7 Characteristics of a Healthy Crypto Economy

After the demise of social blogging platform Narrative recently, I decided to go back to Steemit, which I joined in March 2018. In June this year, I significantly reduced my content creation on Steemit to focus on Narrative. That was a bad decision, but an instructive one.

Narrative had issues from the start. While the site got its aesthetic right, it also proves that aesthetics is not enough to make a platform successful. If the underlying technology isn't up to the snuff, how attractive the site is doesn't matter. The following post includes suggestions based on my experience with Narrative and what I observed were its shortcomings.

4 Essentials of A Healthy Crypto Economy

Since Steemit launched in 2016, there have been many other social blockchain projects launch in an attempt to compete. Some have done fairly well while others are struggling. Steemit is still the market leader.

If I were to start today in building a social blogging platform that competes with Steemit and has a fighting chance at becoming the next big thing, I'd make sure I include at least the following four elements.

1. Economic stability

Image by Reimund Bertrams from Pixabay

The world of cryptocurrency is inherently volatile. This is the first thing anyone should know about crypto. Because of its immaturity and the lack of regulation, the entire crypto market--from Bitcoin to the lowliest altcoin--has built-in volatility. For that reason, any attempt to build an economy around cryptocurrencies--whether that economy is based on a single coin, a token, or multiple cryptocurrencies--the first step should be to affect this volatility with a viable and well thought out monetary policy that should begin with a #stablecoin.

The stablecoin can be an existing coin such as USDT or TrueUSD, or it can be a proprietary cryptocurrency like Steem's Steem Dollars (SBD). In my opinion, this is one thing Steemit got right.

You can learn more about stablecoins from this awesome post at CoinSutra.

2. Sinks

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Sinks are useful ways of spending a cryptocurrency that make it valuable. A utility #token with no sinks is not a utility token. In Narrative's case, the intent was there, but development was so slow that the platform never survived long enough to create more than a single sink -- the ability to purchase niches (content subject silos).

Practically speaking, it doesn't matter what the sink is as long as it encourages members of the economy to keep the currency within the economy.

Imagine if the U.S. government encouraged everyone who earned U.S. dollars in some way to convert those dollars to another world currency rather than spend them in the U.S. economy. How much value would the U.S. dollar have?

Absolutely freaking zero!

This is essentially what Narrative did. Instead of creating sinks for its own token, the founders made it easy for users to cash out their platform token and convert it to fiat money. And that's precisely what a large number of users did. As a result, the token value plummeted to near zero by the end of the year.

If you want a healthy economy for your crypto project, create several sinks.

3. Staking

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Staking is a particular kind of sink. It involves committing the cryptocurrency to a long-term holding within the economy for some useful purpose. Steemit allows users to convert STEEM, the liquid currency of the platform, into Steem Power. To incentivize this action, the sage wizards of the platform tied the voting power of users to the amount of Steem Power in their accounts. The more #Steem Power they have, the more voting power they have.

Staking can take place in any number of ways, but it's essential for the long-term stability of an economy. It's the equivalent of the stock market or certificates of deposit in the U.S.'s fiat economy. Rather than encourage all users to keep their crypto assets liquid all the time, any healthy crypto economy should have a fair number of users staking their currency at any given time. Whatever ways you can devise for encouraging that should be well thought out and implemented from Day One.

4. Security

Image by Reimund Bertrams from Pixabay

No one wants to participate in an economy that isn't secure. If users are afraid their accounts will be hacked or they could lose their hard-earned cryptocurrency, they will not stick around long. So you've got to ensure the platform and each user's wallet has maximum security.

It's important to understand that this security must exist at multiple levels.

1. User level - First off, if you issue user wallets, each wallet must be secure using cryptographic encryption. All account data should be secure, as well.
2. Platform level - Not only must user data and wallets be secure, but the platform itself must be secure from hacking and other bad actors.
3. Server level - Make sure you host your servers with a secure authority that can lock down all data and prevent your system from being hacked. This is especially important if your content assets and front end are not on a blockchain.
4. Blockchain level - Whether your entire system exists on a blockchain, like Steemit, or you simply use a ledger for transactional data, as was the case with Narrative, you've got to ensure the blockchain is secure.

It doesn't matter how much else you get right, if users cannot feel secure in using your platform, your economy will suffer.

3 More Signs of a Healthy Crypto Economy

In addition to the above essential elements of a healthy crypto economy, I'd figure out more ways to improve the economy. The following three elements are not as essential as the above four but are certainly helpful.

1. Monetary scarcity

This is such a basic economic principle that I'm surprised it isn't talked about more often in crypto-social projects. One of the things that drives Bitcoin's value--in fact, one of the most important drivers of BTC value--is its built in scarcity. By programming, Bitcoin will only ever have 21 million BTC mined. For an interesting read, learn what will happen after all of those are mined.

