Cryptocurrencies and Tradable Crypto-Tokens

Table of Contents

1. Frontmatter

2. 1. Foundations of Token Ecosystems

   Ioannis Giannakouros

   Abstract

   Cryptocurrencies and tradable crypto-tokens can be understood only against the background of their generating use cases. Even though they can be traded in exchanges, their primary markets are the blockchain-based ecosystems where these use cases are operationalized. The tokens’ features, their design attributes, are dictated by the needs of said ecosystems. Hence, it is imperative to first situate them firmly in their proper context before analyzing their uses as stores of value and investable instruments across the digital-to-physical worlds divide. This chapter will lay out the foundation of notions and terminology that are necessary to be able to understand the ideas and methodological explanations of the rest of the book.

3. 2. A New Paradigm of Economic Organization

   Ioannis Giannakouros

   Abstract

   As is the case with every important technological development, the blockchain has allowed existing processes to become more efficient. More importantly, it has also created the potential for totally new business processes making use of its seminal features of consensus-based fault tolerance, on-chain validation, transaction finality, and non-repudiation. Hence new products and services can be designed, offered, and sold using a blockchain as transactional ledger. Thus, blockchain-based ecosystems in general, and token ecosystems in particular, represent in effect a new paradigm for organizing economic life in a digital economy. The most varied economic agents and the broadest scope and scale of economic activities can all be brought under this paradigm as long as the associated data can be registered and validated on a blockchain. We explain these concepts in this chapter, departing from a reinterpretation of the notion of “factors of production” in the context of a modern digital society.

4. 3. Economic Value Creation in Token Ecosystems

   Ioannis Giannakouros

   Abstract

   Blockchain-based token ecosystems were explained in Chap. 2 as representing a new paradigm for organizing all factors of production that are relevant in the digital age. In principle, they are multi-sided Agent-to-Agent (“A2A”) marketplaces, where tokens play at least the roles of media of exchange and stores of value. The present chapter has two immediate objectives: first, to demonstrate how these ecosystems create economic value for their participants, above and beyond what is feasible in non-blockchain ones; and, second, to explain the role of tokens in facilitating and ultimately capturing this added value.

5. 4. Cryptocurrencies and Tradable Crypto-Tokens

   Ioannis Giannakouros

   Abstract

   In the previous chapters, we put forward the notion of the blockchain-based ecosystem as a new organizational paradigm of economic activity. In that context we explained tokens as having three roles: first, to enable price discovery, execution of transactions, and storage of value for later consumption; second, to capture the economic substance of assets represented (values “in being”) and services exchanged (values “in action”); and third, to incentivize active participation in governance tasks so as to safeguard the value of network effects. The rapid evolution of blockchain-based token ecosystems has created a rich universe of tokens, across distinct use cases and through various constellations of underlying property rights. In the current chapter, we propose a comprehensive taxonomy that captures most of the use-case/property rights combinations currently observed. We explain the salient features of each token type, resp. subtype; and give concrete examples of each, with references to their respective ecosystem’s documentation. In the process we explaine fundamental legal and operational considerations that need to drive token analysis and design.

6. 5. The Need for Token Ecosystem Design

   Ioannis Giannakouros

   Abstract

   A comprehensive token taxonomy was presented in the previous chapter, with each proposed type exemplified by concrete crypto-tokens already trading in the crypto markets. What should be apparent from that exposé is that, irrespective of their type, tokens are inseparable from the business use case(s) of their generating ecosystem. They are issued (“minted”) only on a particular blockchain, serving the economic purposes of a particular ecosystem, through processes defined and controlled by the latter’s governance. Once used in transactions, they can have economic effects both on and off the blockchain. It is thus important to have an understanding of the end-to-end design parameters behind any particular token. Both opportunities and risks must be placed in a proper context. The current chapter will explain why this design context needs to be that of the entire blockchain-based ecosystem in which the token is issued and used.

7. 6. Market Design

   Ioannis Giannakouros

   Abstract

   This chapter introduces a token ecosystem design framework. A fundamental analogy is postulated in the beginning, that of designing the economy of a country that just came into being. This allows to interpret all facets of token ecosystems in reference to basic concepts from sociology and economics. Design decisions then evolve naturally as transpositions to the digital world of concepts and practices from traditional human ecosystems in the physical world. Armed with the understanding that this analogy allows, the design framework is explained as mainly consisting of three pillars: market, mechanism, and token designs. The structural design of the economic agents active in the ecosystem is the market design. The behavioural framework for said economic agents to interact amongst themselves is the mechanism design. The design of the media of exchange and stores of value is the token design.The current chapter is focused on the first pillar, namely market design.

8. 7. Case Study in Market Design: Nexus Mutual

   Ioannis Giannakouros

   Abstract

   In the previous chapter we laid out theoretical foundations and notions of market design. Here we proceed with a case study of how those notions are evident in an existing Blockchain-based token ecosystem. The focus of our analysis will be ‘Nexus Mutual’ [1] which is currently among the top DeFi insurance-sector protocols by token market capitalization [2].

