In the midst of a harsh bear market, crypto investors are asking tough questions: “What actually drives value to this token, and why would I want to own this?”
I see it first-hand when people ask the same things about Goldfinch, the protocol I helped launch in 2021. The market downturn is forcing the crypto community to become much more discerning.
And this scrutiny is great. It’s prompting the markets to take a more first-principles approach to evaluating tokens, and even more importantly, prompting builders and DAOs to rethink how they design these systems.
Yet where does this lead? I believe it will become table stakes for any token to provide real, tangible value to its holders. Tokens based solely on governance voting power or hopes of a future path to value won’t cut it.
It will also be critical how these sources of value work. The best systems will take a “participant-centric” approach, which reframes the question of value around the network participants rather than the token holders. In other words, worry about the users of the protocol, not the holders of the token.
In the traditional financial world, this approach is often referred to as “stakeholder capitalism,” and it’s the concept behind new legal entity structures like public benefit corporations. But where traditional finance has struggled to make stakeholder capitalism a reality, blockchain technology finally makes it possible because it enables powerful new flywheels.
In this post, I explain how participant-centric systems lead to more sustainable networks with stronger flywheel effects. First, let’s look at how the tokenomics landscape is shifting toward providing value in general. Then, I’ll explain how participant-centric designs amplify it.
It’s All heading to Real, Tangible Value
I believe we’re entering a new phase of tokenomics where it will become essential to provide real value. By this, I mean some way to use the token to access particular benefits or value-driving utility. Not just the ability to vote in governance, or the hopes of some future source of value, but actual value, today.
Currently, virtually no tokens do this. Early DeFi projects like Compound and Uniswap have achieved large market caps without direct paths to value from the token. And in cases like Uniswap, the protocol doesn’t even take revenue. For these early projects, token value is often based on speculation that the protocol might eventually introduce revenue, and that token holders might eventually have some way to access it.
But this premise is becoming less convincing over time, and soon it won’t be enough. Tools like Token Terminal and DefiLlama are already starting to provide more nuanced data, including metrics focused on the revenue that goes to the protocol.
We also have the telling example of GMX, an early mover in creating token value by sharing fees with token holders, and which has dramatically outperformed the crypto markets. Other projects are starting to think about it too, with recent community proposals across protocols like Uniswap, Lido, and Angle (see here,here, and here) that bring up the idea of adding or increasing protocol fees.
These paths remain uncertain since fee distributions to token holders can raise concerns under U.S. securities laws (and as explained below, I think pure distributions are suboptimal anyway because they aren’t participant-centric). But the topic is still coming up more and more.
I believe it’s all part of a broader trend. Protocols will begin to push beyond “governance tokens” and implement more tangible forms of value for their tokens.
Focus on the Participant, Not the Tokenholder
However! The way a protocol implements this value is critical. To create sustainable systems, protocols should design their tokenomics to be participant-centric rather than token-holder-centric.
I’ll define what this means: A “participant-centric” system is one that encourages all of its participants to be co-owners of the protocol. The more tokens the participant owns, the more they benefit from participating in the protocol.
This focus on participants rather than holders is the key. With a participant-centric approach, we ask “How is every participant incentivized to own the token, and how does that amplify their experience?”
That’s a far more valuable and lasting proposition than asking “What do the token holders get?”
This makes all the difference because it leads to systems where token holders must actually participate in the protocol to get value from the token. To be clear, this is not about giving the token holders something to do. It’s about empowering the users to be owners — about building on the crypto ethos of the ownership economy and aligning the people using the protocol with its long-term success.
Participant-centric tokenomics bring this core tenet of decentralized ownership to the use-case layer, encouraging participants to own in the future of the tools they use.
This is incredibly powerful because it creates a flywheel:
Let’s walk through it:
A user participates in the protocol to do some activity they find valuable.
That user can enhance the value they get from that activity by owning more of the token.
This increases demand for the token, which increases the network’s value.
The protocol uses the increased resources from the larger network value to either further incentivize the activity or invest in improving it, like adding features to enhance the experience for participants.
This makes the activity more compelling, which attracts new users and more participation.
This kind of flywheel has never been possible before, and it’s why stakeholder capitalism has previously failed to achieve widespread success. But the superpower of crypto tokens is that they are programmable. It becomes trivial to tie usage of the product directly to ownership of the token in a way that was never an option for any prior form of asset.
To not make that connection, such as by distributing value to holders who aren’t actively participating, is a waste. Crypto allows us to create virtuous loops where the users get to be owners, who then see upside from being even more active users.
Plus, participant-centric tokenomics offer another major benefit in that they may help significantly reduce risks related to U.S. securities laws. That’s because the upside a token holder might get from the token is tied to their actual participation in the system, not to them simply holding the token.
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How to Design a Participant-centric System
To design participant-centric systems, the first step is to go through each participant and identify what value they get from using the protocol. Then, the second step is to implement an incentive where the more tokens that participant owns, the more of that value they get from their beneficial participation in the protocol.
That’s pretty abstract, but I can use Goldfinch as an illustrative example. Let’s go through each participant:
Investors get value by supplying capital to earn yield. So the system should encourage investors to own more tokens in order to increase their yields.
Borrowers get value by being able to borrow. So the system should encourage borrowers to own more tokens in order to be eligible to borrow more.
Auditors get value by being paid to perform audits. So the system should encourage auditors to own more tokens in order to earn more audit fees.
Notably, the value doesn’t need to be a literal distribution. It can be any benefit — like being eligible to borrow, receiving insurance coverage, getting priority access to pools, skipping to the front of a queue, and the list goes on — so long as it enhances whatever value that particular participant gets by using the protocol.
When you achieve this for every participant, it creates a strong, cohesive system: every participant in the protocol is incentivized to own more of the token because it maximizes their individual use case, thereby maximizing value to the protocol.
The Next Phase of Tokenomics
The bear market puts a microscope on everything. As early token models with limited utility become less convincing, I expect protocols will start adding more direct forms of value to their tokens.
The most impactful ones will do so by creating powerful flywheels with participant-centric designs. In the process, they’ll build on the crypto ethos of empowering the users to be owners, and make the vision of stakeholder capitalism a reality.
Ironically, even though it’s the token holders who are sparking this shift, the best designs won’t actually worry too much about what they want. They’ll focus on the users.