Exploring ideas for using basic economic theory in blockchain economic model design

If you are interested in economic model research, please scan the QR code to add BuidlerDAO Assistant to join the group. Please note the economic model. Project parties are also welcome to discuss economic models with us.

We have explained earlier that the economic model design in the project is closely related to the agreement design design of the project. The economic model serves the agreement, and the agreement is the main body carried by the economic model. In a Web3 project, the two support each other, promote each other, and fundamentally, require an agreement or application design that is deeply humane.

The design of a protocol or application is considered more from a human perspective or lower principles. Whether it's a game or some tool application, you need to consider product selection and positioning. The underlying requirements of why users are willing to use it, participate, and spread to people around them can generally be reduced to humanity or desire.

We can explain from two famous theories. One is Maslow's principle of demand, and the other is the usual concept of seven passions and six desires.

(1) Maslow's theory of needs

From Maslow's five-tier requirement principle, we can design tokens to meet several levels of requirements.

• Physical and safety requirements, use financial token design ideas to encourage contributions, and focus on generating external value. FT is more suitable;

• Satisfy love and belonging, use meme meme token design ideas to encourage ownership, focus on intrinsic cultural values, and NFTs are more suitable;

• What do you use to satisfy respect and self-actualization? Proof of Token design idea in the form of SBT? Encourage proof and show off, and focus on expressing the value generated to the group? This doesn't seem accurate, and it also seems like something on a higher level.

(2) Tree of Desire

The general explanation for seven passions and six desires is as follows:

• Seven feelings: Seven kinds of human feelings, generally refer to joy, anger, sorrow, fear, love, evil, and desire.

• Six desires: Buddhism refers to six types of desires: desire for sex, desire for appearance, desire for prestige, desire for speech and voice, desire for refinement, and desire for human companionship, which generally refers to all kinds of human desires.

Generally, it is also more appropriate for product designers to use desire trees for analysis. The content of desire is as follows:

• The desire to survive: including eating, drinking, sleeping, protecting oneself, avoiding risk, evading criminal responsibility, etc.

• Intriguing: People are always happy to get unknown information of interest.

• Desire for expression: By showing oneself, gain a sense of recognition, participation, presence, etc.

• Desire for comfort: Pursue ease, freedom, comfort, and pleasure.

• Social desire: Desire to connect with others to gain a sense of identity, identity, and belonging.

• Desire for fairness: Seek psychological balance, fairness, etc. through various forms such as rewards, swearing, revenge, and the rule of law.

• Desire for achievement: Pursue wealth, fame, status, etc., desire success, and desire to be respected and recognized.

• Desire for power: Desire for power, desire to have leadership, control, influence, etc.

• Fitness desire: I want to stay healthy, beautiful, energetic and attractive, and stay young forever.

• Sexual desire: Driven by reproductive instincts, the pursuit of sexual attraction and sexual satisfaction.

• Lust: Desire for love, family, friendship, etc.

StepN's product design emphasizes the concept of a tree of desire many times. Every product detail is designed from the perspective of the tree of desire to solve what problems users have. Friends who need to know can check out their project's white paper and some interviews with Jerry.

Protocol or application design is an area that requires deep thought. Here we will only mention two dimensions of thought, humanity or desire, without further discussion. A16z has also written some articles related to economic model design and agreement design, which can be viewed online for reference.

As blockchain technology became more mature, more related projects began to appear, whether native blockchain projects or Web3 projects developed later (using blockchain as infrastructure), involving the design of economic models.Design of economic models and design of agreementsClosely related.

Generally, when designing an economic model for a blockchain project, the following factors need to be considered:

1. Total number of tokens design:The total amount of tokens. To meet the development of the agreement, it is also necessary to confirm the total distribution ratio of each participant. Generally, there are fixed totals and unfixed totals.

2. Token issuance:Determine how tokens will be distributed, and how each participant will distribute and distribute them. These include initial releases and releases in the development of the project. The issuance during project development is closely related to the token's liquidity management.

