A Token Economic Design For Enterprise Blockchain Market Expansion
—A Staking For Service Model with Franchising structure With fixed and burn token supply
(This article was wrote by Jack Lu and produced by Trias Token Economic Research Institute.)
People have been struggling to find the real application of blockchain technology. There are many attempts including decentralized finance, decentralized gaming and etc, but few of them show promising future. With the recent Chinese government initiative of exploring blockchain technology, the Chinese regional blockchain industry starts to focus on blockchain application and adoption for both government and private enterprise uses. Parent companies of public chain projects now stay close to the regional government to try to become competitive in this new trend. Billions of dollars has been promised by the central government to boost blockchain and grants and bonus are given to those who are selected to do government enterprise projects. While these companies work hard on their government relationships, none of them still remember the cryptocurrencies they issued for the use of the public chains they promise to do in the first place. Due to the lack of understanding of cryptocurrencies and fear for an unstable financial system, government crackdowns cryptocurrencies in mainland China and emphasizes that blockchain is the future, but crypto is labelled as a scam. To maintain the relationship with government, many token based projects hide or abandon their tokens.
While I support the government blockchain initiative because it provides a clearer direction on how to adopt blockchain to the real world, I think cryptocurrencies should not be abandoned or forgotten. The reason why cryptocurrencies are in trouble is that we haven’t found a good token economic design for the use of crypto in the traditional business setting. Most of existing token models have yet taken the reality of traditional business model into account and tokens do not take the promised responsibilities and roles in the system. Personally, I think blockchain adoption for enterprise uses is the only adoption direction that make economic sense because the value of a new technology is captured if it brings about value to traditional businesses.
Most token economic model mix together financial effects with traditional effects, which is determined to be useless when projects try to apply. The financial side operates through the endogenous determination of token prices. It is affected by the macro market condition of cryptocurrency and speculation. The real economic side focus on user adoption and consumer surplus derived from the growth of network. We have limited control of the macro crypto market condition and speculation, so real economic effects are more important than financial effects in the long-term network development.
There are three main problems which real businesses face with when they try to adopt blockchain and cryptocurrency: 1) Due to legal restriction, it is illegal to trade or apply cryptocurrencies in many countries, especially China. 2) Cryptocurrency is highly speculative, and extreme price fluctuation increases risk and uncertainty for businesses to use in the traditional economy. 3) It is difficult to analyze how blockchain solution could bring more profits to a business through increasing revenue or cutting costs.
In the context of staking, the current prevalent inflationary model does not make economic sense. When a token’s supply inflates, it normally suffers a direct inverse correlation with price. Inflationary models are also unsustainable as you can’t infinitely keep minting new tokens, supply should be limited to ensure ongoing viability for early adopters.
Most of the discussion in the space is about creating velocity sinks for the token, which effectively forces reduction in the token velocity, which coupled with the scarcity of the tokens would create strong price appreciation. The staking has not been done by those who create utilities to the network, but has been done by financial speculators to accumulate more tokens for future sell.
Beliefs and assumptions:
While realizing the benefits of and pursuing the future of blockchain and cryptocurrency, our experience from working with traditional businesses indicates that it is difficult to sacrifice traditional fiat payment and traditional business models such as traditional contracts to adopt a complete decentralized token economics. Currently blockchain companies sign traditional contracts with individual companies and government enterprises, and payment is done through fiat. As a result, this token economics design brings together traditional business model and innovative token model, with the aim of bringing real blockchain adoption to traditional businesses. The following points are my assumptions for the model:
- Traditional enterprises in China sign traditional contracts with others and use fiat only to pay for services, that is, traditional enterprises would not use cryptocurrencies as the payment solution in the near future.
- Traditional enterprises would only pay for services that improve productivity and lower costs for the operation. They would only adopt blockchain technology if the revenue and profit generated from the use of this technology are greater than the cost of adopting it. Traditional businesses will not pay money to buy the idea of decentralization, but will pay for tech that brings them with more profit.
- Traditional enterprises aim for stability and dependency. Traditional enterprises will never outsource a project to or make any service purchases from a so-called community/ ecosystem that is maintained in a decentralized manner. Traditional enterprises only want to deal with companies which take development responsibilities and deliver products on time.
- Because of regulation, it is illegal for many companies to either pay or receive cryptocurrencies. So, a matured token economics for adoption should not consider token as a payment solution for services.
- One of the benefits of blockchain technology is elimination of information asymmetry and wider information distribution. However, while pursuing the ideology of blockchain, we have to admit that a centralized enterprise has privacy that it cannot disclose to the public. Examples include details of contracts signed with other enterprises, profit margin from each contract. A centralized company using blockchain should be as transparent as possible, but remain private for certain things. It is impossible to be completely transparent for businesses using blockchain.
- The staking mechanism should reflect on-chain activities and productivities. The newly generated tokens from staking reward is positively related to the enterprise adoption.
