The main difference between these two comes down to utility. There are things you can do with tokens and not with coins. On the other hand, some marketplaces will accept coins and not tokens. They are usually baked into a cryptocurrency’s code by its founding developers. The conditions in which they are distributed as well as the utility offered influences its supply and demand – creating a different kind of economics, known as tokenomics.

For example, Bitcoin’s tokenomics allows no more than 21 million coins to ever be mined, with the last coin expected to enter circulation around the year 2140. Ethereum does not have a maximum limit, but issuance each year is capped

On a fundamental level, all digital assets can be defined as either a ‘token’ or a ‘coin.’

If the cryptocurrency operates independently of other protocols, has its own blockchain network, unique rules and governance structure, that’s categorized as a coin. The coin itself serves as an incentive mechanism to reward all the participants of the system.

However, if the cryptocurrency depends on a blockchain network or platform such as Ethereum in order to operate then it’s designated as a token. Although each transaction of said token is also a transaction on its parent platform, said platform will have its own cryptocurrency coin. There are plenty of tokens that run on the Ethereum network, but Ether is the official coin of the platform.

Token vs coin: That dinner for two vouchers you got in the mail is a token. Your car title is a token. When you sell your car, you transfer the value of that title to someone else. However, you can't go to Microsoft and buy a computer with that title or dinner voucher.

The difference between token and coin isn't vast, but it can cause a major headache if frequently overlooked. One quick way to decide which one you should use is to pay attention to what you're buying.

If it's a product, most often, you would need coins.

If it's a service, there are usually utility tokens you can use.

Another example is basic attention token (BAT): advertisers use BATs to pay for their ads, publishers receive BATs for hosting these ads, and web browser users are rewarded BATs for viewing these ads. Second, user adoption exhibits network effects. In both examples, the more users the platform has, the easier it is for any user to find a transaction counterparty, and the more useful the tokens are. Our model also applies to tokens used on centralized platforms, such as those being developed by platform businesses.

equilibrium token pricing formula exhibits three desirable features. First, token value depends on the platform’s productivity, which captures the platform’s functionality and other related factors (e.g., technology and regulatory environment). Second, the user base enters positively into the pricing formula, capturing the positive network externality of user adoption. Third, user heterogeneity matters for both platform adoption and token pricing.

Holding tokens as means of payment incurs a carry cost that is the forgone return from investing in financial assets. However, on a promising platform with a positive productivity drift, such cost is partly offset by the expected token price appreciation.

Token Types:

Just as a reckless CEO can topple a company, bad decisions in tokenomics can kill off a DeFi project – and kill confidence in crypto & web3 – like the crypto crash in 2022.

Chris Dixon calls it “the internet owned by the builders and users, orchestrated with tokens.”

The paradox of reputation tokens: Was it earned or bought?

Yet designing reputation systems requires complex considerations around reputation supply, distribution, credibility, and more. So while many are exploring this space—from DAOs like FWB to play-to-earn games like Axie Infinity and new social platforms like BitClout—builders have yet to agree on the best way to design these reputation systems.

Drawing on our knowledge of economic theory and game design, we argue for a reputation system design based on a pair of tokens—one for signaling reputation and the other for offering liquidity —which could serve as tangible representations of meaningful contributions.

This presents a paradox: if a token can be transferred easily, then those without reputation can simply purchase it, which reduces the token’s ability to serve as a reputation signal.

Remember when it was easy for people to buy followers on Instagram? That made the follower count a much weaker measure of reputation, to the point that brands started looking for engagement metrics that were much harder to “buy.”

The link between points and coins provides a natural mechanism to reward users who have made high-quality contributions. But because points are non-transferable, there is an element of hysteresis: those who accumulate points early could end up owning a disproportionate share of the dividends, especially if the asymptotic coin supply is fixed.

In many crypto projects, the largest holders end up being just the people who were aware of the project earliest. But those early adopters are not necessarily the most valuable to the future of the ecosystem. So it is essential to maintain incentives for ongoing contributions and engagement. One natural way to achieve this in a two-token framework is to have points degrade or depreciate over time. This can be implemented by decreasing dividends as a function of the age of user points. But an even easier implementation is to simply have a user’s point totals decline, either mechanically over time or as a function of the user’s engagement level relative to others.

