Social Token Economics
With a market cap representing less than 1% of the entire crypto market, we remain in the nascent stages of social tokens. We’re so early that social token thought leaders are yet to agree upon a definition. Put simply, however, they can be seen as representations of fractional ownership of a brand, individual, or community.
They bring a powerful, yet understated benefit of incentive alignment, facilitating value creation not limited to founders, companies, or creators, but from groups of community members motivated to contribute due to their ownership in the community.
Key to the success of a social token is its tokenomics. With solid token incentive mechanisms, communities encourage strong member participation. Creators, however, are rarely crypto-native enough to design their own tokenomics. The onus is on the issuers.
- Token design
- Token distribution
- How issuers can capture value with their native token
Roll and Rally use contrasting token designs. While Rally applies token bonding curves (TBCs) to social tokens issued on their platform, Roll opts for simplicity with fixed supply.
The pros and cons of the TBC and fixed supply designs are well-covered in this article by Coinvise, which is summarized below.
Roll: Fixed Supply
Social tokens issued on Roll will have a maximum potential supply of 10 million. 2 million are minted at genesis for the creator such that he/she has sufficient “skin in the game”, while the remaining 8 million tokens are distributed across 3 years.
Rally: Token Bonding Curves
Rally has had two versions of their token bonding curves since their inception. Both versions featured a Genesis period, which allocates 24% of potential maximum supply to the creator.
The change came as a result of two issues as communities entered Phase C of their V1 TBC (when more than 150,000 social tokens are minted):
- High volatility, attracting speculators just as the community hits scale
- Potential community members are priced out as excess demand drives prices up too quickly
The linear bonding curve of Rally V2 aims to make Rally a more appealing platform for larger communities:
With the linear curve, Rally’s V2 TBC mitigates volatility as communities scale. It also rewards early adopters through its pre-sale period (between 5 to 7 million tokens minted) before the TBC dynamics take place. Note that Rally’s social tokens are priced against RLY rather than USD to mitigate volatility, pool liquidity, and capture value (more on this later).
Social tokens issued on Rally today use the linear TBC by default, but communities have the option to use the S-curve.
Most importantly for adoption, simplicity resonates with creators, who often find a fixed, simply divisible 10 million token supply more digestible than TBC dynamics. As Coopahtroopa explains,
“99% of creators have no clue (and likely don’t care) what curve they are using.”
However, because Rally tokens are minted on a TBC, liquidity is guaranteed for traders. Roll’s social tokens, in contrast, require users to bootstrap liquidity. This makes their tokens more volatile than Rally’s and incurs high slippage on trades in their early stages.
Nonetheless, one can argue that social tokens need not have liquidity when communities begin to grow. Communities can start by distributing to existing, committed, long-term-oriented members before facilitating price discovery (attracting fewer speculators). Once a larger community is formed, members can bootstrap liquidity with DEX pools.
Due to the diversity of communities, no token design is one-size-fits-all. As we recommended to Grape Protocol during our accelerator program, future iterations of social token issuers should prioritize flexibility and customization.
Most creators, brands, and communities will migrate from Web 2, so opting for the easily- divisible, fixed supply model should be the default over the complexity of TBCs. It will be important, however, for existing crypto-native creators and communities to be able to choose TBCs for guaranteed liquidity.
From then on, customization can be implemented for both the fixed supply model and TBCs. Coinvise has allowed their creators and communities to customize their fixed supply cap, while meTokens allows creators to choose their own TBC. In the future, the distribution schedule for the fixed supply model and the pre-sale period for TBCs can be customized as well.
On Roll and Rally, social tokens are often distributed to users who purchase or engage with creators. You can, for instance, buy certain amounts of $CALVIN tokens issued by Roll for him to promote or provide feedback on your crypto project. On Rally, you can earn $KLD (by NFT music artist Kloud) by creating proposals or participating in contests, programs, and events.
The core theme is that social tokens act frictionlessly facilitate value exchange between creators, core contributors, and community members.
While the Rally token captures value by backing all social tokens’ liquidity, the potential Roll token should capture value through ownership of its social tokens issued.
Roll: Owning the CCs issued
Roll owns 1% of every creator’s maximum token supply. In other words, its token could capture 1% of the market cap of social tokens issued.
Importantly, the social tokens issued on Roll are issued directly on Ethereum rather than a private sidechain like Rally.
Rally: Capturing the Market Cap of all Social Tokens issued
Rally captures the market cap of all social tokens issued on their platform by backing their social tokens’ liquidity using their native token $RLY.
On the frontend, users seem to be able to purchase social tokens on the Rally platform through crypto or fiat seamlessly, but in the backend, users are essentially purchasing $RLY to receive social tokens issued by the Rally platform.
