Token Economics


The purpose of this thread is to focus on claims specifically around token mechanics + token regulation + token governance.

The types of things we’ll make claims about and discuss include:

  1. Who are the actors in the token system and what are the incentives at play?
  2. What are the different types of tokens?
  3. How do we value these tokens?
  4. Are the token mechanics working as expected? Why or why not?
  5. How are these tokens being regulated?
  6. Market adoption and prices
  7. … and basically anything related to token mechanics, token regulation, and token governance.

@zareef1992 will post example claims below to kick off the conversation.


Claim 1: Dai, an ether backed stablecoin which is pegged against USD, has stayed largely stable against USD.

Source: Vitalik Buterin - - 42:00 - 43:00

Background: Dai is a stablecoin pegged against 1 USD, meaning that the value proposition for this stablecoin rests on price volatility (against USD) being minimised. Given Dai can be bought and sold in exchanges, the price of Dai is also driven by buying and selling behaviour of market participants. To ensure that Dai remains pegged against USD, it needs to have some inbuilt mechanism to minimise exchange rate volatility that safeguards the price from external stresses that stimulate buying or selling behaviour. Stablecoins maintain pegs in a variety of ways – in the case of Dai, which is a reserve backed stablecoin, a critical part of the peg mechanism is ensuring that there is always a sufficient reserve of another asset (typically one for which prices can be observed) locked up as collateral, which communicates to market participants that Dai can be redeemed for another asset which also holds value. As of Jan 2019, Dai was entirely collateralised by Ether, and therefore, needed to ensure that there is always a substantial value of Ether locked up in smart contracts, even as the market price of Ether changed.

Analysis: To assess stability of exchange rate, an important metric is the relative standard deviation of the price, which measures how much the price moves against its average. For Dai, the relative standard deviation has been a 1.33%, which is far lower than major cryptocurrencies, including Ether (63.88%), which served as its reserve in 2018.

My Stake : Back Claim - 100 CRED


Claim 2: Dai has survived as much as a 91% decrease to the price of its collateral in 2018.

Source: Vitalik Buterin - - 42:00 - 43:00


For Dai to “survive” the stresses faced by it’s collateral (ether), the price of Dai should not have changed substantially under even as price of Ether fell. To confirm this claim, it is necessary to confirm that

  • the price of Ether dropped by as much as 91% during a certain time period - Extract of historical price log for Ether reveals that price of Ether fell by as much as 94.21% between 13/01/2018 (Price = 1448.18 USD) and 15/12/2018 (Price = USD 83.79).
  • the price of Dai remained largely stable during, and also following that time period - Price of Dai has fallen by a maximum of 12.87%, with the price peaking on 04/01/2018 (Price = USD 1.0940, and falling to its lowest in 21/01/2018 (USD 0.94). Further, the correlation between the same day price changes of Ether and Dai for the whole year has been quite low (0.031), suggesting prices changes in Ether do not impact price of Dai on the same day.

My Stake: Back Claim - 100 CRED


Claim 3: The total Eth supply locked as collateral in smart contracts was .03% of total Eth supply at the beginning of 2018, and is 1.8% of total Eth supply at the beginning of 2019, which represents a 60x annualised growth in use of Ether


Background: This is implicitly making a claim on use of Ether to maintain collateral, specifically to support reserve backed Stablecoins. To observe the amount of Ether which contributes towards collateral for a Stablecoins, one would need to identify relevant smart contracts owned by Stablecoin platform administrators that lock up Ether. However, dApps underpinning stablecoins will typically request to interface with ERC20 tokens for the purpose of collateral management. As Ether itself is not an ERC20 token, Ether is first locked into a smart contracts which subsequently issue Wrapped ETHs (WETH) – ERC20 tokens that have 1-1 ratio against the amount of ETH locked up – which then interface with stablecoin dApps. The analysis will therefore focus on the WETH used to support stablecoin reserves. Transparency on WETH held as reserves, however, is limited by the disclosures shared by stablecoin platform administrators. In the case of MakerDAO, a public dashboard is available which displays the amount of WETH stored, and provides linked relevant Ethereum addresses that can be audited. A review of 50 stablecoin projects released in October 2018 by Blockchain ( indicated MakerDAO was the only live reserve backed StableCoin that used solely used Ether as a reserve. I have therefore limited my analysis to MakerDAO.