Making reputation tokens transferable not only reduces their ability to serve as a signal of reputation, it can also diminish their ability to serve as valuable compensation. Thus, establishing reputational capital requires fully (or at least mostly) non-transferable tokens. The question, then, is how to translate reputation into liquidity.

This is again analogous to what happens in gaming: With absolute leaderboards, points are zero-sum—if a player does not maintain their contributions, then they eventually lose their standing as other players overtake them. The same is often true on creator platforms, where competition for consumer attention incentivizes ongoing participation.

We’ve outlined some core principles of social token design, but it’s equally important to complement such designs with product-market fit that intrinsically motivates users. For example, a play-to-earn game that focuses its efforts on enabling users to profit but that doesn’t get the “play” element right misses the point: that games are, first and foremost, supposed to be played for fun.

A product that’s bootstrapped around a reputation system but lacks true product-market fit risks creating a community of speculators, rather than of actual users.

But once product-market fit is achieved, incentive dynamics take over. It would be very difficult for a platform to scale and reach mass adoption if it doesn’t reward users properly. To make the incentives work, a reputation system should separate social capital from financial capital, particularly if the former offers a clear path to the latter.

Reputation cannot be transferrable or liquidated.

This informal approach to governance mixes on-chain execution with off-chain decision-making processes.

With off-chain governance, decisions are made away from the blockchain – that’s to say, decisions are discussed at conferences and via written proposals, then executed on the blockchain in a separate process. Instead of true decentralization, off-chain governance sees key stakeholders (the lead developer team or significant miners) vying for control via influence and strategy (sort of like politics).

The result? A system that is once again centered around an influential few. Let’s take a quick look at two of the top-dog cryptocurrencies who both use an off-chain governance system.

That’s right, the leading cryptocurrency – the protocol that lit the world up with the potential for decentralization – relies on off-chain governance.

With Bitcoin, all major modifications suggested to the network are discussed off-chain. This is to say that big decisions are made at conferences and via messages by important parties, such as the core development team, miners and to some extent the end-user community. So owning BTC might give you a voice in the conversations, but ultimately you have no proper voting rights – development is proposed and decided centrally, and ultimately the activation of those new ideas is undertaken by the network nodes.

Ethereum’s governance model is pretty similar to Bitcoin’s. There’s a core dev team (led by Vitalik Buterin) and any changes or modifications to the network are addressed both publicly and in private discussion. Users of the protocol get a say, but they don’t quite get the sway that might influence change.

What happens here is that the control is centralized around a few stakeholders and a few influential people get a genuine say in where the protocol can go. In other words, simply holding some ETH does not give you a say in how the network is run.

If off-chain governance sees big decisions discussed informally by a core few, on-chain governance moves the entire process onto the blockchain itself and gives all stakeholders a voice.

Here, proposals are accepted or rejected via governance tokens (we’ll talk about that below) which allow holders to cast a vote on key decisions and have it weighted to reflect their stake in the project.

The key difference between off-chain and on-chain governance is in how decisions are made and by who. With off-chain governance, very few parties really get a say in the process – by the time proposals reach the blockchain, they have already been defined and shaped by a few core voices, and even then, the final adoption of those proposals rests with the nodes, rather than the stakeholders in the currency itself.

With on-chain governance, all changes are coordinated on the blockchain network and are approved or rejected proportionately by anyone who holds a governance token.

If blockchain allowed the whole system to become decentralized, then governance tokens take the movement a step further by enabling the entities within that system to decentralize themselves as well.

Simply put, governance tokens are crypto tokens that interact with the smart contract of a blockchain to grant an owner voting powers for the project. They’re like a little voting chip issued to members involved in the project to accept or reject proposed changes. This means that anyone with a governance token has the power to directly be involved in where a protocol might go.

Every token offers the owner a voice in the ecosystem, meaning devs, big wigs and big miners don’t make the decisions in a silo.

The beauty in a governance token is that it allows projects to become fully decentralized and autonomous, forming and galvanizing a community by distributing control to the users in an organized way – from here, hierarchy is no longer actually needed.

This has already created ripples in how we organize and what we expect. The emerging ecosystem of DAOs for example has been enabled by governance tokens, permitting token holders to form a real community and be heard within that community.

This means that all sorts of DAOs, from creative projects to automated market maker (AMM) DAOs, investment DAOs, and metaverses have been established by the concept of a token that empowers the community to run the project and dictate its future.