The process is as follows:
- Using a CEX or DEX pools, users purchase $RLY using fiat or crypto
- The $RLY purchased is then supplied to the social tokens’ liquidity pools
- The $RLY is converted to the social token for the user on the private Rally sidechain
- Social tokens liquidity pools only hold $RLY, and the social tokens are minted relative to $RLY via their bonding curves
Hence, the Rally token captures value from locking its circulating supply, capturing the market cap of all social tokens issued.
Comparing the mechanisms of value capture, it is likely that Rally’s mechanism will capture more value from its set of creators. While Roll owns just 1% of their social tokens’ genesis supply, the $RLY token captures the market cap of all social tokens on their platform.
However, social tokens issued on Roll are composable as they are issued on Ethereum rather than a private sidechain. They can consequently plug into DeFi protocols, tapping into opportunities ranging from creating money markets on Rari Capital (so fans can lend and borrow tokens to unlock tiered perks and memberships temporarily) to having creators own their own liquidity through Olympus Pro. These potential integrations with the money legos of DeFi could attract more Web 3-native creators.
In essence, the choice of an issuer’s value accrual model depends on the priorities. To capture high value, adopt the Rally model of a native token backing social tokens’ liquidity. To attract Web 3-native creators and leverage the composable money legos of crypto, adopt the Roll model of a small percentage of social tokens owned by the Roll treasury.
Future Opportunities for Value Capture
Today, anybody looking for passive social token exposure lacks the indexes to do so. On Set Protocol, only SuperGroup has created a social token index, with a lack of investors and a >90% weightage towards Friends with Benefits ($FWB).
There are opportunities for Rally and Roll to issue passive social token indexes containing social tokens issued on their respective platforms.
Roll, for instance, could tokenize the portion of its treasury that holds the 1% ownership of all social tokens issued on their platform, and issue it as a passive social token index. As a result, the future Roll token can capture fees from the management of the TokenSet fund. (As a private sidechain, however, Rally would not be able to leverage the tools created by Set Protocol, but can build the TokenSet themselves to capture further value.)
The risk is that anyone else can create a more comprehensive TokenSet across all social tokens, unrestricted to those issued only on Rally or Roll.
The issuers, however, are in unique positions to offer perks to owners of their TokenSets. The 1% ownership of the social tokens currently held by Roll, for example, can be decentralized to a future Roll DAO. Members of the Roll DAO and owners of the TokenSet could unlock the benefits associated with the social tokens that the index is composed of.
For instance, if you purchase some TokenSet tokens and more than 75 $FWB is “contained” within it, you can access the FWB Discord server (subject to your FWB application). Consequently, the user not only benefits from passive social token exposure, but the perks associated with holding the tokens within the index.
The opportunity for value capture through passive provision of index funds is substantial. In traditional finance, asset management holds more than $100 trillion in value. Set Protocol currently holds around $400m in TVL, which has grown by more than 14 times since January 2021. When you imagine the potential of how any person, brand, or community can create their own social tokens, capturing even 1% of indexed exposure to these assets is an opportunity that cannot be ignored.
In summary, future iterations of social token issuers can consider two token designs for their creators, brands, and communities:
- Rally model: Token bonding curve with genesis and pre-sale periods
- Roll model: Fixed supply
With the Rally model, issuers can enhance flexibility by allowing creators to choose their own TBC and pre-sale periods. The Roll model can be further customized such that creators can choose their own supply cap and distribution schedule.
There are two ways for issuers to capture value with their native token:
- Rally model: Capture the entire market cap of social tokens issued by having the native token back their liquidity
- Roll model: Own a small percentage of total potential token supply
To capture further value, consider capturing fees from managing an index of social tokens issued. The future members of issuers’ DAOs can also benefit from the perks of the social tokens held in the issuer’s treasury.
More broadly, we look forward to more experimentation around social token economics. In contrast to one-sided interaction, social tokens incentivize any community member to contribute to the creators they follow or the causes they believe in. In return, they offer opportunities for anyone to earn ownership, usually limited to employees with stock options in Web 2.
Issuers themselves may even incentivize their creators to contribute proposals to tokenomics that align with their needs. In that vein, Web 3 creators would stand in stark contrast to their Web 2 counterparts by truly owning the platforms they create value for.
If you would like to collaborate, please reach out @0xEmerson.
LongHash Ventures is a Web 3 investment fund and accelerator collaborating with founders to build their Web 3 model and tap into the vast potential of Asia. In January 2021, we launched a DeFi-focused fund and invested in projects such as Balancer, Acala, Instadapp, and Zapper. We collaborated with their founders to develop their tokenomics, governance, and communities through Asia DeFi Network.
With our LongHashX Accelerator, we have partnered with Polkadot and Filecoin to build more than 40 global Web 3 projects which have raised more than $100m in the past 3 years. Through such investments and active collaboration, we are committed to realising our mission of catalyzing growth for the next generation of the Web.
Disclaimer: LongHash Ventures may hold positions in some of the assets mentioned in this article.