Analysis: To confirm this claim, it is important to check that:

Total Ether supply locked up in collateral for stablecoins was approximately 0.03% in Jan 2018

Total Ether supply locked up in collateral was 1.8% in Jan 2019

Supply of Ether as of 05/01/2019 = 104.22 Million

Supply of Ether as of 05/01/2018 = 96.8 Million

MakerDAO WETH balance as of 05/01.2019 = 1.847 Million

MakerDAO WETH balance as of 05/01.2018 = 0.032 Million

Percentage of Ether locked up in WETH on 06/01.2019 = 1.78%

Percentage of Ether locked up in WETH on 06/01.2018 = 0.03%

My Stake: Back Claim - 100 CRED


Claim 4: Ether as base commodity money backing an open financial economy isn’t a future narrative, it’s happening now


Background: It seems likely, based on analysis of previous claim, that this conclusion was based on apparent growth of Ether reserves used to support stablecoins.


To validate this claim it is necessary to confirm

Ether is indeed being used extensively as reserves in a wide range of projects as a commodity (e.g., as collateral, such as gold, to withdraw loans). Analysis of prior claim indicates that all of the growth can be attributed to 1 project – MakerDAO. Further, a review of 50 stablecoin projects released in October 2018 by Blockchain research team - pages 70-78) indicated MakerDAO was the only live reserve backed StableCoin that used solely used Ether as a reserve, indicating that it is unlikely that Ether is being used in other Stablecoin projects.

Use of Ether as a commodity is generating benefits promised by the “open financial economy” - While “open finance” or “open financial economy” is a not a formally defined term, it generally attempts to suggest that development of decentralised financial infrastructure (note decentralisation itself requires more robust definition), development of new financial assets on such infrastructure, and opening up access to such assets, or supporting services to a broader class of consumers, will add economic value to the real economy. If Ether’s, as a commodity money, is being used as collateral to support Dai, it’s success in driving an open finance economy rests on MakerDAO’s success in generating economic value. It is not possible to determine if MakerDAO adds economic value just yet.

Therefore, there is still insufficient evidence to conclude, based on this data alone, that Ether is establishing itself as a dominant commodity and driving the benefits promised by an open financial economy.

My Stake: Challenge Claim - 20 CRED (Noting that there are other ways of qualifying this claim)


Claim 5: Crypto asset activities undertaken by regulated financial institutions in the EU (including owning crypto-assets directly, market-making, lending against crypto-asset collateral, clearing or trading derivatives with crypto-asset underlyings, or providing custody wallet or trading platform services) has been very limited to date (as of January 2019).

Source: European Banking Authority -

Background: The European Banking Authority has a mandate to assess risks and vulnerabilities in EU’s financial system through regular risk assessment reports, especially to support the European Commission on relevant policy decisions. It has recently released a report to advise the Commission on, amongst other things, the applicability of the specific regulations that can govern specific services provided by entities that involve crypto-assets (e.g., custody wallet services), and the scale of such activities undertaken by regulated financial institutions.

Analysis: While they have acknowledge that there have been challenges in collecting detailed quantitative information due to absence of granular reporting requirements on crypto asset activities, they have based their conclusion on prior initial finding presented by the Financial Stability Board ( which suggested that crypto assets are relatively small compared to the rest of the financial system, and information collected directly from 7 regulatory authorities across they EU (out of 30+). Data from these preliminary findings are detailed below:

While the analysis is not exhaustive, it mirrors recent sentiment and news reports on crypto-asset, and lack of public campaigns that would have been released by FIs that would seek to advertise their offerings should it be more mature.

Caveat: Analysis covers only regulated financial institutions that fall within EBA’s remit – it does not provide any detail on OTC platforms or crypto exchanges.