To get a better picture of exactly what sort of projects are utilizing governance tokens, and how, let’s take a look at some recent examples, and what they meant for their projects and community.

Decentralization exists on a spectrum, and it makes sense to begin with the project pushing the limits of that spectrum. YFI is the token behind Yearn.finance, a project that was launched by a guy called Andre Cronje. His decision as the lead dev of the project was to create a token that would hand over the reins of the project entirely to the community and transform it into a ready to go, self-sufficient DAO  – in other words, Kronje himself did not keep any of the token, or its associated powers.

The launch of the project was a big deal and it’s considered one of the deepest dives into decentralization we’ve seen so far. It’s a bit of an experiment in the space, as it pushed the boundaries of how extreme decentralization could go, so keep watching YFI for insight about the future of decentralized communities.

People are people, and governing a blockchain comes with many of the same problems as real-life governments: one common bone of contention is low voter turn-out, which can make processes slow and unrepresentative. Polkadot – the layer-two blockchain seeking to make all networks interoperable – overcomes this with a formalized system, where Council Members can be voted on by holders of DOT to represent their interests, sort of like a member of parliament.

Polkadot not only embraces on-chain governance but also gave careful consideration to how its voting processes would interact with the people behind the tokens, to ensure the long-term success of the project. We might expect to see this more often as the blockchain ecosystem expands and matures.

One interesting trend to emerge from the use of governance tokens is incentivization of support for early-stage projects. Ethereum Name Service (ENS) adopters saw a MASSIVE reward with a huge airdrop of governance tokens in late 2020 and it caused a major stir in the space. The price of the project’s native token ($ENS) shot up and the early adopters saw an immediate reward for their initial support, which caused a huge buzz in the DeFi space and left many users wondering which projects would be next to do the same.

The drop came with a bit of a caveat: To claim the tokens, users needed to vote on four of the articles of the protocol’s constitution first. It’s a case of active participation generating active rewards – representing the concept of governance token rather neatly.

The metaverse promises to offer users hyper-realistic online societies that mimic real life, but offer greater potential for global collaboration, creativity and global self-governance. So it stands to reason that governance tokens are playing a big role in organizing the voices within that system.

Decentraland, one of the biggest social metaverses in the space, is a DAO run by holders of the native tokens MANA, who can use it to vote on decisions and proposals about the Decentraland ecosystem and its future; these include whether certain locations should be points of interest for users to visit, scaling solutions, which members should be hired as DAO facilitators, the banning of some addresses from chatting, and a whole number of things that shape the future of the metaverse and where it goes.

All of this can be undertaken by a community that is physically scattered but united around the management of Decentraland.

The distribution of power via governance tokens means that the fate of a project rests in the hands of its community.

Read that again. Yes, it is a bit scary. And that’s OK.

These tokens are not just about power – they confer a pretty big responsibility too. How a project performs relates directly to how we, the community, have managed it, and with decentralized governance still nascent, we’re yet to see where that will take the blockchain environment as a whole. But with DAOs emerging to rival traditional companies in nearly every sector, the metaverse on the ascent and DeFi continuing to offer users fairer access to finance via decentralized protocols, it seems this is the start of something pretty significant, not just in terms of technology, but in terms of what we consider a community to be.

So stay informed, talk to the projects that interest you and make sure you do you own research – the reward is having a voice where you never had one before.

The liberal billionaire Frank McCourt has pledged $25 million toward developing a protocol for putting your social graph—the interlocking map of relationships that you’ve built up over the years but that is probably owned by Facebook—on the blockchain.

Crypto’s user-unfriendliness puts tremendous pressure on the whole ecosystem to do the one thing it was designed not to do: centralize.

Moxie Marlinspike, a cryptographer and creator of the open source encrypted messaging app Signal, argues that because most people crave convenience, centralized services always end up imposing themselves on top of decentralized technologies. In the early days of Web 1.0, some people thought “we’d all have our own web server with our own website, our own mail server for our own email,” he writes. “However—and I don’t think this can be emphasized enough—that is not what people want. People do not want to run their own servers.”

the technology is far too difficult to use. Doing anything in Web3 is unbelievably confusing. I needed help just to redeem my crypto lunch tokens when I checked in at the hotel. If you want to get anything done and aren’t a programmer, you end up just clicking “OK” on a bunch of prompts that you don’t understand. This is a great way to get ripped off.