3. Incentive mechanism design:Design incentives to enable participants to actively participate in the project and promote the prosperity of the agreement. It is reflected in more application functions and equity functions at the protocol level, such as token application attributes, payment and value storage; token equity attributes, such as voting rights and proposals in DAO organizations. These incentives are designed to ensure that the development of projects is in line with the wishes of the community. The incentive mechanism includes positive incentives and negative incentives. Positive incentives are rewards, and negative incentives are punishment. For example, rewards in Ethereum staking are positive incentives, and Slash (penalty) in case of problems is negative incentives. At the same time, being able to use positive incentives and negative incentives is a good incentive design.

4. Liquidity management:It is necessary to ensure that the total amount of tokens in circulation matches the development of the protocol. In order to ensure the balance between supply and demand in the agreement, this involves liquidity management methods, inflation and deflation mechanisms. These include internal issues as well as external issues, such as market size, in-app supply and demand, user growth, and competitor strategies.

5. Risk management:One important aspect of token design is risk management. On the one hand, it is mainly reflected in compliance, so that the development of the agreement complies with users' local laws and regulations. On the one hand, it is necessary to consider the systemic risks of the project, such as serious incidents of theft and loss of control of funds management. In addition, corresponding agreement risks also need to consider internal issues such as the project party's sustainability and organizational management methods.

As mentioned above, if we want to consider the above questions, what theoretical systems do we generally follow? Here, we mainly examine the economic model design of blockchain from the perspective of economics. In summary, we mainly start with several main elements of economics: macroeconomics, microeconomics, money banking, and game theory. We look at the principles of design from these aspects, and the part of the design where the economic model interacts with the agreement.

The economic model of a traditional agreement or application is externally presented in a traffic mindset, that is, finding ways to import traffic, promote the prosperity of applications, and then consider commercial monetization. Web3 applications with an economic model generally present value thinking because of the existence of tokens and the growth characteristics of Tokenomics. One idea that achieves balance or mutual influence between traffic thinking and value thinking is market-making mentality. It is necessary not only to drive the value growth of tokens through the prosperity of applications, but also to promote the prosperity of applications through the value of tokens, that is, market-making mentality.

Summarized in one sentence: A protocol or application is a traffic mindset, a token is a value mindset, and the in-between is a market-making mindset.

We analyze the thinking dimensions of design from several economic theory support systems. For each theoretical system, we first summarize its main research content or methodology, and then list the issues that need to be considered in the economic model design and agreement of a project based on the research content.

Macroeconomics is a discipline that studies the overall operation of the economy and macroeconomic phenomena. Its main research topics include the following aspects:

1. Macroeconomic policies:It mainly studies the content and related effects of fiscal policy and monetary policy.

1. Money and finance: Macroeconomics studies the function of money, the money supply, and the impact of monetary policy on the economy. At the same time, it also studies the impact of financial markets and financial institutions on the operation of the economy.

2. Government policies and economic cycles: Macroeconomics studies government economic policies, including fiscal and monetary policies, and the impact of these policies on economic cycles (such as boom and recession).




2. Aggregate demand and total supply:The scope of aggregate demand and total supply, and the content of considering both demand and supply impacts on the economy.

3. economic growth: Macroeconomics focuses on long-term growth trends in total economic output and factors driving economic growth, such as technological progress, capital accumulation, and labor force growth.

4. Inflation and price levels, employment conditions:Macroeconomics studies changes in price levels and the causes and effects of inflation. Research focuses on the impact of factors such as money supply, demand, and cost on price levels. Unemployment and employment: Macroeconomics focuses on employment and unemployment in the economy, studying changes and causes of unemployment, and the impact of government policies on employment.

5. International trade and the international economy:Macroeconomics studies international trade and international economic relationships, including the causes and effects of international trade, balance of payments, etc. It is generally classified as international economics separately.

6. Economic Imbalances and Economic Fluctuations:Macroeconomics studies economic imbalances, such as economic fluctuations, economic crises, and economic restructuring, and analyzes their causes and effects.

There are several main differences of opinion on macroeconomics: monetarism, neoclassical macroeconomics, and neo-Keynesian economics.

In short, the main research content of macroeconomics is to focus on overall economic operations and macroeconomic phenomena, and to study issues such as economic growth, inflation, unemployment, currency and finance, international trade, and government policies from a macro perspective.