When you limit the supply of an asset, you increase its value. That's a simple economic principle. If the asset has intrinsic value to begin with, its intrinsic value will be greater when you limit how many can be in circulation at any given time.

There are any number of ways to increase scarcity. The most obvious way is to program an upper limit that can be mined, minted, or created for your economy. That's not a perfect solution because programmers can always change the code. If you're the programmer, I strongly encourage you to pick a reasonable number, and don't change it.

Another way is to "burn" your tokens.

In a token burn, an entity within the economy (it can be a miner, the minter, a user, or anyone within the economy) sends a number of coins or tokens to a wallet address that cannot be accessed. For this to work, the wallet has to be created and the cryptographic keys destroyed so that no one--not even the wallet's creator--can access the wallet. All burned tokens go to that wallet address never to be seen again.

If you want a healthy crypto economy that encourages more participation and creates a natural competition for valuable tokens, find a way to create monetary scarcity.

2. Incentivized & disincentivized activities

Image by Gerd Altmann from Pixabay

As important as incentivizing and disincentivizing behavior is, it's easy to get wrong. It's likely that you'll end up spending a large amount of time experimenting with what works and what doesn't work, but it will be time worth spent. User experience on a crypto-based social blogging platform is tied to how well the platform deals with this Lincoln log.

• Incentivization - Figure out early on what you want your users to do, and assign a level of importance to each activity. Your incentives should be tied to those actions. In Narrative's alpha stage, it was important to create the niches that users would later--once beta launched--bid on and own. Therefore, Narrative incentivized the niche suggestions and voting on niches. However, once beta launched, this activity was not as important. The platform missed an opportunity by continuing to reward users for suggesting niches and created issues for itself by increasing reputations too rapidly. This led to some high-rep users gaming the system unfairly.

Not only is it important to incentivize useful activities, but it's important to get the incentivization percentages right. Users will behave according to your rewards system. If your algorithm rewards short posts and photos over long-form content, that's what you'll get. Put a lot of thought into your incentivization practices.

• Disincentivization - Just as important is what you disincentivize. In my opinion, Narrative was too hard early on with regard to certain infractions, but they proved not to be hard enough on the serious infractions.

It's natural for people to behave in such a way to maximize benefits in their favor, and if they can get away with it, they'll rig the system to work against others--especially if there is an equal and opposite benefit to themselves. To create a platform that doesn't account for this seedy side of human nature is irresponsible.

While there are exceptions, in general, people will put forth the least amount of effort necessary to get the maximum reward. What you want to do is create an economy that is fair to all users. That means dealing harshly with the seedy elements: Spam, low-quality content, and plagiarism can kill a social site.

As controversial as discouraging adult content is in some circles, it's worth considering whether you want to allow it, discourage it, ban it, or relegate it to a certain corner of your platform. The answer may be different for every platform, but it's a discussion that you should have.

In my opinion, Narrative got the adult content issue mostly right, but they got the spam, low-quality content, and plagiarism part all wrong. That, and the aforementioned sink hole, are what killed the site despite Narrative Company's insistence that it was the crypto market and regulation that did them in.

In short, put some thought into what actions you want to incentivize, what actions you want to disincentivize, and the weight of each activity with regard to your economic incentives and disincentives.

3. User interaction

It might seem like this point might belong in the "essential" category, but I don't think it's necessary for a social blogging platform to receive feedback from users if you have an economic model that is well thought out and proven to work. Naturally, you want some way to communicate with your users and to get their feedback, but if you get user interaction right and everything else wrong, you shouldn't expect success.

Narrative had a community support platform where they received suggestions for improvement and communicated with members of the community. There was a strong core group of users who routinely made suggestions and interacted with the company on its support site. But rarely did suggestions go further than on the digital page. In its eight-month life, Narrative only saw a couple of updates with user suggestions implemented. If you do provide a way to receive user feedback, it's far more important that you act on that feedback than that you receive it.

Nevertheless, I recommend that you provide a way for users--especially early on in the life of your platform--to give you feedback and make suggestions on improvement. But I can't stress this enough: If you do, take suggestions seriously and act on them.

Conclusion

It's important to realize that cryptocurrencies are still fairly new, and crypto economies are still in the experimental stage. There's no such thing as a perfect economy. With some work, you can have a healthy economy, but it requires some forethought. You can't just throw one together.

As much as I believe in free markets, I'm also a practical believer in Libertarian ideals. What that means is, you can allow your platform users a lot of freedom in terms of what they can do on your platform as long as you implement a strong monetary policy and you prevent bullying and other forms of abuse.

A lollipop attitude toward human nature will only lead to a weak and unhealthy economy. Bad actors will take over your platform if you give them an open door and a foothold. When that happens, the best content creators will leave and your economy will suffer. Death of the platform will not be long after.

First published at Cryptobloggers.

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