This pattern, Marlinspike points out, is already repeating itself in Web3. It’s quite cumbersome, if not impossible, for an app on your phone to interact directly with a blockchain. So almost all Web3 apps rely on one of two companies, Infura and Alchemy, to do that. Likewise the digital wallets that most people use to store their crypto assets. In other words, nearly every Web3 product relies on a middleman to say what’s happening on the blockchain. That’s a whole lot of trust for a system designed to make trust obsolete.

The situation is even more centralized than Marlinspike lets on, because one company, ConsenSys, owns both Infura and the most popular wallet, MetaMask. Yes, your data lives indelibly somewhere on the blockchain, but in practice, any Web3 app you might use probably relies on these centralized services to access it. As an illustration, Marlinspike writes that when a satirical NFT he created got pulled from OpenSea, it also stopped appearing in his MetaMask wallet, even though it still existed on the blockchain.

“There’s a lot of things that people try to use blockchain for that you don’t actually need a blockchain for,” Johnson says. “People try to build social networks on blockchains, and they put every tweet, or whatever they call it, and every ‘like’ on the blockchain, and it’s like, What are you doing? That’s so dumb!”

A decentralized technology does not guarantee a decentralized market. Take email. Email is a decentralized protocol. Anybody can, in theory, set up their own email server, but very few people do, as Marlinspike pointed out. Instead, people use email clients, and the market has centralized heavily around a handful of providers, especially Gmail. Even if you personally opt out of Gmail, the person on the other end of every second email you send probably uses it, meaning a copy of your email lives on Google’s servers whether you want it to or not.

But even members of the progressive Web3 community have essentially zero interest in directing their formidable resources toward influencing public policy. They tend to think, instead, as Pangilinan put it, that government is the problem being designed around: just another institution, like Google or Facebook, that demands our trust without earning it.

former Ethereum core developer named Lane Rettig. He was frank about the shortcomings of crypto and Web3. But he strongly agreed with Pangilinan about the futility of government regulation. Rettig is working on a blockchain called Spacemesh. Unlike Bitcoin or Ethereum, which require tremendous computing power to mine, anyone can mine Spacemesh tokens using spare processing power on their laptop or smartphone, just by downloading an ordinary-looking app—meaning the network could be distributed among millions of participants, rather than the tens of thousands of people who run Bitcoin or Ethereum nodes.

BACK IN THE early days of Web 2.0, the open source movement—that era’s generation of idealists—was guided by a perhaps naive belief in the willingness of people to volunteer their energies and talents for the greater good. Linux die-hards believed software should be free, recoiling at the profit motive. The platforms born in this era played to that spirit, deploying lofty rhetoric about making the world a better, more open, more connected place—while, in the background, quietly setting up global surveillance operations to spy on their users for the benefit of advertisers.

The thing is, those ordinary users probably don’t care much about data ownership or immutable public ledgers. They care about convenience and fun and being where their friends are. So how do you get anyone to use your new Web3 app?

The answer is tokenomics. The business model of nearly every proposed Web3 platform entails distributing tokens to everyone involved, thus incentivizing them to use and improve the platform to make the value of those tokens go up. In Web3-speak, this is called “aligning the incentives.” The concept has its roots in Bitcoin, whose pseudonymous creator, Satoshi Nakamoto, devised a set of rules to prevent conflict between an individual’s self-interest and the interests of Bitcoin. Using game theory principles, Bitcoin could incentivize everyone to act for the collective good. Even if someone took control of enough of the network to be able to rewrite its history and inflate their account, they would have a powerful reason not to: Such treachery would kill confidence in Bitcoin and thus crater the value of their own holdings.

Web3 apps promise not just to pay users but to give them a say in how the platforms are run.

How do you keep someone from buying enough tokens to exert unilateral control? How do you know the crypto accounts holding tokens belong to separate human beings? If you do manage to keep things decentralized, how will you act quickly enough to compete with traditional businesses that don’t have to put every single decision to a vote?

The answers are all speculative, because none of that governance stuff actually exists yet.

Everyone has a white paper spelling out how their new platform will be governed by “the community” … eventually, ultimately, at some future point yet to be determined, once a whole bunch of other issues are sorted out and the platform gets big enough to remove the training wheels.

