Cryptocurrency blockchain technology is attracting worldwide attention. An initial coin offering (ICO) is a type of funding using cryptocurrencies, and the number of ICOs has been increasing since Vitalik Buterin, who made groundbreaking contributions to the development of cryptocurrencies, created the Ethereum platform in 2014 [1
]. Specifically, more than 30 ICOs took place in 2016, their number reaching 800 in 2017 [2
]. Many countries recognize cryptocurrencies as a type of asset and are preparing standards and regulations in this respect [4
]. Recently, leading global corporations joined in ICOs, raising expectations that cryptocurrencies can complement the conventional corporation system. A number of ICOs, however, failed to achieve the desired purposes due to poor design of their economic models. This study aims to propose a process for building a desirable model for ICOs based on case analysis. ICOs with a well-designed economic models will achieve high market value and sustainable growth with voluntary activities of participants who may pursue their own interests.
The key to a successful ICO is the design of a token economy model. Despite the significant interest in the business field on this topic, academic research is scarce and still emerging [5
]. As such, to respond to the urgent demand for research on token economies with blockchain technology, this study analyzes an exemplary token economy model, Steemit. The research question is, how should a community design its token economy model for self-sustainable growth? While most studies on token economy models come from economics or computer science viewpoints [6
], this study contributes to the literature by suggesting a process for building a token economy model from the strategic management perspective. Specifically, we focus on a mechanism design that enables sustainable business growth with de-centralized governance and an incentivized user base. The results will also provide managerial insights for managers and entrepreneurs to develop their businesses using cryptocurrency tokens.
To explain the new economic trends of cryptocurrencies, we need to understand the concept of crypto-economics. Crypto-economics is different from conventional economics in three ways. First, it is also referred to as a programmable economy, as it can program an economic system that reflects complexity and volatility based on blockchain technology [8
]. Such a system can earn high trust from participants. A blockchain technology-based system has no central server and the original data are stored in distributed servers, making them less vulnerable to hacking and more difficult to change data once they are registered, guaranteeing non-reversible trust [9
]. Second, a user participation incentive system can be established [9
]. In crypto-economics, the property of currency can be programmed and human behavior controlled within a predictable range by programming incentives. For instance, incentives can be designed to make users participate in activities to raise the value of the currency and enhance system efficiency. Finally, a crypto-economic system is transnational [10
]. Taking Bitcoin as an example, it can be liquidated in most countries with just a wallet address and used to make payments with QR codes (Quick Response codes), while carrying the wallet address cannot be regarded as an illegal transfer of foreign currency.
Crypto-economics can program human behavior through incentive design and solve a range of problems related to sustainability. For instance, it is necessary to obtain and measure an extensive amount of data to address climate change or energy problems, as well as the active participation of people worldwide to such issues [11
]. With a crypto-economic system, it is possible to collect highly reliable data with technologies such as the Internet of things (IoT), big data, and blockchain technology and design incentives for participants to produce and consume energy more efficiently, thus inducing global participation. When incentives are designed with conventional currencies or points, instead of a cryptocurrency, the system is not free from manipulation, hacking, or abuse, and financial resources to provide incentives should be prepared. On the other hand, a cryptocurrency-based incentive system is not only transparent and accurate in handling data, but also allows businesses to substitute initial investment costs with cryptocurrency tokens until they are on a sustainable growth trajectory in terms of network effects [12
]. Metcalfe’s law states that the effect of a network is proportional to the square number of connected users in the system [13
]. In the system of crypto-economics, the value of the network is linked to that of the token and, as the network expands, the value of token incentives—distributed to initial participants—increases, making it possible to provide sufficient benefits to participants. In the energy sector, various cryptocurrency projects are in operation at initial stages.
The essence of crypto-economics lies in the design of a token economy model [12
]. Here, a token is a medium for exchange and also has value and functionality. For the sustainable growth of crypto-economics, it should be modeled so that the properties and management strategies of the token are linked to user incentives, motivating users to voluntarily contribute to the development of the system [12
]. Token economy is a discipline developed for the systematic reinforcement of target behaviors among students or patients [14
]. Research on token economy is however required to systematically manage user behavior in de-centralized crypto-economics, but there exist few studies on token economy that specialize in cryptocurrencies.
