Introducing The Token Canvas (Beta)
Summary
- The total number of tokens in circulation and their scarcity are critical for determining the value of a token.
- There are two main limits to consider: the maximum number of tokens that will ever be released and how fast tokens are issued.
- Consider what your tokens are exchangeable for, what they give access to, and what benefits the token holders might receive just for holding them.
- Your tokens may be considered securities, access tokens, royalties, or may fall under other regulations.
The Canvas
I first described the Token Canvas during a lightning talk at the “sane crypto” meetup. A number of folks asked me for it. So, here’s the beta version to help you sketch your token economy!
Please feel free to copy and edit the Token Canvas Google Slide. Please leave comments to help me improve it.
There are several areas to think through when designing a token economy for a project or an ecosystem.
Circulation
It’s important to decide how tokens will come into existence. When will they be issued, to who, and when? It’s equally important to decide if tokens will stay in circulation forever or if there is a process that removes or “burns” tokens.
Limits
The total number of tokens in circulation and their scarcity are critical for determining the value of a token. There are two main limits to consider (1) the maximum number of tokens that will ever be released and (2) how fast tokens are issued.
Here are some examples. Bitcoin issues a maximum of 21 million Bitcoins over about 30 years (6,930,000 blocks). They are issued to one miner per block at a rate of 50 Bitcoins per block of transactions confirmed. The block reward halves every 210,000 transaction blocks confirmed.
Many token launches have an initial issuance of tokens to the core team. You can check out the singularDTVToken code to see what this looks like for an Ethereum Solidity token smart contract. You may also want to reserve tokens for development grants.
Although it’s not on the canvas it is also worth considering how easy it will be to buy or sell tokens — the liquidity.
Regulatory Framework
Cryptocurrency regulation is a big topic. Your tokens may be considered securities, access tokens, royalties, or may fall under other regulations. They may even fall under regulation from multiple agencies like the SEC, FINRA, and FinCEN.
US regulatory agencies haven’t given clear guidance yet but there are some sensible guidelines that you can follow. The Securities Law Framework for Blockchain Tokens is a great place to get acquainted with the landscape. Check out page 10 and the handy framework for analysis at the end.
You will want to think through this section with a blockchain knowledgable lawyer who understands the law for the industry you are addressing. I’m not just saying this cause I have to write a disclaimer — you should take this seriously. You will want to pay especially close attention if you are selling tokens to investors. Not to freak you out, but selling unregistered securities to unaccredited US investors is really not the kind of thing you want to do (aka a felony).
Value
Determining why your token will have value is a fundamental issue. Tokens have value because of what you can exchange them for. They appreciate in value by creating more demand for them than the number of tokens available for purchase (scarcity). This can be influenced by limiting the total supply of tokens.
The utility of owning a token is often under appreciated. For instance many people think that Bitcoin’s value is entirely “speculative” or some self-fulfilling cypherpunk prophecy seeded into our sub-conscious by Neil Stephenson. They miss that in addition to speculation and sci-fi sparkles Bitcoin has utility for confirming transactions across international borders without censorship, with some level of anonymity, at comparatively low transaction cost. This is real value to real users that competes effectively with traditional bank wire transfers and cash for specific use cases.
There are other kinds of token value. Storj tokens are exchangeable for decentralized storage. Golem tokens are exchangeable for decentralized compute cycles.
Consider what your tokens are exchangeable for, what they give access to, and what benefits the token holders might receive just for holding them (e.g. royalties).
You will want to think through this part with the business team to determine what users want; and a blockchain knowledgable developer to determine what’s viable.
Purchase From The Issuer
This is the area to flesh out if tokens can be purchased directly from the issuer as an investment or as access tokens. “Investors” could receive tokens from a Swiss Stiftung foundation in return for their donation to the foundation like Ethereum and Tezos. Accredited investors could be purchasing a stock represented by a blockchain token. Alternately, users could directly purchase access tokens from an issuer like Storj.
Think carefully about this so as to avoid unnecessarily centralizing your model. This is also related to the way that your token will be regulated.
There is no section for taxation, but you should definitely consider how the sale of your tokens will be taxed. Your jurisdiction matters. Some crypto projects have chosen to form entities in Delaware, Nevada, Gibraltar, Switzerland, Estonia, and Singapore for various reasons — some of which are tax related.
You should think through this section with your lawyer and your accountant.
User Narrative
This is a verbal walkthrough of how tokens circulate through your token economy. It restates some attributes in the interest of concretely imagining how real people or machines will interact with your system.
For a deep dive you can expand this section with a crypto-clever UX designer.
Key Algorithms & Smart Contracts
Blockchain systems typically rely on core algorithms for managing token scarcity and dispute resolution. For most permissionless blockchains the key algorithms include Proof Of Work, “simple” payment verification with Merkle Trees, and longest blockchain length voting.
Token issuers on the Ethereum blockchain don’t need to worry about implementing low level blockchain algorithms. Instead, Ethereum token projects should identify key smart contracts like: standard token (ERC20, ERC223), token exchange, fund, payment splitter, etc.
You should think through this section with a blockchain knowledgable developer.
What’s Next
Although the Token Canvas isn’t exhaustive it’s a good way to think through some of the interdependent aspects of creating a valuable token. There’s a surprising number of angles that must be considered. Around Y2K Ian Griggs helpfully pointed out that there were 7 expertise layers to address. In a way he is the pre-author of the Token Canvas before we made canvases.
Many thanks for dialog about related ideas with the SF Legal Hackers community, Tony Lai, Ron Patiro, Derek Razo, Chelsea Robinson, Jerri Chou and numerous blockchain engaged folks.
I’m looking forward to refining the canvas with additional areas like incentive modeling, governance, and taxation. I’d love to see what you do with the canvas and to hear about the token economies that you create.
Noah Thorp is a Founder at CoMakery.com where he builds token economies for innovation networks and projects. He’s fascinated by blockchains, upgrading governance, and the emergence of decentralized collaborative culture.