My Stake: Back claim – 50 CRED (It would be 100 CRED if the data available was more exhaustive)


Claim 1: In order to achieve Civil’s decentralized goal, activity on the platform will be managed by an Ethereum blockchain-based token, CVL.


Background: Civil is the decentralized communications protocol for journalists and citizens, launched by The Civil Media Company. The protocol limits the need for (and influence of) third parties like advertisers and centralized publisher conglomerates. The protocol aims to support independent newsrooms initially focused on producing high-quality local, international, investigative and policy journalism. In time, they envision a vast ecosystem of journalists, citizens and developers building products and services dedicated to powering sustainable journalism throughout the world.

Analysis: Civil did an ICO in October, 2018 but it failed. The user experience is still difficult for non-technical people to donate by studying and taking a blockchain, install Metamask, create an account on Coinbase, buy Ethereum there and then buy CVL. They set $8 million as minimum for their ICO which I think it was too ambitious at that time. HERE is what the CEO wrote about it.

I think it’s great that Civil is trying to save journalism by creating CVL tokens and incentivizing people to vote if a news is good or bad with them. It’s similar to TruStory but they work with professional journalists. They have $3.5 million in funding from Consensys and have about 125+ journalists across 18 newsrooms. Nearly 3,000 people have already expressed their intent to support and join these journalists by participating in the ICO. They all received money back. There will be a new CVL token sale in early February, 2019.

My Stake: Back claim - 50 CRED


This is interesting, what do you think the decentralisation goal means for Civic? Can it be measured (so we can tell whether if the goal is being achieved)? And how do tokens enable that goal? The following article could provide food for thought:
“Quantifying Decentralization” by Balaji S. Srinivasan

  1. Civil’s decentralization goals mean they seek to enable a more direct, transparent relationship between journalists and citizens, while using blockchain to also strengthen protections for journalists against censorship and intellectual property violations. 2. To ensure that its marketplace would produce a diverse array of quality journalism from day one, The Civil Media Company has allocated $1MM USD in grants to support a “First Fleet” of more than 100 full-time, veteran journalists across approximately 18 newsrooms. 3. Newsrooms will be able to accept compensation from the communities they serve in any currency preferred by the end consumer (e.g. USD, EUR via credit cards; ETH, CVL via web wallets).


Why did Steem’s token incentives not work as well as expected? I had this question for quite some time. Steemit is one example where I feel incentivized community can promote bad effects rather than good. Is it poor consensus mechanism purely based on voting model or powerful actors or what really caused steemit not work?


Didn’t civil fail to pay journalists??


This is what the Civil CEO Matt Iles said:
“We didn’t promise anyone tokens would be worth any specific amount,” he told CoinDesk. “Anytime we discussed potential token value with newsrooms, we made it clear we were making estimates and that there was risk involved.”

Civil never said that the ICO will be a 100% success for sure and only pays journalists with tokens. ZigZag, one of the newsrooms at Civil, got paid partially in fiat and partially in CVL.


interesting point. What are potential ways that MakerDAO could generate economic value? Also, do you the chances of Ether being a base commodity decrease when MakerDAO moves to a multi-collateral approach?


I would say that it depends on how MakerDAO’s stablecoins are used in the wider ecosystem, which is not yet well established. Based on the uses/discussions we can be currently (page 12-13 of the following StableCoin report present useful discussion ), MakerDAO could be used:

  1. For getting longer exposure to Ether – A borrower wanting to get longer exposure to Ether could deposit Ether as collateral in the MakerDAO system to borrow Dai in return, which can be subsequently be used to purchase more Ether at an exchange. This could be desirable because the borrower expects the value to go up in the future, and the MakerDAO system allows the borrower to access leverage, and realise gains from appreciation with minimal investment.

Value Added: If the Ether does indeed appreciate, this adds wealth to the borrower which can subsequently be used to purchase other goods. Alternatively, the long exposure can be used to hedge against assets which are either uncorrelated or negatively correlated to the price of Ether –protection against future uncertainty could be seen as a value add as well. This does however require Ether’s price/value to settle on fundamentals (currently not the case), so that decision making does not dissolve into a pure betting exercise.