For some Web3 luminaries, the real goal is to use cryptocurrencies to lock human beings into a more cooperative, less self-destructive society.

Kevin Owocki is the founder of GitCoin, a platform for funding open source Web3 projects that has raised and distributed roughly $60 million so far.

Owocki told the crowd that since research shows money stops increasing happiness after about $100,000 in annual income, Web3 founders should maximize their happiness by giving their excess money to public goods that everyone gets to enjoy. “There’s cypherpunk, which is all about privacy, decentralization: hardcore libertarian shit,” he told me. “I’m more of a leftist. I’m more solarpunk, which is, how do we solve our contemporary problems around sustainability and equitable economic systems? It’s a different set of values.”

“regenerative cryptoeconomics.” Crypto­economics, he writes in GreenPilled , “is the use of blockchain-based incentives to design new kinds of systems, applications, or networks.” Regenerative  cryptoeconomics means doing this in a way that makes the world a better place for everyone. The goal is to break free from the zero-sum, rich-get-richer patterns of capitalism. Owocki believes that the right cryptoeconomic structure can help solve collective action problems like climate change, misinformation, and an underfunded digital infrastructure.

The Quadratic Lands, Owocki explained, are a mythical place where the laws of economics have been redesigned to produce public goods. “It’s just a meme,” he said. “I don’t want to tell you it already exists.”

In a quadratic voting system, you get a budget to allocate among various options. Let’s say it’s dollars, though it could be any unit. The more dollars you allocate to a particular choice, the more your vote for it counts. But there’s an important caveat: Each marginal dollar you pledge to the same choice is worth less than the previous one. (Technically, the “cost” of your vote rises quadratically, rather than linearly.) This makes it harder for the richest people in a group to dominate the vote. GitCoin uses an adaptation, quadratic funding, to award money to Web3 projects. The number of people who contribute to a given project counts more than the amount they contribute. This rewards ideas supported by the most people rather than the wealthiest: regenerative cryptonomics in action.

Glen Weyl, the polymathic Microsoft researcher who came up with quadratic voting, is far more cautious than Owocki about its applicability to blockchain. In a foreword to Owocki’s book, he writes, “I am deeply ambivalent about Web3.” He has positioned himself as a sort of insider critic of the movement, one who supports its broad goals of decentralization and digital public goods but questions its faith in the potential of blockchains and cryptocurrencies in their current state.

Weyl walked me through the weaknesses of using quadratic voting in a DAO. A major problem is Sybil attacks, in which one person creates a thousand “sock puppet” accounts and uses them to take over the voting. Even if you come up with a solution to the proof-of-­identity problem so that it’s hard to make duplicate accounts, someone could just get people in the analog world to create accounts on their behalf. Imagine, Weyl said, if the Chinese government wanted to take over a DAO. All it would have to do is instruct its citizens to join and hand over control of their wallets.

Matthew Effect, which, he explained, is how economists refer to the fact that the rich tend to get richer. “It’s a fundamental law of economics,” he said, but that doesn’t mean it’s unbeatable. Conquering laws of nature is what technology is for. “An airplane upends gravity; what if you can build an economic system that upends the Matthew Effect? Dude, quadratic voting is it.”

Setting up a DAO is a bit like designing a video game. You have to create incentives and rules that will keep people playing and can’t be easily exploited. In fact, it feels like a game within a game, because Web3 itself is not unlike an immersive RPG—an alternate reality with its own rules, customs, and language. Play for long enough and you stop having to check the instructions. All kinds of esoteric jargon starts making sense. Switch your wallet from the Ethereum mainnet to the Gnosis chain to claim your LMAO tokens. Sync your tokens with the ­collab.land Discord bot to prove you’re a member and get access to the locked Discord channels.

The real fun of BUIDLing lies in the problem-solving. How will we get people to join, for example? Nathan, one of my devs, comes up with an idea: He can scrape every crypto wallet that holds either a Bufficorn NFT or ETHDenver meal tokens, and use that as a proxy for people who attended the conference. Then we can “airdrop” our custom token to everyone on that list. Most intoxicatingly, this all takes place in a relatively closed system. Very few of these decisions require us to think much about the messy world outside the confines of our DAO. It all helps me understand the draw of Web3. The sense of moral valor that once accompanied working in Web 2.0 is harder to find these days. Whatever else Web3 is, it’s a realm where coders and technologists can reconnect with the joy of hacking, where they can feel good again about working in tech. Jacksón, who in fact builds elaborate board games as a hobby, tells me that escapism is part of Web3’s appeal. The question is whether the escape hatch leads to a real place or a fantasyland.