This study thus proposes a process for building an adequate model of a token economy based on the case of Steemit, a blogging and social networking website that is creating high value due to its efficient token economy model, laying the foundation for the future development of crypto-economics research.
This paper analyzes the token economy model of Steemit, a lucrative business model using cryptocurrency. Specializing in cryptocurrency, token economy is in its early stages and, thus, an in-depth case analysis of a real-life, successful token economic model can provide significant implications for future theory-building [30
]. To this end, the design process of a token economy model is proposed here based on the Steemit case and other related studies. The Steemit model of token economy is then described in detail according to this process. Materials on the token economy of Steemit were gathered from the Steem white papers, other reading materials, and an interview (The interview was conducted in the form of private seminar with Steemit users in Seoul, Korea on 2 May 2018. The seminar was hosted by IT Chosun with the title of “Ned’s Talk: The Future and Opportunity of the Steem Blockchain.” One of the authors participated in the seminar and talked with Ned Scott [31
].) with one of its co-founders, Net Scott. We chose a case analysis to develop the design process of a token economy model, due to the lack of extant studies and other reference materials.
We also analyzed the relationship between token value and users’ posting activity on Steemit. We accessed the user data on steemsql.com
, a publicly available database, and STEEM price data on coinmarketcap.com
. Daily data from 1 May 2017 to 18 November 2018 were gathered. We discuss the results in the “Conclusion and Discussion” section.
When designing a token economy model, the following should be considered. From a strategic management perspective, corporations need to use tokens to remain competitive. To this end, the fit between the market and the proposed token business model should be high [11
]. High technical skills may not lead to business success if the product-market fit is low. Sustainable value creation can be achieved through a good fit between the product and the market [32
]. At the same time, the incentives given to participants based on tokens should help create business value and, ultimately, corporate performance. The token economy model can then be introduced to existing businesses, and also used to create new ones [12
]. If it is believed that tokens can be useful in securing a competitive advantage, the terms of providing and exchanging tokens should be defined for the businesses to remain competitive. Specifically, how tokens can be used, and the strategies to operate and increase the value of tokens, should be established, along with a mechanism for measuring the value of tokens realistically while steadily increasing the number of users [12
]. For sustainable growth or the stability of token value, encouraging users’ long-term participation is required to create token demand and design an incentive system for users’ desirable behaviors and long-term possession of tokens [34
]. Against this backdrop, this study suggests the following design process of a token economy model: (1) Determine token-business fit, (2) determine the chance of success, (3) determine the properties of token, (4) give tokens intrinsic value, (5) establish strategies to raise token value, (6) establish operational strategies of token economy system, (7) establish strategies for token liquidation, and (8) continue modifying the operational base.
5. Conclusions and Discussion
Sustainability, such as energy, the environment, and climate change, is frequently mentioned as an area where blockchain technology can be applied [11
]. By doing so, accurate and transparent incentives can be offered to corporations or individuals, inducing them to voluntarily participate in activities that produce and consume energy more effectively and protect the environment. While corporations and individuals act in their own interest, they can help solve environmental global problems at the same time. To build such an ecosystem in a sustainable manner, the number of participants should be large enough to create a network effect, which will make the utility of each participant higher than the cost of participating in the ecosystem. However, utility is hitherto assumed to be lower than cost, it is thus necessary to make significant investments to attract participants to the ecosystem. In areas with large potential profits—such as Facebook and Uber—traditional venture capital played the role of an initial investor and reaped the majority of gains from ecosystem growth. However, there have been no subjects to date that can cover the initial investment cost and risks in the public domain, in areas such as energy, the environment, and the climate. At a more general level, sustainability deals with, not only environmental effects, but also social issues. Sustainable development of a business involves the achievement of economic, environmental, and social sustainability objectives, satisfying diverse interests of stakeholders [48
]. From this point of view, the business model of Steemit can better achieve social sustainability by sharing value with community participants, compared to established social media giants that share profits only with shareholders. With the introduction of cryptocurrencies and the token economy, it has become possible to issue and distribute financial rewards to initial participants, allowing the results of the growth of the ecosystem to be shared among participants [12
]. To spread this trend, it is necessary to have a better understanding of cryptoeconomics in relation to blockchain-based cryptocurrencies.
