Proof of Use: Activating Networks through Encoded Participation | ConsenSys Codefi
Ever wondered how domain brokers are prevented from harvesting large numbers of trademark domains without actually contributing to broader value creation? Trademark holders are required to prove use. By the same measure, distributing digital access and maintenance rights for a decentralized network should follow a programmable standard to ensure tokens end up in the hands of actual users. That’s why Activate includes what we call ‘Proof of Use’, in every token launch.
- Proof of Use requires users who claim or purchase tokens during a launch to actively “prove use” before they’re allowed to transfer or redeem them for alternative purposes
- For example, a participant may be required to delegate their purchased tokens for 90 days before being able to transfer them outside the network
- Distributing tokens amongst stakeholders with aligned incentives is critical to minimize passive speculation, while ensuring networks are effectively bootstrapped at launch
A Brief History
Open protocols are a vital piece of the digital world of today and their proliferation is critical to create a more open, innovative, and transparent world of tomorrow. Yet incentivising their creation and maintenance has been complicated by the difficulty of monetizing them through traditional means. Token economies offer a new way to incentivize the creation and maintenance of open protocols and governing their evolution.
Launching a token-based open protocol is inherently different from building a digital business or bringing a software product to market. It requires an effective means of distributing a network’s native access and servicing rights — formalized by digital assets known as ‘utility tokens’ — in a way that achieves sufficient security, decentralization, and performance standards. As a result, optimizing the initial token distribution among the right stakeholders is a critical step to effectively bootstrapping and strengthening the long-term viability of a network.
Over the last two years, we saw a meteoric rise of token launches, predominantly linked to public funding mechanisms like ICOs and IEOs. The rush of 2016–2018 was marked by irrational exuberance, followed by arguably equally irrational skepticism — a symptomatic cause of market coordination failures resulting from trailblazing experimentation in the face of lacking regulatory and industry standards.
- Lack of Utility: A key component of value created by the token is its utility. If properly designed, this ensures that the tokens value grows alongside adoption or success of the given project. A token that lacks utility, either by (poor) design or as a consequence of a premature distribution, will see its price based solely by speculation.
- Market Irrationality: Market irrationality coupled with the lack of a mature fundamental valuation methodology results in a volatile spread of returns when liquidity channels such as exchange trading are opened. Whether tulips or tokens, we tend to “devote our intelligences to anticipating what average opinion expects the average opinion to be.” (Keynes, 1936)
- Speculative Intent: As a contributing factor and consequence of the above, token sales often attract hordes of retail purchasers that engage in passive speculation without actually using tokens for their intended purpose.
We believe that establishing a framework of Token Launch Standards is the first step to address these market and coordination failures. Despite strong advancements and maturation in crypto-economic design, most token distribution mechanisms continue to lack a built-in filtering mechanism that encourages distribution amongst representative participants with aligned incentives. Enter….Proof of Use!
What is Proof of Use?
Proof of Use is a programmable distributive mechanism designed to optimize the initial distribution of tokens to the right stakeholders. As the name suggests, Proof of Use is a feature that requires users who claim or purchase tokens during a launch to actively “prove use” of their tokens on the networks mainnet before they’re allowed to transfer or redeem them for alternative purposes. This creates a measurable incentive mechanism aimed at minimizing passive speculation on token appreciation, whilst maximizing active contribution to the network. Factoring in self-selected productive efforts beyond capital contributions in a sale or (pseudo)-random selection in a passive airdrop is essential to:
- Maximize the likelihood of regulatory compliance by ensuring that a token is being used for its intended purpose on the network.
- Filter for participants most likely to participate in the network to disincentive short-term speculation, price volatility and dumping.
- Effectively bootstrap the network at launch, whilst enabling early adopters to familiarize themselves with the network and earn token-based rewarded for their efforts
How does it work?
Proof of Use requirements are defined and automatically enforced at the smart contract level.
For example, if you participate in our upcoming token launch you will be required to delegate your purchased tokens to your favourite validator(s) for a minimum of 90 days before being able to transfer them outside the network. During this period of time all token holders who delegate through the Activate platform will earn staking rewards for their efforts. This is one way Activate makes participation and network activation easy!
Of course, Proof of Use is an adaptive mechanism that depends on the desired token distribution model and design of the supported network. For example, as a participant of an interactive airdrop, you may be required to fulfill proof of use requirements to unlock escrowed collateral in a lockdrop as suggested by NuCypher’s warlock or the warlock approach. Similarly, participants in a decentralized exchange launch may be required to prove use prior to getting whitelisted access to a uniswap liquidity pool.
On Activate, our mission is to attract and build a community of individuals who recognise the importance of collectively participating and putting their tokens to work. This is why Proof of Use is a core pillar of Activate’s guiding methodology.
Stay tuned for more information regarding Proof of Use and how it will be used to secure the network of our first launch partner!
Written by Mara Schmiedt
Sign-up and find out more about our upcoming network launch at www.activate.codefi.network
Originally published at https://codefi.consensys.net on December 19, 2019.