Once a distributed ecosystem centralizes around a platform for convenience, it becomes the worst of both worlds: centralized control, but still distributed enough to become mired in time.

I think we should expect this kind of platform consolidation to happen, and given the inevitability, design systems that give us what we want when that’s how things are organized.

I think the opposite might be true; it seems like we should take notice that from the very beginning, these technologies immediately tended towards centralization through platforms in order for them to be realized, that this has ~zero negatively felt effect on the velocity of the ecosystem, and that most participants don’t even know or care it’s happening. This might suggest that decentralization itself is not actually of immediate practical or pressing importance to the majority of people downstream, that the only amount of decentralization people want is the minimum amount required for something to exist, and that if not very consciously accounted for, these forces will push us further from rather than closer to the ideal outcome as the days become less early.

The people at the end of the line who are flipping NFTs do not fundamentally care about distributed trust models or payment mechanics, but they care about where the money is.

Think about how to avoid web3 being web2x2 (web2 but with even less privacy) with some urgency.

1. We should accept the premise that people will not run their own servers by designing systems that can distribute trust without having to distribute infrastructure. This means architecture that anticipates and accepts the inevitable outcome of relatively centralized client/server relationships, but uses cryptography (rather than infrastructure) to distribute trust. One of the surprising things to me about web3, despite being built on “crypto,” is how little cryptography seems to be involved!

1. We should try to reduce the burden of building software. At this point, software projects require an enormous amount of human effort. Even relatively simple apps require a group of people to sit in front of a computer for eight hours a day, every day, forever. This wasn’t always the case, and there was a time when 50 people working on a software project wasn’t considered a “small team.” As long as software requires such concerted energy and so much highly specialized human focus, I think it will have the tendency to serve the interests of the people sitting in that room every day rather than what we may consider our broader goals. I think changing our relationship to technology will probably require making software easier to create, but in my lifetime I’ve seen the opposite come to pass. Unfortunately, I think distributed systems have a tendency to exacerbate this trend by making things more complicated and more difficult, not less complicated and less difficult.

“Web3” is a good all-encompassing term that captures cryptocurrencies (digital gold & stablecoins), smart contract computing (Layer 1-2 platforms), decentralized hardware infrastructure (video, storage, sensors, etc), Non-Fungible Tokens (digital ID & property rights), DeFi (financial services to swap and collateralize web3 assets), the Metaverse (the digital commons built in game-like environments), and community governance (DAOs, or decentralized autonomous organizations).

Tokens are a breakthrough in open network design, because they are a mechanism for incentivizing open network participants, including users, developers, investors, and service providers.

tokens are just code that lives on a global peer-to-peer network called a blockchain. But unlike other forms of money, they’re digitally native, programmable, and secured by one’s crypto wallet and private key. Cryptocurrencies are just one type of token

tokens: fungible (e.g., interchangeable) and non-fungible (e.g., unique). As more creators and communities build their own crypto economies, fungible tokens will be used to exchange goods, store value, and make collective decisions. Meanwhile, non-fungible tokens (e.g., NFTs) will be used to create new business models centered on collectibles, rewards, achievements, and more — giving people a sense of identity, status, and belonging.

A common problem in online community building is fostering a sustainable community, one that limits spam, ensures members have skin in the game (vs. drive-by commenters), and incentivizes community members to make the overall community desirable to join over the long-term.

As more communities become tokenized, I think we’ll see best practices like vesting schedules and lockup periods implemented to ensure long-term incentive alignment.

I believe crypto-native social apps will create a new form of “non-fungible likes” that feel like the badges and in-game items in video games. For example, Snap’s Spotlight program pays creators for popular content. But it’s an opaque process.

Instead, crypto-native social apps can allow consumers to vote on their favorite content, reward top-voted creators with NFTs, and allow these NFTs to be redeemed for a percentage of a prize pool. The process would be community-driven and independently verifiable because it’s done on-chain through crypto tokens and smart contracts.

