time in history, we have a bright future with fair ownership, openness and composability. We have just taken the first step to establish a social token network.

As a builder, it's fun to be part of this new and exciting space. I'm eager to know more. For this article, I would like to thank Gaby Goldberg, Mario Gabriele, Chris Dixon, Patrick Woods, Vitalik Buterin, Jade Esber, Scott Kominers, etc., for their excellent work in exploring the social token space. We are building on your insights.