As such, this paper introduced a method to design a token economy model, the essence of crypto-economics, and analyzed the case of Steemit, a fast-growing token economy. The first step in building a token economy model is judging token-business fit [11
]. In other words, it should be decided whether a business can be newly implemented and grown by the introduction of tokens. Second, it needs to be assessed whether a business can have a competitive edge. That is, a business should be able to provide differentiated values to users, leading to tangible results, including creating new sales, expanding market share, and having first-mover advantage. Third, token properties should be determined [12
]. Depending on their use, tokens can be used as platform, service token, reward, or membership tokens. Multiple properties can be given simultaneously and considered differently from the user perspective. Fourth, it is possible to secure system stability by giving intrinsic value to tokens. This means pegging tokens to a legal tender at a fixed exchange rate. Fifth, a strategy to raise token value is needed. Token velocity should be appropriate to enhance token value [41
]. To induce users to hold tokens for longer, they can be allowed to share profits, require transaction requests to be delayed for a certain amount of time, or raise the expectation of the future growth of the community. Sixth, operations strategies for the token economy need to be established. Generally, strategies can be classified into business growth-linked type to use network effect, burning type to increase token value, and dividend type to allocate newly issued currencies to token holders. Seventh, token liquidation should also be considered, and can be considered an exit strategy by allowing token holders to realize the value of their tokens by listing them on an exchange [46
]. Finally, it is important to make continuous efforts to improve and manage such a system based on its operation.
Tokens have significant influence on the growth of communities [22
]. Chohan [47
] argues that the value of Steemit is likely closely related to the value of social networking and sharing rather than that of speculative investment. In other words, token value will be correlated with the fundamental function of the content platform, that is, sharing the content. We collected STEEM price and Steemit user data to analyze the correlation between the number of postings on Steemit and STEEM price. Analysis of the daily data from 1 May 2017 to 18 November 2018 shows that the correlation coefficient is 0.82, with a significance level of 0.01. The result confirms that the value of Steemit is highly correlated with users’ activities of sharing the content, which could be attributed to the sound token economy model.
However, Steemit has several limitations. Token price is determined by supply and demand of the token, so there should be enough sources of token demand for a sustainable token economy design. Steemit has an innovative design for paying tokens to users, but there are not enough sources to spend tokens on. Another limitation is that a few wealthy users with a lot of SPs may monopolize the power in the community [47
]. Additionally, there might be problems of self-voting and power abuse [7
]. Steemit pursues a decentralized community model, but the strong influence of heavy users may undermine this vision.
This paper brings significant implications by presenting the design process of the token economy model, the essence of crypto-economics, using a case study. While most studies on the token economy model are from the perspectives of economics or computer science [6
], this study was conducted from a strategic management perspective, focusing on sustainable business growth with an incentivized user base. Considering crypto-economics is still at an early stage, it is expected that the guidelines on the token economy model suggested in this paper will contribute to the development of future research. Additionally, it also provides practical implications for corporations to use cryptocurrencies in their operations. Given that numerous corporations worldwide are using cryptocurrencies and ICOs, studies on a token economy model in diverse areas will be beneficial. There are some limitations pertaining to this study. First, there is the issue of external validity due to the number of cases it analyzed. Steemit is one of the few communities with crypto-economics that have grown over the years, so the number of real business cases is still small. Second, there are few extant studies on the topic of crypto-economics, so we had to rely on the business case to propose the token economy model. As such, our results should be cautiously generalized. As the number of successful models of token economy accumulates in the future, empirical studies with statistical analyses will present more generalizable results. Also, analyses of token economy models that directly deal with environmental or social sustainability issues will yield significant implications.