9 QUESTIONS MARTIN DELLA CHIESA, FRANÇOIS HIAULT AND CLÉMENT TEQUI FROM ACCURACY. (3/3)
1. What does it mean for a business to have strong token economics? How do you build a sustainable token model?
An economic model that works for the greater good has strong token economics. Vitalik Butterin defines Blockchain technology as “a lego mindstorm for building economic and social institutions”. A token is a form of programmable money and enables the creation of financial incentives to align interests online. Thanks to this feature, it is possible to design a business model where furthering personal interests can be in the collective interest. In other words, the social optimum can be reached by changing some rules on how people act in a network: thanks to the token, incentives can be created to lead people to behave in such a way that their personal interest is aligned with the common good.
It is possible to create an economic environment that increases the effectiveness of the circular economy. A business that has strong token economics must therefore adopt this concept. To do so, an entrepreneur has to resolve this issue using a reverse-engineering logic, that is, starting from the result and solving how to get there.
First, the entrepreneur has to identify the pain point in a market or industry. Then, he or she must define the features of the token to lead people to behave in the desired way — in academic research, we talk about ‘mechanism design’. To have a better understanding of this, let’s consider an example: the creation of a board game. When you create a board game, you first imagine the universe and the dynamics of the game. Then you set them and establish the rules to reach the initial objective. For instance, if you want to create a game where people need to cooperate to win, you create rules where players have no other choice but to cooperate.
Let’s go back to token economics now. The rules you create materialise in the features of the token and the incentive it creates. Based on this, you can imagine new business models where searching for the common good and the social optimum is the ultimate objective. To illustrate this, let’s take the example of a traffic jam. How do traffic jams start? They derive from the fact that the personal interest of the driver is to take the shortest route. Nevertheless, when all people leave from a point A to go to a point B at around the same time, the aggregation of the personal interests of all the drivers does not lead to the collective interest. The question is this: how can I incentivise people to act in a way to avoid traffic? Thanks to a token linked to a mobile application, you can imagine a system where drivers are incentivised to take alternative routes to avoid a traffic jam. In this example, the personal interest of the driver is to take the shortest route but also to take into account the incentive created by the token and take alternative routes. In such a system, the aggregation of personal interests can lead to the collective interest, thanks to the token economy.
2. What are the biggest challenges faced by crypto-entrepreneurs?
There are two types of challenges faced by crypto-entrepreneurs.
First, challenges appear during the creation of the project: the choice of where to locate the head office is key, for example, because it could be more or less easy to open a bank account depending on the legislation of the country in question. After that, the crypto-entrepreneurs have to design a business model that respects the logic of token economics (see answer above). Once they have a good idea of their business plan and road map, they need to determine their desired type of financing: traditional with public venture capital, public ICO, private ICO or a stepped combination of them. The choice of financing is significant because it has implications for the road map.
Second, challenges appear during the development of the project. Crypto-entrepreneurs have to deal with technical issues such as the choice of the Blockchain: do they want to connect their solution to an existing Blockchain like Ethereum or Cardano or do they want to create their own? Last but not least, they have to find a market and consumers for their products. Indeed, many very ambitious projects do not have a strong enough user base to have a sustainable market. For instance, during the last month, Augur has only had 66 users per day (source: Coindesk).
In short, the main difficulty is that there is an interval between the maturity of the technology and the consumer take-up of it. Market sizing and the capacity to create a resistant community of users are key factors in a successful development.
3. What should we expect from the PACTE law?
Recall the large number of frauds that have discredited the system over the past three years. The ecosystem needs more credibility to have a global impact on economic life by creating new business models.
The PACTE law can be part of the solution to give this much needed credibility by separating the wheat from the chaff in Blockchain. It was imperative to create a legal environment specific to this new ecosystem. The main issue was the regulation of the ICO: without any regulation, consumers were not protected against fraudulent projects.
We expect that the French market will become more attractive to both international investors and entrepreneurs. Financial investors are very sensitive to the stability of the legal environment. Indeed, before investing in a sector, they look for security and stability. The PACTE law will bring both: the AMF visa brings security because it puts the spotlight on serious projects, whilst the flat tax brings stability because it facilitates the calculation of anticipated taxation. From an entrepreneur’s point of view, the PACTE law is also appealing. Communication between entrepreneurs and institutional authorities is essential for a dynamic and sustainable environment.
In conclusion, the PACTE law brings visibility and clarity to a new ecosystem, which it certainly needs.
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