Note: The economic terms here can be easily matched to the things in the agreement. Aggregate demand and total supply are basically the same as total supply in the agreement; economic growth corresponds to how many users of the agreement; employment and unemployment can be compared to how many participants in the agreement use the agreement; the level of inflation and price can be compared to the extent to which the number of tokens applied to the agreement and the token price in the agreement; the international economy can be compared to other projects other than the agreement. This kind of analogy makes it easy to understand the relationships between the different objects in these economic principles and the things in the project.

Regarding the research content of macroeconomics and the work content of agreement design, we have summarized a preliminary design content survey table:

Table 1. Contents of macroeconomic theory analysis

Among them are points to consider that may be controversial or extend issues:

The main contents of microeconomic research:

1. Demand and supply (supply and demand relationships and market mechanisms):Study the relationship between supply and demand in the market, as well as the mechanism of price formation. It mainly explores individual decision-making behavior in the market and changes in price and volume caused by exchanges.

2. Utility theory (individual decision making behavior):Study the decision-making behavior of individuals in the face of different choices, including consumer purchasing decisions, enterprise production decisions, and labor supply decisions.

3. Production and costs:Research the production process of an enterprise, including the combination of production factors, production technology, and production efficiency. It also studies the cost structure and cost control of enterprises.

4. Market theory (market structure and competition):Study the different market structures in the market, such as perfect competition, monopoly, oligopoly, etc., as well as corporate behavior and market efficiency under different market structures. Main lecturesInvisible hands。

5. The role of government (market failure and government intervention):Research market failures, such as externalities, public goods, information asymmetry, etc., as well as government interventions and policies on these issues. Main lecturesVisible hands。

6. The role of government (income distribution and wealth gap):Study income distribution methods, the formation and influencing factors of the gap between rich and poor, and explore ways to reduce inequality through economic policies. Mainly speaking of visible hands.

7. Factors of production market:It mainly studies producer-related content, including the influence and determinants of manufacturers' profits, labor supply, interest, etc. As well as specific situations under different market theories.

8. General equilibrium theory welfare economics:Study the impact of general equilibrium theory and economic activity on social welfare, evaluate the effects of economic policies, and explore ways to maximize social welfare.

   
   

These are the main elements of microeconomics research, through research onIndividual Behavior and Market MechanismsResearch, microeconomics, provides theories and methods for understanding and solving practical economic problems.

Note: The economic terms here can be easily matched with the things in the agreement: demand and supply in the market, that is, demand and supply in specific application scenarios in the agreement; utility theory is the utility problem in the agreement; market theory is basically exactly the same as reality in the design of economic models and agreements; government theory is generally not thought to exist in blockchain projects, but foundations or DAO organizations all assume some of the relevant responsibilities; generating factor markets can be compared to the functions of agreements formed based on FT and NFT; equilibrium theory and welfare economics can be understood as the function of agreements formed based on FT and NFT; equilibrium theory and welfare economics can be understood as agreement ecology Similar issues arise for overall development, such as rewards for product use, grant rewards for supporting ecological development, and airdrop rewards for completing some tasks.

Regarding the research content of microeconomics and the work content of protocol design, we have summarized a preliminary design content survey table:

Table 2 Microeconomic theory analysis content

The content of microeconomic design generally involves specific scenarios. There are not many disputes or extended issues; basically, they can all be solved using microeconomics theory based on specific events. Many of these scenarios use game theory content and are described in section 2.4. The role of microeconomics and game theory can be broadly understood, processed, and analyzed by agreements in this wayThe results use microeconomic theory,Controlling the one that produces resultsThe rules are designed using game theory.

The main contents of monetary banking research include the following aspects:

1. Monetary theory:Research theoretical issues relating to the nature of money, the origin and development of money, the function of money, and the supply and demand of money.

2. Interest rates and exchange rates:Similar currencies mainly study the theory and function of interest rates, while different types of currencies mainly study the theory and effect of exchange rates.

3. Monetary policy:Research the formulation and implementation of monetary policy, including issues relating to monetary policy instruments, selection of monetary policy goals, and implementation effects of monetary policy. Study the goals, tools, and mechanisms of monetary policy, and coordination with fiscal policy.

