Token Architectures: What Are They?

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Architecture is the planning and designing of structures, while tokens on a blockchain, a decentralized ledger or database, represent assets or utility. In order to maximize utility for all stakeholders and align individual incentives with network goals, stakeholders trade value in the form of tokens inside a predetermined framework of incentive mechanisms. This process and product are referred to as token architecture.

Process for Token Architecture

Let's first concentrate on token architecture as a method for creating token structures. The method for developing token architectures has been the subject of extensive research. The 3Ds of Token Ecosystem Creation was written in 2018 by Eden Dhaliwal of Outlier Ventures, and the Token Engineering movement was the first to employ complicated system engineering software to simulate, optimize, and validate token architecture parameters. The token architecture process is based on the 3Ds framework and includes the following steps:

• Outlines the essential features of a token architecture in Token Discovery.
• Optimizes and verifies the fundamental elements of a token architecture.
• Implements a token architecture into the central workings of a crypto system.

Here is a brief summary of Token Discovery in case you haven't read the 3Ds:

1. Consider what issue the token should be resolving, or more specifically, what precise value or functionality the token will be bringing to the business model or value proposition of its crypto protocol. For instance, the decentralized governance issue is resolved in the case of Aave by the AAVE token, which also derisks the protocol through the Safety Module.

2. Consider all the various behaviors that participants in the value chain are required to display, and then use this behavior framework to categorize them into distinct stakeholder groups. There are AAVE token owners, Liquidity Providers, and Users in the case of Aave.

3. Consider the various stakeholder groups when returning to the problem described in Step 1 and designing the mechanisms that will guide the stakeholders toward fixing the problem. Remember that different stakeholder groups frequently have competing interests, and that the key objective is to build mechanisms that encourage cooperation among stakeholders for the benefit of the crypto system. For instance, Aave is pursuing this objective via the Ecosystem Reserve, Safety Module, Backstop Module, and Aave Markets.

4. Transform the above into a visual depiction of the value exchange system, which is effective at communicating the key concepts behind the token. Figure 2 shows how Aave's value exchange system is graphically represented (token architecture).

Visit the 3Ds of Token Ecosystem Creation for information on tools and later stages of the process if you're interested. For the remainder of this post, we'll concentrate on Step 3, specifically what strategies we may employ to address the problem statement. Optimizing token value, the major factor influencing token price, is one of the fundamental objectives of mechanism design in token designs. Determining the worth of tokens and the primary factors that affect their price and value in token systems is therefore necessary before moving on to the actual mechanisms.

Breaking Down Token Price & Value

The utility or value of the crypto protocol token is implied by the token's value. A token's price is essentially a numerical representation of the value that buyers and sellers are ready to exchange at any particular moment. Token value is a more elusive idea than token price. Depending on the needs and preferences of each stakeholder, the token value may vary. Generally speaking, emotion based on perceived token value determines the price of a token. Although maintaining a high token price may seem needless, it is essential to the success of any crypto network for a number of reasons, the two most important of which are the protocol's security and stakeholders' profitability. The difficulty of attacking a token's crypto protocol increases with its price. The price of a token can be broken down into two parts:

1. Speculative Component
2. Fundamental Component

Speculative Component of Token Price

The market forces that primarily depend on sentiment and perception are responsible for the speculative component. No matter how useful the crypto system and its tokens are right now, if demand exceeds supply on the secondary market, the market price of a token will increase. Although they don't directly affect the outcome, the laws of reflexivity, as outlined by George Soros, can have a big impact on token price. Utilizing market makers on centralized exchanges and extensive liquidity pools on decentralized exchanges will help you manage the speculative component of token price. It is significant to remember that most cryptocurrency asset values at the moment are primarily driven by speculation. Contrast this with, for instance, real estate, where the fundamentals and usage of assets are far more obvious and much easier to value than in the case of cryptoassets, making it less driven by speculators and more driven by fundamentals.

Fundamental Component of Token Price

The Fundamental Component of Token Price is the token's worth determined by the essential benefits it provides to stakeholders. This core principle typically derives from two sources:

1. Protocol Service
2. Token Architecture

The quality of the underlying product and product market fit influence the utility or usefulness of the protocol service. This can be affordable storage on decentralized storage protocols like Filecoin or low slippage on significant decentralized exchanges like Uniswap. The demand for the token will increase if stakeholders deem the product valuable and it is related to this value. On the other hand, token architecture focuses on the systems that raise the token's intrinsic value. Token architecture was previously described as a process; let's now consider it to be a finished good.

Product: Token Architecture

Token architectures are made up of stakeholder structures that communicate with one another and the crypto protocol via various ways. Systems working toward a purpose are known as mechanisms, or, to use a purely engineering definition, mechanisms are devices that change the input forces and movement into the required set of output forces and movement. According on early 2021 assessments of the larger cryptocurrency industry, the vast majority of token systems display the following three sorts of mechanisms:

1. Utility Mechanisms
2. Governance Mechanisms
3. Distribution Mechanisms

This concludes part 1 of 2...