How tokenization can improve markets for user-generated goods

futureprecedent (39)in #cryptoeconomics • 7 years ago (edited)

Hello, Steemians! As promised in our intro post, here is an overview of @futureprecent's first paper on how tokenization could be used to improve markets for user-generated goods (i.e., free stuff you get online). What we propose is a new system of economic value creation and distribution which is possible with blockchain technology. With a new kind of money, we can create a new kind of economy. This is an extension of what Steem/Steemit has already done for blogging. Without further ado...

TL;DR

What we like: Free stuff.

What's the problem? Making free stuff isn't profitable, so there's not enough if it. Since the producers don't get paid, the consumers don't get much say in what stuff gets made and what doesn't.

What helps: Ads, "freemium" features ...but we don't like them.

What's a better way? Reward people who make free stuff with tokens (like Steem does). Then, let consumers use the tokens to set bounties for stuff they want made.

How does it work? Setting bounties is valuable, because it helps people get the stuff they want. This makes the tokens valuable. Since people who make free stuff get tokens, more people will want to make more free stuff, expanding the productive capacity of the market. This means more and better goods can be made faster, which makes the ability to set bounties even more valuable... a positive value feedback loop! Conceptually, this is very similar to how a relatively small group of advertisers pay for an internet search engine that the whole world uses for free, but without the ads and the data collection.

But would it actually work? You tell us! We've written a paper explaining the idea in depth, but we need your review and feedback in order to test and further develop it. Please let us know your thoughts.

Full overview

Note: The term "goods" is used here to refer to both goods and services. The term "user-generated goods" is used broadly to mean user-generated content and other goods which are generally made available to consumers for free online, such as blogs, webcomics, YouTube videos, free and open-source software and mobile apps.

Purpose

The purpose of this post is to introduce the Content/Bounty Coin, an abstract type of cryptographic token designed to add value to markets for user-generated goods by addressing two key problems: profitability and allocation of productive resources.

A Content/Bounty Coin addresses these problems with two key features:

Content-rewarding—The token is used to reward producers of user-generated goods.
Bounty-setting—The token can be used to set bounties for user-generated goods.

We believe that Content/Bounty Coin type tokens have the potential to transform markets for user-generated goods by offering unique solutions to the problems of profitability and allocation, resulting in the sustainable production of more and more valuable goods. Thus, we believe that Content/Bounty Coins can add significant value to the economy when introduced in suitable markets.

What does it mean to "add value"?

The utility of cryptographic tokens and their appropriate application has become a highly contested issue in light of the recent ICO phenomenon. Approaching the question from basic economic principles, we propose that a token adds value to an economy if and only if the following conditions are met:

Productiveness—It increases the total value of production of an economy.
Uniqueness—The same economic benefits cannot be achieved using other existing currency (whether crypto or fiat) or non-currency solutions for the same or lower cost.

We propose that the introduction of a new token is justified if and only if it adds value to an economy.

Why do profitability and allocation matter?

There are two ways to increase the value of productive output of an economy: produce more goods or produce more valuable goods.

More goods can be produced either by producing goods more efficiently or by increasing the amount of resources (labor and capital) employed in the production of goods. In a market economy, the amount of resources employed in the production of goods depends on profitability. If the goods are more profitable to produce, more resources will be allocated to their production.

More valuable goods can be produced by inventing new and improved goods (e.g., smartphones instead of "dumb phones") or by allocation of more productive resources towards goods which consumers value more (e.g., producing more Froot Loops than Cocoa Puffs if consumers on the whole prefer Froot Loops). In market economies, allocation is accomplished through "dollar voting" by consumers.

Why are there problems with profitability and allocation in markets for user-generated goods?

These problems stem from the fact that user-generated goods, which are generally available free of charge to consumers, are not directly monetized. What we mean by this is that producers do not receive money from the actual consumption of their goods.

Instead, producers monetize these goods (if at all) indirectly through ads or donations or partially through freemium revenue models. All of these are less efficient and sustainable revenue models than full, direct monetization. In all three models, the producers fail to monetize the full value of their goods. This means production is less profitable than it could be, which means fewer resources are devoted to production, production is less sustainable and fewer goods are ultimately produced.