  1. As Universal Medium of Exchange – Some businesses may find it expensive to accept payments in fiat, especially if cross border payments are concerned - crypto currencies have been cited as solutions to stimulate international trade. Traditional businesses at present would take a significant risk accepting cryptocurrencies as a medium of exchange due to the significant volatility of this asset class. As a stable coin, under the right conditions, Dai could serves as a medium of exchange that allows merchants to transact with more consumers.

Value Added: Costs add friction to transactional exchanges, so its absence will encourage stimulate trade, which adds value to both the merchant and the end consumer.

  1. To allow DApps to distribute value – Existing Decentralised Applications could also require a price stable currency to enable exchanges between DApp participants.

Value Added: The mechanism through which value is added to end participants would be same as that of a universal medium of exchange. However, the prevalence of stablecoins could also encourage investment in DApps (which require price stable assets as a pre-requisite) - this will enable formation, and consumption of new set digital goods and services, so the value added could potentially be greater.

I would also distinguish between

  • value being consumed privately
  • value being consumed by ecosystem as a whole
  • value that contributes towards human welfare

…and these would need to be considered separately, and may not always be aligned. E.g.:

If we take use case 1, borrowers could argue that the opportunity to get longer exposure to Ether, irrespective of whether if creates wealth or not, is a service a service they get value from privately, and the system lower the barriers to access capital which allows them to get exposure.

This can, however, encourage speculators, who subsequently utilise the new found leverage to generate buying demand on Ether which drives up prices, and move it further away from its fundamentals. Ultimately, as the price corrects, and Ether comes tumbling down, the reputational damage suffered can create knock on impact on other unrelated DApp projects. These may either have relied on Ether for funding and suddenly see their capital diluted, or find harder it to obtain new funding from investors who become more risk averse. This generates negative value for the wider ecosystem, and the net welfare impact generated by MakerDAO remains uncertain. This phenomenon has already been observed, even prior to MakerDAO’s emergence.

The general framework does have a lot in common with the narrative that explains asset bubbles, and especially the 2008 financial crisis. Growth of financial innovation (e.g. complex securities such as CDOs, CMOs) that predated the crisis generated an unsustainable credit boom which was heavily invested in existing real estate, and caused prices to accelerate sharply in developed nations. When the real asset prices (and the debt that fuelled it) proved unsustainable, the subsequent debt overhang resulted in prolonged recessions that economies are still struggling to recover from.

On Ether as the dominant commodity money: I think that Ether’s chances of establishing itself as the commodity money of choice would depend less on MakerDAO’s approach to managing collateral, and more on Ether’s tendency to retain its purchasing power. If it serves as a good store of value, it could dominate the reserve composition even after MakerDAO adopts a multi-collateral approach.


ha, yes. this is fascinating.

yes, fair point.

Question for you: Hasu has recently written an article stating that Maker is actually a decentralized and very efficient version of centralized lending services. Don’t you think this is another way (and perhaps a primary way) that MakerDAO generates economic value?


Could you share some background? What were Steem’s token incentives, and how did they fail to live up to expectations? Were the expectations well formed?


I am perceiving economic value at slightly more macro level.

MakerDAO operates as bank which allows borrowers to borrow price stable and potentially liquid assets by depositing collateral in return. I would say that a bank does not generate economic value purely from lending money. If the money lent subsequently generates greater purchasing power that lasts in perpetuity (i.e., it is permanent), and allows borrowers to acquire more goods than otherwise would have been feasible, the acquisition of goods create utility for the borrowers which generates economic value. If subsequently the borrower is not able to pay back (e.g., their income never would have afforded them the loan, or the goods in the first place), subsequent hardship will negate any economic value initially generated (I would again mention that the mortgage crisis illustrates this phenomenon well).

I make this distinction because it is difficult to judge how MakerDAO’s will play out, although the risks it can generate are more obvious:

  • On one hand, borrowers acquiring Dai may have found it difficult to liquidate or transact with Ether in the first place, and maybe Dai, as a more stable asset can grow to be accepted by merchants. Borrowing Dai against Ether (or other non liquid assets, once MakerDAO adopts a multicollateral approach), may allow the borrower to now acquire goods that they could not have done with less liquid assets.
  • On the other hand, if the borrower instead uses the Dai to purchase more Ether, there is a risk of entering into a vicious cycle which ends up with the borrower acquiring a highly leveraged position that will be difficult to recover from.