Today, top creators are rewarded with inefficient virtual currencies (e.g., likes/follows) and cash from a centralized platform. In the future, creators will build a new form of status through these community-driven NFTs which they own through their private key and can directly redeem for money.

crypto protocols can issue NFTs to commemorate milestones and achievements based on on-chain activity. For example, Rabbithole partners with leading DeFi protocols to create quests that people can perform to receive a special NFT and/or protocol tokens. This helps protocols with customer acquisition while giving people a fun way to onboard into crypto by performing on-chain quests for special NFTs.

Another example is Uniswap’s v3 protocol. Whenever a liquidity provider (LP) deposits into a pool, the protocol transfers the LP an auto-generated NFT based on a number of factors like which pool they deposited into and at which range in the liquidity curve.

Over time, I believe the internet-native version of a trophy case and a walk-in closet will be collections of NFTs that commemorate important on-chain activity.

In Japan, business people exchange gifts to build trust and signal respect. On Twitch, viewers send tips and buy gifts to signal their affinity in hopes for a shoutout. In cryptoeconomies, tips and gifting could become a core primitive for building relationships online.

Web 2.0 was about social graphs — follows, likes, comments. Web 3.0 is about social + economic graphs — NFTs you buy, projects you invest in, social tokens you earn. Company profiles on Crunchbase are an early example of economic graphs. For most startups, you can see who funded them, how much they received, and when the funding round took place.

Another way NFTs can enable new types of relationships is through peer-to-peer credentialing. Today, the main source of credentialing comes from a college degree, what companies you worked at, social media clout, and references. These are inefficient forms of credentialing: they either aren’t very specific, or they cost a lot of time and energy to become legible (in the case of references).

“Top Backend Engineer” NFT to the best backend engineers you’ve ever worked with? Or a “Very Helpful VC” NFT to a board member? The benefit of these badges being NFTs is that you can prove they came from a specific person and that it’s scarce (e.g. you’ve only ever given out three of these). I’d much rather hire someone based on referrals from people I respect than a fancy degree.

I believe NFTs like these will enable new types of relationship graphs which we can use to build better recommendation systems for job postings, content, dating apps, and much more.

LinkedIn also follows this approach by giving premium subscribers more searches and advanced analytics, which can lead to finding a job faster or hiring the right candidate.

In crypto, NFTs can be awarded to power users to give them special capabilities like being a moderator in a popular community. So why do it as an NFT? The benefit is that the NFT owner can’t be rug pulled by a centralized entity. Instead, a smart contract will execute the terms based on independently verifiable logic.

https://darkstar.mirror.xyz/uoR55AXp9r2Qm0ptdtsYq2TQjivxLXpDT9j4a7VdW1A

Tokens enable a new way of organizing and compensating the collective that is building something -- and is uniquely suited to concepts where the 'classic' startup org and comp model don't work as well. Its ability to form consensus and energy around an idea quickly is the unique advantage it brings to the market. This highlights a massive gap that exists within the existing web3 development ecosystem — most builders are putting all of their energy on making the token the product, when actually the product is what is funded, enabled and/or governed by the token. Knowing that tokens could drive a very strong bootstrapping method to embrace the hardest challenges that (hopefully) crypto can solve, that method should reflect this. Come for the tokens, stay for the product.

Tokens should drive the creation of products and platforms that open accessibility to individual’s that was near impossible without them. In the case of music, instead of tokens just being the asset, tokens should drive the opportunity to give dream roles and responsibilities to individuals that they’d never get prior. This means that you, human, should now be able to become, through DAOs, a record producer. Or a talent manager. Or an actual artist yourself. It completely changes the way opportunities can be obtained. The traditional path of experience is no longer a prerequisite for participation.

And that means putting a lot less emphasis on the token being the product and more around how we build products as an extension of the tokens. And when we do that, we’ll see development and opportunities that we could have never dreamt prior.

https://moralis.io/what-are-governance-tokens-full-guide/

DAO is a governance body of a project or dApp (decentralized application)

Distributing control to stakeholders through governance tokens is often referred to as “on-chain governance”.

The individuals participating in this system can vote on a number of different proposals ranging from minor details to more complex changes to the governance system itself.

The number of proposals is vast, and there are often as many as there are token holders. This suggests a wide variety of proposals that the token holders need to consider. However, some general examples can be changes to the ecosystem of a cryptocurrency to implement more advanced technology to increase security, interest rates in a DeFi protocol, or game mechanics of a video game.

How to match a DAO's goals with the right incentive mechanisms to achieve them...