User-generated goods are still produced even if production is not profitable from a monetary perspective. For example, many are produced as a hobby. Hobby production tends to be smaller-scale and less reliable than production by dedicated, full-time teams. This is not ideal for consumers of the goods, who would benefit from commercial-grade production.

In a market economy, allocation of productive resources is theoretically optimized through dollar voting by consumers. Where goods are monetized through ads, there is no direct mechanism for dollar voting. These goods are still responsive to "view voting" by consumers, since viewership determines the producer's revenue, but this is a less effective allocation mechanism than dollar voting for a number of reasons. Even dollar voting is not an ideal allocation mechanism, because consumer spending data is historical. Hence, dollar voting is not a good way to signal future demand. Neither is view voting, since viewership data is also historical.

Donations are a better allocation mechanism in one sense, because they provide consumers a better opportunity to signal their demand for future production. However, since the producer receives the donations before the good is produced, there is a risk that consumers never get the good they wanted.

How does a Content/Bounty Coin improve profitability and allocation in markets for user-generated goods?

A Content/Bounty Coin has two key features:

Content-rewarding—The token is used to reward producers of user-generated goods.
Bounty-setting—The token can be used to set bounties for user-generated goods.

Producers of goods which receive positive consumer feedback (e.g., upvotes, downloads) are rewarded with tokens. This makes production of user-generated goods more profitable.

The token can also be used by consumers to set bounties for goods which they want produced. These bounties would guarantee a reward to producers who produce a specified good and guarantee consumers get their money back if nobody actually produces it. Bounties are an excellent method for signalling future demand, and beneficial to both producers and consumers. Hence, bounties are a more effective allocation mechanism than dollar voting, view voting or donations.

Why would anyone want to be paid in Content/Bounty Coins?

Producers will only want to be paid in Content/Bounty Coins if these tokens have value to them. For tokens to be valuable to their holders, the holders must either be able to do something useful with them, or else sell them for other currencies or tokens with which they can do something useful. Of course, no one will trade something useful for something useless, so the tokens must have some use to someone.

A token can have internal uses such as enabling or improving use of its native platform's features. A token can also have external uses, such as being used as a store of value or for making payments outside the native platform.

A Content/Bounty Coin can be used to set bounties on its native platform. Bounty-setting is valuable, since it allows token-holders to influence the allocation of productive resources towards productions of the goods which they desire. Hence, consumers who want to set bounties will want to buy Content/Bounty Coins from producers who receive them as payment for production.

Is a Content/Bounty Coin a unique solution to the problems of profitability and allocation?

This depends on the specific instantiation of the Content/Bounty Coin and the market to which it is being applied. It will need to be evaluated on a case-by-case basis.

That said, there are a number of unique advantages to implementing content-rewarding and bounty-setting features through a token.

One is leveraging the benefits of blockchain technology. A blockchain ledger can provide an immutable record of consumer feedback, increasing both producers' willingness to distribute goods on the platform (since they are not afraid of being cheated). Smart contracts can be very useful for bounties, because they can provide an immutable record of bounty specification criteria, pool bounties for the same good from a large number of consumers, automate payment/refund of bounties and potentially achieve trustless consensus on bounty fulfillment. These features increase the level of guarantee provided by bounties (i.e., that no one will cheat or get cheated), which in turn increases their effectiveness. As blockchains improve in terms of features, cost and transaction throughput, leveraging the benefits of this technology will become increasingly valuable.

A unique advantage of using a native token is that the platform controls minting of the tokens. This means that producers can be rewarded for general (non-bountied) production with newly minted tokens. Neither the platform nor the consumers need to pay anything for the goods, yet the producers can still earn a profit without relying on ads or donations or restricting features. (As an interesting side-effect, if tokens are minted exclusively to reward production, then this results in a currency backed by proof of useful production.)

If the content-rewarding token is required for, or improves, access to the platform's bounty system, then a positive value feedback loop between content-rewarding and bounty-setting emerges. As demand for setting bounties increases, the value of the content-rewarding token increases. This will increase production levels both by drawing new producers to the platform and by incentivizing existing producers to produce more. This increases the productive capacity of the platform. As the platform's productive capacity increases, bounty-setting becomes more valuable, since bounties are likely to be fulfilled quicker and as more producers participate, the cumulative abilities of the platform's producers are likely increased, allowing a wider range of goods to be bountied. This again makes the content-rewarding token even more valuable, and the loop repeats.