4. Financial intermediation system:It mainly studies the composition of financial intermediation systems and the international financial system. Among them, it mainly studies theoretical issues such as bank organizational structure, operating model, risk management, and capital adequacy ratio.

5. Financial markets:It mainly studies the system, function, and related theories of financial markets. Research the impact of financial innovation on economic development, including issues related to innovative products in the financial market and the application of fintech.

6. Financial regulation:It mainly studies the principles and theories of financial supervision, including issues relating to the establishment of supervisory authorities, formulation and implementation of regulatory policies, and application of supervisory tools. Study the stability and risk management of the financial system, including issues relating to risk assessment in the banking industry and early warning and response to financial crises.

7. The international monetary system:It mainly studies the international influence of influential currencies, regulations related to the international monetary system, and internal and external equilibrium theory.

The above are the main contents of monetary banking research. Different researchers and scholars may have different research priorities and contents.

Regarding the research content of monetary banking and the work content of agreement design, we have summarized a preliminary design content survey table:

Table 3. Theoretical analysis of monetary banking

The main role of money banking has both a macro perspective and a micro perspective. The macroeconomic aspect of monetary policy mainly considers the use of monetary policy to manage liquidity. The micro aspect involves the use of monetary instruments to carry out specific liquidity management. This liquidity management includes tools and instruments that can be used internally, as well as external financial intermediaries and financial markets.

Game theory is a discipline that studies the interaction between decision makers. It mainly includes the following knowledge points:

1. Game definitions and classifications:It includes factors such as participants, strategy, and revenue in games, as well as categories such as zero-sum games and non-zero-sum games in games.

2. Nash equilibrium:Nash equilibrium refers to a state in a game where each participant chooses a strategy and has no motivation to change their own strategy. Game theory studies the existence, calculation methods, and properties of Nash equilibrium.

3. Minimize and Maximize:Game theory studies how to maximize or minimize one's own benefits, including minimization and maximization of pure and mixed strategies.

4. Solution to the game:Game theory studies the concepts and solution methods of game solutions, including pure strategy balance, mixed strategy balance, partial cooperative balance, and complete cooperative balance.

5. Cooperative game:The issue of cooperative game research participants maximizing benefits through cooperation includes the core of cooperative gaming, the nature of stable aggregation and settlement.

6. Dynamic games:Dynamic games study the evolution of games over time, including sequential games, repetitive games, and evolutionary games.

7. Balanced Choice:Game theory studies how participants choose equilibrium, including rational choice, fair choice, evolutionary choice, etc.

Game theory has a wide range of applications in economics, politics, sociology, biology, etc., such as market competition, auctions, cooperation and conflict, and social norms. These applications are all reflected in the design agreement, taking into account the interests of multiple parties, so that the rules designed are more conducive to the development of the project. The relationship between game theory and microeconomics is described in section 2.2.

In this design, it is more about analyzing game scenarios in the agreement, and using the principles of game theory to analyze the desired results in order to achieve balance.Although there are some rational statements about game theory,However, in design, it is basically necessary to consider complete rationality, because there are many jerk parties or experts involved, and almost every scenario can be exhaustive. Once a loophole that can be exploited theoretically is discovered, it will be very destructive.

There is little content in the following table, because it is necessary to separate all game scenarios in the agreement and then determine that game theory principles can solve problems, so this table lists several methods of game theory, and later addresses specific business scenarios. It would be easier to break it down if there were specific cases. So the case study of airdrops was used later:

Table 4 Game theory analysis content

Designing a complete economic model is very time-consuming. It requires designers to be familiar with the business scenario and combine the underlying theory of economics with comprehensive considerations.

As Web3 matures in many fields, the economic model design for projects such as GameFi and SocialFi is more complex. For example, StepN's white paper includes both macroscopic design of product design and economic models, as well as detailed microscopic design, and extensive application of game theory content (including the act of manually deleting bot accounts and inactive accounts in community operations).

It is limited to the size of this topic, and to make it easier to have an initial foundation for understanding, so我Use a very simple scenario - the airdrop of the project to analyze. Because it is very small, it does not cover all of the previous principles and methods, but it can reflect ideas for applying these theories.