9. 8. Mechanism Design

   Ioannis Giannakouros

   Abstract

   We refer again to the analogy that was introduced in Chap. 6, namely of designing the economics of a token-based ecosystem being akin to designing the economics of a new country. The token-based economic design framework followed in this book consists of three main pillars: market design defines the typology of economic agents active in the country and the possible ways for said agents to interact with each other; mechanism design prescribes the rules and incentives/disincentives of economic agent interactions; and token design describes the functioning of the country’s currency and stores of value. In this chapter we will expand on notions of the second pillar: mechanism design.

10. 9. Case Study in Mechanism Design: Lido

    Ioannis Giannakouros

    Abstract

    The previous chapter set theoretical foundations of mechanism design in the context of blockchain-based token ecosystems. How their practical application is evident in the workings of already operational token protocols will be now demonstrated through a case study. Its focus will be ‘Lido’ [1], which is currently one of the top DeFi projects (by token market capitalization) in the ‘Liquid Staking’ category [2]. As in the previous case study, we begin with the closest analogues to Lido’s business case from traditional finance in order to help the reader interpret its main transactional pathways, as only then can mechanisms be properly identified and examined for consistency. Project documentation will be used to identify them and to interpret them as design choices.

11. 10. Token Design

    Ioannis Giannakouros

    Abstract

    We now arrive at the last main pillar of the proposed token-based ecosystem design framework, namely, token design. Without detracting from the role of the other two, market and mechanism designs, token design is the most important one. The reason is that value and transactional calibrations enabled by the digital token are the crucial characteristics differentiating blockchain-based ecosystems from other physical, or indeed digital, ones. The reference token typology discussed near the end of Chap. 4 (Sect. 4.3 ) will be used here as a basis, upon which to explain the objectives, scope, importance, and material factors of token design.

12. 11. Case Study in Token Design: Bumper

    Ioannis Giannakouros

    Abstract

    The previous chapter presented theoretical notions of token design in blockchain ecosystems. We now proceed with a case study of how these notions are in evidence in an existing token project. Our analysis will focus on “Bumper” [1], an ehereum-virtual-machine (EVM) compatible project, the business case of which revolves around price-risk hedging of existing token positions. As in the previous case studies we begin with an analogue business case from traditional finance in order to demonstrate how blockchain-based token ecosystems can be understood of as translations of established business practices into a new technological context. We then proceed with an examination of the apparent token design calibrations by the protocol designers, based on Bumper’s official documentation and on artefacts published under the auspices of its governance body. We thus demonstrate how traditional finance concepts and processes have found direct analogues in the construction of Bumper’s crypto-tokens.

13. 12. Bonding Function Design

    Ioannis Giannakouros

    Abstract

    The blockchain paradigm has enabled decentralized transactions and automation, without necessitating the existence of centralized governance. In order to avoid chaos ensuing in token-based ecosystems, crucial process steps must be automated and allowed to execute fast without the need for human intervention. Instabilities can be reduced as long as the rules of this automation are carefully thought through in advance and implemented through robust technical means. Many ecosystems where cryptocurrencies and other crypto-assets are minted and transacted have opted to control such instabilities through so-called Bonding Functions, implemented in smart contracts. In this chapter, we explain this concept in some detail, progressing from basic definitions to typology, reference implementations, and finally to implementation guidelines.

14. 13. Case Study in Bonding Function Design: Bancor Carbon

    Ioannis Giannakouros

    Abstract

    The previous chapter presented some theoretical notions of bonding function design in the context of blockchain-based token ecosystems. We thus proceed with a case study of how these notions are in evidence in an existing token project. Our analysis will focus on ‘Bancor Carbon’ [1], a DEX protocol, the business case of which revolves around the trading of crypto-tokens.

15. 14. Case Study in End-to-End Design: Aave

    Ioannis Giannakouros

    Abstract

    The last case study in the book brings in evidence all token ecosystem considerations across market, mechanism, token, and bonding curve designs at once. We will demonstrate the interplay among all design pillars in a working, mature ecosystem, and thus prove the practical usefulness of an end-to-end Design Framework approach, as promulgated in Chap. 4. We will also explain how functional and non-functional requirements evolution (and parallel advances in blockchain and other technology platforms) across protocol generations can be accommodated in a controllable manner by following this approach. The focus of the end-to-end design case study will be ‘Aave‘[1], which is currently among the top DeFi lending and borrowing ecosystems by token market capitalization [2].

16. 15. Cryptocurrencies and Crypto-Tokens in Short

    Ioannis Giannakouros

    Abstract

    The previous book chapters followed a pedagogical approach, which entailed laying out facts and building up knowledge systematically on topical points of focus. This disciplined approach becomes unavoidable in a book about methodology, and more so in a relatively new field where concepts have been evolving rather chaotically, being discovered and getting accepted together with the field itself. Having explained concepts in some detail, and hopefully convinced the reader about the importance of a consistent analysis and design methodology in the first place, we now come to a point where it is expedient to place them within a “bigger picture” so to speak. The purpose of this chapter is to put the current state of affairs in the crypto-market into a perspective, that is, to help the reader interpret it as an evolutionary stage along appropriate axes. It is not an attempt to justify its existence at all, but rather an explanation of why and how this market appeared and reached the state that it did, why in the general timeframe that it did, and how it could evolve.

17. Backmatter