But how can a token create value out of thin air? Somebody has to pay for it, right?

A Content/Bounty Coin can create value for holders by enabling them to set bounties in a new and better way. A Content/Bounty Coin can then distribute this value to producers of general (non-bountied) goods, thereby benefiting both producers and consumers through the positive value feedback loop. If enough value is generated this way, producers can make a profit from general production without relying on ads or donations or restricting features. The entire output of the platform (both general and bountied production) would effectively be paid for by the bounty-setters, while passive consumers get full access to the goods free of charge.

Conceptually, this is very similar to ad-based monetization—e.g., how a relatively small group of advertisers pay for an internet search engine that the whole world uses for free. It is better than ad-based monetization for some markets, however, since a Content/Bounty Coin can add more value to an economy by addressing profitability and allocation in a better way.

However, Content/Bounty Coin developers must beware of value diversion—i.e., increasing the value of the Content/Bounty Coin to its holders at the expense of decreasing the overall value that it adds to the economy. This happens when platform features which could just as well be accessed with another token or currency are restricted to holders of the native token. In such case, requiring users to buy the native token to use the platform's features creates deadweight loss. That said, value distribution is not straightforward. Maximizing total value-add to the economy might require some amount of value diversion.

So, in which markets exactly could a Content/Bounty Coin add value?

A Content/Bounty Coin could be introduced on platforms like...

GitHub, giving consumers more influence over the production of free and open-source software,
App Store/Play Store, making full-featured, ad-free apps available free of charge,
StackOverflow, helping help-seekers get help with their obscure million dollar questions, and
Reddit/YouTube/Instagram/Facebook and other similar platforms, making "professional poster/upvoter" a more viable profession.

Can Content/Bounty Coins add value in markets beyond user-generated goods?

Yes, they can. Problems of monetization and allocation affect markets beyond just those for user-generated goods.

One example is the market for recorded music, which has become very difficult to monetize in the past two decades, first due to piracy and now due to legal streaming services like Spotify and YouTube.

Another example are the markets for basic research and applied R&D. Basic research is not directly monetizable, resulting in under-investment in basic research. Companies rely on patents—legally enforced monopolies—to make investments in applied R&D profitable. Patents result in deadweight loss and high consumer prices, which for products like pharmaceuticals are both an economic and ethical concern. There is also a lot of deadweight loss resulting from competing companies spending billions of dollars and years of time on siloed and possibly redundant R&D.

Has anyone built a Content/Bounty Coin yet?

Steemit, a Reddit-like platform powered by the Steem blockchain is the most successful existing platform with a tokenized content-rewarding feature. However, Steemit does not have a bounty-setting feature. To our knowledge, there are no existing platform with a tokenized bounty-setting feature. Tokenized bounty-setting is more difficult to implement than tokenized content-rewarding. The key difficulty is developing a robust system for consensus on bounty fulfillment. Please see section 6 of the full paper on the Future Precedent website for an in-depth overview of these challenges.

OK, I'm interested. Where can I read the full paper?

You can read the full paper on the Future Precedent website.

OK, I've read the paper. What do I do now?

Get in touch! We'd love to hear you thoughts on the paper and what you'd like to do with Content/Bounty Coins. We'll let you know what else we're working on, too. Maybe we can even work together ¯\(ツ)/¯

Wait a minute... who are you?

Ah right, we forgot to introduce ourselves... Sorry about that! We are Future Precedent. Hi! You can scroll down to the next section to find out a little more about us.

About Future Precedent

Future Precedent is a group of blockchain futurists who believe in the potential of this technology to bring about revolutionary social and economic changes. But its up to all of us to make that change happen. So—we're working on it!

Visit our website every once in a while, we'll keep it updated with the projects we are working on. Or come hang out with us on Slack to hear the latest. You can also email us with the subject "mailing list" if you want to receive occasional updates on our work.