Previously we discussed token metrics and the first two stages of the tokenomics framework (UNAGIs) i.e. Users and Needs).
Step 1: Identify Your Users
Step 2: Identify Their Needs
Step 3: Define Actions & Goals
Step 4: Build an Incentive Mechanism
Step 5: Test and Simulate KPIs
Let’s now shift our focus to steps three and four of the tokenomics framework, which involve the AGIs (Actions, Goals, Incentives). These components play a crucial role in shaping the community around the project and are used as a roadmap to align and achieve the long-term vision.
The AGI framework is built on three fundamental questions: what (Goals), how (Actions), and why (Incentives). By answering these questions, we can gain a general understanding of the roadmap and identify potential pitfalls and sinkholes. We use simulations to test the framework and ensure that it is resilient against malicious actors.
In our previous discussion, we covered the first two stages of the tokenomics framework, which are UNAGIs (Users and Needs) and token metrics.
Better Questions → Better Results
In the past, computers were primarily used as decision support systems (DSS) that processed vast amounts of data quickly. Nowadays, DSS are utilized in healthcare to assist with diagnosing and treating patients based on their medical history and symptoms. Financial advisors also use DSS to recommend investment options that align with their clients’ risk tolerance and financial goals.
Recent advances in AI technology, such as ChatGPT and Dalle-2, are revolutionizing content generation tools and redefining the concept of creativity. With minimal effort and friction, these tools can generate outstanding blog posts, complete homework assignments, or create impressive designs in the style of legendary artists in mere seconds, instead of hours or even days (and in some cases years). The implications of this breakthrough are groundbreaking, as it transforms the work of one person to that of 10x knowledge workers, much like a crane replacing dozens of laborers.
In the near future, individuals and organizations that take advantage of these exponential technologies will outshine their competitors. The only crucial skill required is the ability to ask the right questions.
Asking better questions can stimulate deep, critical, and creative thinking, broadening our perspective and leading to more innovative and effective solutions. Moreover, effective questioning can help us engage more fully with the problem at hand, refine our thought processes, and concentrate our efforts. When we ask the right questions, we can align our project goals, values, and vision more completely.
Legend has it that Microsoft’s success can be attributed to one bold question. Instead of the conventional “How can I create a great product?” query, Bill Gates asked, “How can I develop the intelligence that will govern all computers?” (or what product is required for that purpose).
The Lava decentralized peer-to-peer remote procedure call (RPC) network was born from pondering what is missing in Web3 and what is crucial for its success. The answer was the elimination of single points of failure and the decentralization of the technology stack. You can follow the thought process that led to this realization in @moxie’s exceptional blog.
Peter Drucker, the father of modern knowledge work, once said, “Efficiency is doing things right, while effectiveness is doing the right things.” Therefore, it is essential to reflect deeply on identifying the right questions for the project. Begin with the “what” and later focus on the “why.”
Actions, Goals, and Incentives: How, What & Why
Humans are motivated by two powerful forces – pain and pleasure. Naturally, we seek to avoid the former and seek out the latter. Incentives (and disincentives) are tools used to influence a specific behavior or action. There are two types of incentives: monetary and non-monetary.
Monetary incentives include tokens (fungible or non-fungible), surprise airdrops, potential price appreciation, return on investment, or the possibility of a future promotion. These are the more common incentives that most projects focus on.
However, non-monetary incentives can be even more powerful motivators. These include recognition or praise, the feeling of being unique/significant/important (through contests, leaderboards, acknowledgments, gamification), having choices and variety (through “good” surprises or easter eggs), feeling needed/heard/in control (through governance tokens), being part of a community/tribe, sponsoring and helping others (through scholarships, donations, teaching), and feeling that you add value to the people you care about as part of a greater common vision (more on that later).
Why does receiving a like on our social media post make us feel happy? The Social Dilemma documentary highlights how social networks are designed to provide that dopamine hit that keeps us engaged.
Similarly, why would someone travel across the world and spend thousands of dollars to watch a soccer game they could see for free from home? It’s because experiencing a favorite singer or team score a goal in a packed stadium surrounded by their “tribe” is an entirely different experience.
Projects should incorporate as many legal incentives in their arsenal as possible, but the ones that truly create viral network effects are non-monetary incentives. When users become raving fans (not just clients or customers), that’s when organic virality is created.
Goals: Expanding the Pie
Total addressable market (TAM) refers to the potential revenue available for a product or service, and is used to prioritize business opportunities by evaluating their potential. The more value-generating users and resources a product has, the better.