The following table cross-references important factors such as decentralization, complexity and impact with the key tools or incentives being used by DAOs today. They have been chosen because they focus on the following important inputs:

https://blog.aragon.org/incentive-design-tooling-for-daos/

https://sourcecred.io/docs

Sourcecred. A tool for communities to measure and reward value creation.

technology that makes the labor of individuals more visible and rewardable as they work together in a project or community. wealth actually flows to those who are creating the value in our world.

algorithmically objective network analysis system. Simply put, it enables participatory actions and recognition workflows to be created such that the algorithm makes calculations around how value has been created and accrued. Think of it as a bot keeping score of actions, impressions and other activity in Discord, Github and community forums like Discourse. The greatness of this system is that it removes much of the daily administrative burden for DAO operators and is decentralized - no-one is making decisions about allocation. On the flipside, detractors would say that, used unwisely, any algorithm can become a weapon of math destruction , and that without human oversight it is possible for people to “farm” cred. However, if you have a thriving community with a few developers that can keep an eye on it, it's actually a pretty cool and valuable tool.

https://blog.aragon.org/incentive-design-tooling-for-daos/

Decentralized payroll management for DAOs

DAO’s don’t have top down management. There is no HR department. There are no contracts and no salary negotiations. How do you properly incentivize and reward contributors?

Coordinape is a decentralized, pro-social recognition tool that moves recognition from leaders to teams. It works by allocating tokens to each participant, who award them to their peers during 'epochs'. At the end, an individual's proportion of tokens is converted into their proportion of financial rewards allocated from the treasury. There are many powerful mechanisms at play, such as promoting the acts of giving and recognition amongst teams, as well as removing capped individual recognition in favor of uncapped rewards from across the whole pool. It’s no wonder that so many DAOs - including some of the largest and most successful - are already using it.

https://www.cheqd.io/web-3.0-and-digital-identity

Identity wallets (ID Wallets) are the visible and user-friendly part of decentralised identity or self-sovereign identity models. These wallets are applications installed on users’ mobile devices, capable of securely and privately storing all their personal information. In this way, users’ personal data is only guarded by the users themselves. There is no central authority or hyper-identity provider controlling this personal data. This model has the advantage of federated identity; we only create a single identity (in this case in the ID Wallet), and it also solves the problem related to the privacy risk of users’ personal data. In this way, the handling of identity-related information is returned to its rightful owners, the users, preventing unauthorised use of their personal data.

As on the Web3, decentralised identity is based on blockchain technology, which is the technological layer that validates the authenticity of the personal and private information that is shared, thus enabling an ecosystem of trust between the parties involved and returning control of personal data and identity to the users.

Decentralised identity based on blockchain and ID Wallets solves the privacy and power abuse problems of centralised platforms, while preserving the good user experience of federated schemes.

verifiable credentials

Digital identity, and in particular self-sovereign identity (SSI) is key to enabling Web 3.0 as it’s all about decentralisation and data privacy.

a method of identity that centres the control of information around the user, removing the need to store personal information entirely on a central database.

Self-sovereign identity (SSI) is arguably the most effective way of digital identity for Web 3.0. SSI is a method of identity that centres the control of information around the user. Fully in line with Web 3.0, SSI removes the need to store personal information entirely on a central database and gives individuals greater control over what information they share safeguarding their privacy. It’s a fully user-centric and user-controlled approach to exchange authentic and digitally signed information in a much more secure way.

This level of verified, and decentralised trust, will be essential in combining data elements together for a unified and open Web 3.0.

Use cases of SSI in Web 3.0 are plentiful. Anything on decentralisation (hint, SSI also has a wide application in a centralised world) welcomes SSI with arms wide open – NFT, metaverse, gaming, Decentralised Finance (DeFi), Centralised Decentralised Finance (CeDeFi), peer-to-peer transactions.

“Open standards and the interoperability of digital identities will play a crucial role in the pursuit of a multi-chain ecosystem that offers reliability and scalability of everything from payment rails to community-building,” says Fraser Edwards, CEO and co-founder at cheqd.

From a legal perspective, many government and public bodies are already considering the use of SSI technology for electronic identity verification. The European Commission, United States and Canadian, as well as Australian governments, have led, or intend to lead, initiatives to actively promote the use of SSI to streamline their e-government services or national data processes.