January 5, 2019 Joel Monegro
Cryptonetworks are online micro-economies organized around a specific service, and regulated by a cryptoeconomic protocol. The cryptoeconomic circle is a model I like to use to think about how value flows through different participants in these economies. It looks like this:
The Cryptoeconomic Circle
The model describes a three-sided market between miners (the supply side), users (the demand side), and investors (the capital side). Miners opt-in to the consensus protocol and coordinate their resources to provide the network’s service in a decentralized manner, users consume the service, and investors facilitate exchange while capitalizing the network.
These groups exchange value with each other using the network’s own scarce cryptocurrency, or token. I call these interactions the miner-user , investor-miner , and investor-user relationships. They describe abstract flows of value, which can take many forms beyond direct transactions between two people.
这个组合使用自身稀缺的特质让加密货币相互交换价值。我将这些互动称为矿工用户，投资者 - 矿工，和投资者 - 用户，这三种关系。它们描述了抽象的价值流动，它可以采取多种形式，而不是两个人之间的直接交易。
The circle is simple by design so that it can be extended and modified. And it is visual, rather than mathematic, so that it can be used in a brainstorming or conversational context. The goal is not to describe the nuances of every network, but rather to provide a broad framework for thinking through cryptoeconomic design and network governance models.
Miners and Users
In the miner-user relationship, miners are compensated for their work through tokens. The network’s consensus protocol standardizes the service, while the cryptoeconomic model controls when and how miners get paid – typically when the network deems their work to be ‘correct’.
在矿工 - 用户关系中，矿工通过代币得到补偿。该网络的共识协议使服务标准化，而加密经济模型控制矿工何时以及如何获得报酬 - 通常是在网络认为他们的工作“正确”时。
Different services need different kinds of work, and users can transfer value in many ways, from direct payments to token inflation/deflation models. Bitcoin, for example, uses transaction fees and inflation to generate income for its miners. MakerDAO charges Dai users a stability fee which goes to buy-back and burn MKR, rewarding holders with increased ownership for assuming the system’s risk. Meanwhile FOAM cartographers, in a TCR model, can earn tokens for curating points on the map.
不同的服务需要不同类型的工作，用户可以通过多种方式转移价值，从直接支付到代币通货膨胀/通货紧缩模式。例如，比特币使用交易费和通货膨胀为其矿工创造收入。 MakerDAO向 Dai 用户收取稳定费用，用于回购并烧毁MKR，奖励持有者增加所有权以承担系统风险。同时，FOAM制图员可以在TCR模型中可以获得地图上策划点的代币。
This architecture is desirable when the benefits of a distributed supply side (such as lower costs of production, higher reliability and greater user leverage) outweigh the performance losses of decentralized systems.
Investors and Miners
There are short-term investors (traders), and long term investors (holders). Traders create liquidity for the token so miners can cover operational costs, while holders capitalize the network for growth by supporting token prices. The former is a direct form of value transfer where miners sell earned tokens in the open market to cover their costs and reinvest profits, and the latter is an indirect transfer of value that shows up in miners’ balance sheets rather than their income statements.
Different capitalization levels affect how the supply side develops. A cryptonetwork is fully capitalized when the price of its token is at a level where mining is breakeven. When prices fall below this level, the network is under-capitalized, mining is unprofitable and supply contracts. When prices rise above, it’s well capitalized and supply expands as the profit opportunity for miners grows. Therefore, by supporting certain price levels, holders (which often includes early miners and users) fund the supply in an indirect, but essential way.
In the beginnings of a cryptonetwork, investor capital stands-in for user demand as a way to help bootstrap the supply-side. Of course, it is possible to over- capitalize a network, which becomes a problem when capital withdraws as user demand fails to meet investors’ expectations, and sudden price drops take miners out of business. The key is to match network capitalization to fundamentals, which is a difficult task in absence of fundamental value models.
Investors and Users
People who hold tokens as investments expect them to appreciate in value, which means demand for the scarce pool of tokens must increase over time. Generally, investors expect this to come from a growing user base in cases where tokens need to be spent to use the service. But demand can also be supply-driven, as with some proof-of-stake systems, or even investor-driven, at its most fickle. We can display these nuances by altering the direction of the arrows in the model, but in any case, investors help create long-term liquidity pools , available at different prices, from which new future demand can draw tokens.
Recycling the examples above, Bitcoin investors expect value to come from increasing demand for BTC as more people embrace the benefits of digital gold. MakerDAO investors expect growing demand for Dai to drive the value of MKR through consistent buy-back burns, and FOAM investors look to a future where the world deems it as important to be present on its map as it is to be on Google Maps, driving demand for its token (without getting into FOAM’s proof-of-location service).
Another side effect of investor participation is supporting users’ purchasing power. In cases where the cost of service is set by competition among miners (i.e. prices float around the token), higher token prices increases the purchasing power of token holders, which may lead to increased consumption and therefore greater value for the network. But whether any of this works in practice cannot be generalized, and must be debated in the context of each network’s cryptoeconomic model. Nevertheless, the principal observation about the investor-user relationship remains: token liquidity and price support is as important for the demand side as it is for the supply side, and investors who participate through the open market contribute to both.
投资者参与的另一个副作用是对用户的购买力的支持。如果服务成本是由矿工之间的竞争决定的（即价格在代币周围浮动），则更高的代币价格会增加代币持有者的购买力，这可能导致消费增加，从而增加网络的价值。但是，这在实践中是否能有效扩展，必须在每个网络的加密经济模型的背景下进行辩论。然而，关于投资者 - 用户关系的主要观察仍然存在：象征性流动性和价格的支持，对需求方和供应方都同样重要，而通过公开市场参与的投资者对两者都有贡献。
Using the model
Isolating the different roles helps us analyze costs, incentives, and value flows for each group. It can also help us think about relative power and identify potential points of centralization, which is important to design more balanced governance and token distribution models.
If you’ve been in crypto for a bit, none of these ideas may strike you as new. But looking at networks this way has led me to a few interesting ideas I’m cataloguing under the term crypto-capitalism, which I’ll expand upon in future posts. For example, it helped me see cryptonetworks as systems for exchanging labor for capital (vs. currency), the fundamental concepts of network capital , and what the different roles are for investors like us in the development of these new economies. The circle will serve as a baseline for these explorations.