In industrial engineering, this is referred to as Operations Research (OR), a discipline that deals with the development and application of analytical methods to improve decision-making. At its core, OR focuses on resource management and optimization to maximize the use of resources.
Ideally, a product should aim to have as many consumers and producers/contributors as possible, without sacrificing quality and uniqueness. However, achieving this balance is a challenge. It should also aim to maximize resources, but avoid unnecessary use when demand is low.
The two most effective ways to achieve these goals are through incentives and reducing friction. With the right incentive model and mechanism, as well as a large and high-quality community, a project can be operated similarly to traditional Web2 open-source projects that are built and maintained by community members (i.e. type-2 incentives). Web3 has an advantage in providing type-1 incentives, attracting better contributors who have “skin in the game.” The real magic happens when the two incentive types are combined. Key areas of focus should include integration with other projects, usage, users, resources (compute, storage, etc.), contributors (developers, marketers, content creators), UX, and tools.
Developing a great and intuitive UI is difficult but can be a significant differentiator, particularly since the current crypto landscape lacks on the UX front. Additionally, providing tools such as “1-click” UI (Stride), chatbots (Axelar), SDKs (Forta), APIs (Squid), and libraries, as well as code and brand templates (SubQuery), can be invaluable.
Goals by User Needs
One method for brainstorming ideas is to approach goals from different angles and dimensions. By doing so, some goals may appear in a different dimension, and goals that appear in multiple dimensions indicate better alignment.
Example #1: User goals that promote certainty/trust/security
In previous blog post, we discussed how Satoshi’s invention of an automatic, code-based “trust machine” removed untrustworthy, expensive, and inefficient humans from the equation. Automation is a fundamental aspect of any decentralized product, and striving for as many automatic and semi-automatic processes as possible is key.
The invention of automated market makers (AMMs) by Bancor in 2017 was one of the most important innovations in crypto’s short history. This crypto primitive, along with the introduction of lending and borrowing by Compound and AAVE, catalyzed the DeFi summer of 2020.
In 2022, the field of artificial intelligence and decision support systems (DSS) reached a pivotal moment with the development of AGI, or artificial general intelligence. This breakthrough is bringing machines closer to possessing a level of intelligence comparable to that of humans. One of the new and shiny tools on the block is ChatGPT, a chatbot model developed by OpenAI that uses natural language processing to generate human-like responses to user inputs such as prompts and questions.
Within just five days of its release, ChatGPT had already reached 1 million users, temporarily dethroning the previously trendy AI tool, DALL-E 2. DALL-E 2 is capable of generating amazing images from text descriptions, allowing it to create visual representations of ideas and concepts.
User-generated content (UGC) refers to any type of content created and published by users, such as text (e.g. code, content, feedback, docs, translations), images, videos, or audio (marketing, tutorials, teaching material). UGC includes everything from blog posts and reviews to social media posts and comments, videos, and podcasts. It is often seen as a more authentic and trustworthy form of content, as it comes from regular people sharing their own experiences and opinions, rather than from media organizations or advertisers. Web3 projects need to recognize the untapped value of UGC and actively encourage their users to generate and share content related to their products or services.
On Facebook (Meta), every user participates in UGC as both a producer and consumer. Every action, such as posting, clicking, liking, following, sharing, and even reading (i.e., not scrolling), contributes to the marketing and AI machine. These actions automatically improve the algorithm and models by retraining and updating user preferences, as well as the audiences to which the user belongs.
However, the problem with this model is that users receive almost no value in return, as Facebook does not offer a profit-sharing mechanism for the average user. This presents an opportunity for Web3 projects like Embed protocol, which is an Engage-to-Earn protocol that curates, powers, and activates metaverse communities. It is essentially a Web3 advertising protocol built from the bottom-up, with the goal of providing value and profit-sharing mechanisms for users.
Without A Vision, People (and Products) Perish
A product’s vision is a statement that outlines its future goals, direction, and purpose. Bitcoin and other cryptocurrencies were founded on the vision of a free, open, and trustless economy that would liberate the unbanked from a life of poverty. Ambitious objectives inspire and motivate people, and the promise of a brighter tomorrow encourages them to stay committed in the face of adversity. This is why moonshots such as SpaceX and Tesla have succeeded despite the odds.
John F. Kennedy’s quote “We choose to go to the moon in this decade and do the other things. Not because they are easy, but because they are hard” encapsulates this sentiment.
In the early days of Bitcoin, people invested in it because of this vision. Additionally, the token economics and game theory that were incorporated into the protocol were key factors in its growth and development, shaping it into what it is today.
To rephrase it: Instead of asking what your protocol can do for you, ask what you can do for your protocol.