This is what I found from Steemit blue paper! ( so far I have only read white papers :smile:)

Steem provides a scalable blockchain protocol

  1. For publicly accessible and immutable content, along with a fast and fee-less digital token (called STEEM)
  2. Which enables people to earn the currency by using their brain (what can be called “Proof-of-Brain”).

Steemit token has primarily two features.

The first is a pool of tokens dedicated to incentivizing content creation and curation (called the “rewards pool”).

The second is a voting system that leverages the wisdom of the crowd to assess the value of content and distribute tokens to it.

Tokens come from The Rewards Pool
In order to understand what the Rewards Pool is, one first needs to understand that tokens are produced differently in DPoS blockchains than they are in PoW blockchains. In traditional PoW blockchains, tokens are produced regularly but randomly distributed to the people whose machines are performing work (“miners”).
Different from PoW-only cryptocurrencies, tokens in Steem are generated at a fixed rate of one block every three seconds. These tokens get distributed to various actors in the system based on the defined rules of the blockchain. These actors, such as content creators, witnesses, and curators, compete in specialized ways for the tokens. Unlike the traditional PoW means of distribution, where miners are competing over raw computing power, the actors in the Steem network are incentivized to compete in ways that add value to the network.

Of the supply of new tokens created by the Steem blockchain every year, 75% of those tokens compose the “rewards pool” which are distributed to content creators and content curators. 15% are distributed to vested token holders, and 10% are distributed to Witnesses, the block producers cooperating inside Steem’s DPoS consensus protocol.

The users that take time to evaluate and vote on content are playing an important role in distributing the currency to the users who are adding the most value. The blockchain rewards both of these activities relative to their value based on the collective wisdom of the crowd collected through the stake-weighted voting system.

Steem operates on the basis of one-STEEM, one-vote. Under this model, individuals who have contributed the most to the platform, as measured by their account balance, have the most influence over how contributions are scored.

Steem only allows members to vote with STEEM when it is committed to a 13 week vesting schedule called Steem Power. Under this model, members have a financial incentive to vote in a way that maximises the long term value of their STEEM.

Steem Blockchain Dollars (SBD)

In order to help bridge the gap between more traditional fiat money systems which mainstream users are used to, and the cryptocurrency tokens which they are awarded through the platform, a new currency called Steem Blockchain Dollars (SBD) was created. SBD tokens are designed to be pegged closely to one USD, so that users who receive them can know approximately how much they are worth in “real dollar” terms. SBD tokens also offer a relatively stable currency for users to hold if they are looking to preserve their account value relative to USD.

Even with all the good intentions of a decentralized, tokenized community for content creation and curation Steemit ended up cultivating a loud and non-representative group of get-rich-quick schemers, idealistic anarchists, and true scammers. They even had ‘vote bots’ which are automated Steem accounts that have a ton of tokens invested as “Steem Power,” which takes 13 weeks to withdraw. Users can send them money in exchange for Steem upvotes, which allocate large steem rewards to their posts. In other words, when you use a vote bot, you spend money to receive an upvote that (in theory) is worth more than you spend. It’s a scam, plain and simple. Send money, receive more money, no effort required.

This medium post summarizes all those flaws Steemit failed to prevent.

Do you think Steemit can correct their token economics, specifically payout distribution and what do you think would be some of the adjustments they should make?


makes sense to me. so you’re suggesting it’s unclear whether Maker’s lending services will produce real economic value or not, yet. thanks for explaining :ok_hand:


Some background would on Civil would be very helpful. Some questions that spring to mind:

What is the functional purpose of this token in the Civil ecosystem? (E.g., Are they rewards for publishing content? )And why would token holders attach value to these tokens specifically (e.g, are there any reasons for thinking that the same outcome could be achieved without use of tokens? Or via a centralised service provider instead of on a public network?)