- A token economics cannot be successful without a multilayer structure because there are various types of resources and economic parties in a token economy and they serve different functionaries and have different incentives.
A staking for service model
We propose a token-locking reward model, which enable clients to reward service providers by locking tokens, without needing to sacrifice their tokens. We use our token-locking reward model to build a franchise network, allowing franchisees and franchisers to negotiate an agreement for services.
In China, most of blockchain companies are doing businesses with individual and government enterprises. Many of these companies have tokens listed on international exchanges. From the development we have observed, these blockchain companies are doing industry vertical development. As an example, Trias currently provides blockchain-enabled infrastructure and data security solutions to 1) infrastructure security such as Everbright Bank. 2)Trustworthy auditing such as Soochow securities and Shanghai Stock Exchange. 3) Trustworthy enterprise data such as ERP/MES SaaS solution for enterprises. These ongoing projects are promised to move onto the public chain these companies developed and use on-chain resources.
In my opinion, it does not make sense for tokens to be involved in China, however tokens can be used for the purpose of market expansion outside China. Development from different industry vertical can be packaged and pasted in other countries such as south east Asia. From economic standpoint, the replication of blockchain development in specific industry not only put the resources into the best use, but also benefit the parent company since they can make serval revenue from one development. There are many reasons why tokens are needed for oversea market expansion: 1) Tokens improve the integrity of a network on a public chain. 2) Tokens increase the stickiness between merchants and clients and improve customer loyalty. 3) Tokens facilitate market expansion through the ease of access and transact.
We introduce Franchising into our network because the market expansion of a blockchain expansion company is similar to traditional franchising model. We give definitions of franchisers and franchisees in the context of blockchain development businesses:
Franchisers (most likely Chinese based): A blockchain development company which has a public chain and a native token. The company develops enterprise solutions in various industry verticals.
Franchisees (We use south east Asia as eg): A subsidiary of the franchisers in specific region. Local franchisees have special terms with franchisers such as an exclusive right to sell product in that region.
Clients: An oversea company that needs blockchain solution. In special case it can be local government.
Our model takes two types of relationships into consideration: 1) The relationship between franchiser and franchisee. 2) The relationship between service provider (both franchiser and franchisee) and clients. Tokens will be involved in both types of business relationships, but the economic values that tokens represent are different.
A franchisee is required to stake tokens as part of its service guarantee. This process is similar to locking tokens: the principle is locked in a pool by a franchisee based on terms signed. A franchisee and a franchiser must negotiate a term for franchise-ship, both in terms of tokens needed and time length, allowing blockchain to service as a public record of their agreement. Once terms have been established, the franchisee writes a transaction to the blockchain with the terms of their agreement. We refer to this transaction as the franchise agreement transaction. This type of staking is non-inflationary since it rewards the staking party in the form of services. The staked tokens from a franchisee ensure that he/she works around the ecosystem and the franchisee does not lose anything at the end of the contract when staked tokens are unlocked. A franchisee can benefit from the appreciation of token value after the staking period, and the appreciation of the token value comes from the business development from the franchisee during staking period.
In addition to the token lockup as a guarantee of the franchise-ship, franchisees are required to share some percentages of revenue with franchiser. Because the franchise is kept in token, it has to be that the more tokens franchisees are willing to lock, the less percentages of revenue the franchisees are required to share with franchiser. To sum up, a franchiser and a franchisee need to decide how many tokens are needed to be staked during franchise and what percentage of revenue need to be shared to franchiser.
The revenue share from franchisees to franchiser needs to be in form of tokens. Because franchisers are now doing businesses in China and generate fiat based revenue, they do not benefit token holders. As the result, the additional revenue from the oversea franchise needs to be burned or reward to token holders.
(I do not need to talk about how to monitor franchiser and franchisee revenue, it is matured for ages. Plus we have blockchain to record things)
Now, we need to talk about the business relationship between clients and service providers. We ignore the business relationships in China since it is stick to the traditional model, which clients pay blockchain companies in fiat and sign traditional contracts. There is no tokens at all. However, we have more options if we consider oversea business development and market expansion.
In some countries where cryptocurrencies are more acceptable, business enterprises are able to receive and pay in crypto. So we design the second business model to be more interactive with traditional business model. When a deal is executed, a franchisee receives fiat payment from the enterprise. The execution of a contract involves a real time OTC process which franchisees takes the responsibility of using certain percentage of fiat revenue from the fiat payment to purchase tokens on the exchange or from circulation. The number of tokens purchased equals to the amount of fiat money divided by the real time token price of token in the market. The purchased tokens by franchisees are sent to the token burn pool and these tokens are permanently locked and are unavailable to the market. As the result, the quantity of tokens in the token- sharing pool is proportional to the revenue and profit of the SaaS services franchisees builds for enterprises. The more traditional deals franchisees sign, the more revenue the alliance will generate and then more money is used for the purchase of tokens and allocate tokens into the token burn pool.