The case uses our Web3 email project as an example, so there will be a basic scenario consensus. Others can also practice based on cases they are familiar with. In this scenario, we analyze the specific task of airdrop, and use several perspectives described above in macroeconomics, microeconomics, money banking, and game theory to look at the process of economic model design and protocol design.

All the game scenarios in the business are broken down in the following table, and the basic information is organized as follows:

Table 5 Effective Action Breakdown

According to the macroeconomic theory analysis in Table 1, we need to know some information:

1. What is the total number of economic models designed?

2. What is the ratio of airdrops to the total number of economic models? (It will involve later liquidity management)

3. What are the total KPI metrics to complete for the airdrop? (It is the total demand part of ecological construction)

4. What measures are in place to manage the liquidity of airdropped volumes?

5. What are the external impacts and risks?

Based on a few questions above:

1. According to the size of the market, we designed the total number of tokens to 100 billion;

2. Share of airdrops, using a portion of early customer contributions. That is, a maximum of 10%; some NFT products (ordinary NFTs, SBT type NFTs) were designed to record some non-homogenized contributions.

3. The KPI indicator to be completed by airdrop is to attract a certain number of early customers and generate paid actions. The amount is yet to be determined. The payment ratio is 1/5-1/2 of the total airdrop amount.

4. The airdropped liquidity management uses fee-based funds plus some of the investors' funds, and the airdropped tokens have a withdrawal period. There will be direct buybacks and promotion from both aspects of app promotion. (i.e. market-making theory)

5. External impacts and risks: Legal and regulatory risks, process quality risks, etc.

According to Table 2 microeconomic theory analysis, we need to know some information:

1. Who are the specific participants?

2. What does everyone involved expect from the airdrop?

3. Decomposition of effective actions?

4. What are the generating elements in an airdrop?

5. Value capture in airdrops?

6. What are the external impacts and risks?

7. When does it start and end?

Based on a few questions above:

1. Participants are: C-side customers, B-side application providers, and project parties; C-side customers can be further broken down into jerky parties and real users;

2. The expectations of C-side customers from airdrops: earn tokens and enjoy real services; B-side customers earn tokens, sell products or services, and get revenue;

3. The breakdown of effective actions is shown in Table 5.

4. There are the project's own tokens, as well as some NFTs and SBT, which identify other characteristics of participants;

5. Value capture: installation and use of clients, acquisition of real users, establishment of relationships, verification of detailed products, verification of business models,...;

6. Project development risks, external regulatory risks,...

7. Start date: August 2023 - June 30, 2024. Publish the rules first, then slowly cultivate users and polish the product. Airdrop tokens will have a lock-up period and use a method that can be redeemed early at a discount, but the overall principle is to release users' airdrop tokens in the early or upward phase of the next bull market.

Based on the analysis of game theory in Table 4 and the breakdown of effective actions in Table 5, we summarize them as follows:

Each of these segmented actions has game theory design and considerations, and in addition, combined actions are used to complete the design of game scenarios. For example, eligibility to participate in airdrops uses a combination of the whitelist function of the mission platform, client installation and payment actions, etc., to play games with the Mao Party, absorb real users, and control the cost of absorbing real users.

The theoretical analysis and case study described above are all exploratory attempts. Currently, blockchain or Web3 projects are still relatively early. Many times a reason determines the success or failure of a project, and other design factors don't seem that important. One notable phenomenon is that as long as the project develops well, the overall value of tokens will rise, and making many adjustments and rule settings will not affect development. Ethereum is an example. There have been many economic model adjustments in the development process, including major consensus mechanism changes from PoW to PoS.

The prices of various digital currencies fluctuated sharply in the early days, and there were extremely large uncertainties. However, according to this kind of theoretical analysis and practice, it is very necessary. For example, if the Fcoin exchange is analyzed according to such economic principles, it will be discovered that their business design is unreasonable, the application of game theory is insufficient, and the application of macroeconomics is insufficient (medium- to long-term design without a liquidity management mechanism). A complete comparison can also reveal many problems.

Generally speaking, compared to blockchain native projects before 2021, many current projects are increasingly reflecting the qualitative quality of work and paying more and more attention to medium- to long-term considerations, so economic model design in these projects is also becoming more and more important, and will play a critical role in the success or failure of the project.