Post 23: Single Purpose Tokens
TLDR; A simple interface that lets users tie the value of a digital token to a specific real world metric. For example, say you want to increase solar energy usage. You pick the metric “cost per kWh,” tying that cost to the value of your token so that when the cost per kWh decreases, the token value increases. Token holders now have a financial interest in that metric. As another example, say you want to decrease malaria deaths. You pick the metric “deaths from malaria per year” and make the token’s value a function of that metric so that when annual malaria deaths decrease, the token value increases. You could even tie a token’s value to research outcome metrics as a way to derisk basic research. The premise of these “single purpose tokens” is to create a financial model for changes that people want to see in the world that are not incentivized by the existing fiat economy.
Solving Fiat’s Symbolic Error With Single Purpose Tokens
Fiat currency has stopped equaling value over time.
That means people do work that generates income but doesn’t meaningfully contribute to civilization, i.e. the 50th b2b saas company selling crm software, or the 75th energy drink, or the 100th athleisure brand. It also means there is work that would be valuable for civilization to prioritize but fiat currency can’t reliably be generated by doing that work, i.e. reducing malaria deaths, publishing basic research, removing plastic from the ocean. The third error of fiat currency is the many examples where the work somebody does to generate income actually harms our collective future, i.e. unhealthy consumables like high fructose corn syrup or cigarettes, illegal activity like human trafficking, optimizing advertising platforms that divert our attention from more meaningful pursuits.
To help solve this three part “symbolic error” of fiat currency, this post proposes a digital token whose value is tied to a specific real world outcome via measurable metric[s], or a “Single Purpose Token” (SPT).
Here are a few examples to demonstrate this Single Purpose Token concept:
A token aimed at increasing renewable energy usage worldwide whose value is tied to the three metrics: the cost of producing one kWh of solar energy, the cost of producing one kWh of wind energy, & the cost of producing one kWh of hydropower. As the cost per kWh decreases for each energy source, the token value increases.
A token whose value is determined by the number of malaria cases worldwide. As the number of malaria cases drops, the token value increases.
A token whose value is determined by the biotech research goal of extending the lifespan of a mouse. As researchers extend mouse lifespan, the token value increases.
A token whose value is determined by the number of domestic violence cases in the U.S. As the number of cases decreases, the token value increases.
In this future world, there would be as many “currencies” or unique digital tokens as there are problems we want solved that the fiat system doesn’t prioritize. The idea isn’t to replace fiat, but to expand the variety of valuable activities it’s capable of recognizing, thus expanding the overall scope of the economy.
A Currency For Every Focus
This post proposes “Single Purpose Tokens,” or SPTs, as a strategy for placing our collective attention on the work that we feel is important but currently lacks a financial model in the fiat system.
Let’s run through a rough user experience to see how SPTs could work:
A person or a group of people decide they want to pursue a certain change in the world. It could be related to the cost of solar, malaria mitigation, reducing domestic violence, or anything else that a user wants to see change.
Let’s say a group of ten people living in San Francisco want to provide housing to the homeless population.
With a goal picked, the group now needs a discrete and trackable metric or metrics that they can tie the token's value to. Let’s say the metric is “the average number of people sleeping on the street in SF each month.” Then they can either tap into existing data that tracks that metric or they may need to create new data sources to consistently generate that data. They’ll have to be careful with the metric[s] they pick because an unclear metric can cause net negative solutions. For example, “less people sleeping on the streets in SF” could inspire the community to bus the homeless population to another city instead of actually improving the homeless population’s life experience in SF.
Once the group has chosen their metric and procured a data source that they all trust, they can generate their token. We’ll call this example token the “SFHOUSING” token. The initial members of the group will transfer existing currency into the project, whether fiat or crypto. Members can decide to start the project using a smart contract to lock funds, a more centralized banking solution, or some other mechanism to lock funds.
The token acts as a deposit-backed stablecoin with upside (or downside) based on the metric’s performance. For example, let’s say the SFHOUSING smart contract receives 1 million in a USD-backed stablecoin from the 10 original members. There are now 1 million SFHOUSING tokens in circulation, priced at one dollar before the metric has moved up or down. Like any stablecoin, the native token burns when swapped.
Now, let’s say the currency holders do a good job of improving their metric and reduce the monthly average homeless population by 50% over some arbitrary period of time. The SFHOUSING token goes up based on that success. The pricing function could be something like this: Price [P] = [Total Value Locked [TVL] * (1 + % Change in Metric [ΔM])] / Circulating Supply [CP]. To clean that up: P = (TVL*(1+ΔM))/CP
Using that $1m locked and 50% reduction, we get a price of $1.5 per SFHOUSING token. This pricing function is very rough. The price function needs to be experimented with to find the right weights. For example, the multiplier could be non-linear, i.e. P = (TVL*(1+ΔM)2)/CP
Hopefully that flow provides you with an idea for how an SPT could function. While the exact implementation needs work, the high-level tokenomic idea is to have the token be stable unless something changes in the real world based on the token’s expressed purpose as tracked through the metric[s]. These SPTs should not be subject to supply and demand forces or speculation, their prices should only go up or down as the metric they are tied to improves or gets worse.
There are many challenges with this concept. Here are just a few.
Using off-chain data. The oracle problem is tricky. It’s possible the solution isn’t a trustless oracle, but rather starting with a small group of people who all agree on the metric chosen and trust that if the metric meaning degrades, then the “DAO” that manages the currency will make a reasonable decision. A lag time from when the off-chain data changes to when the token price updates could help build this trust.
Creating a modified stablecoin. As we’ve seen many times, creating a straightforward stablecoin is not simple and they often depeg for a variety of reasons. To add this “real world function” into the mix complicates the already complicated stablecoin project.
Selecting the tech stack. Is this an EVM project? Cross chain? L2? Its own chain?
Prioritizing which currencies are valuable. If this platform took off and millions of currencies were created for a wide variety of problems all over the world, then you’d need some evaluation mechanism to help prioritize currencies.
Spam SPT creation. What if bad actors use bots to generate SPTs, flooding the platform with the goal of eeking out some fraudulent alpha.
Reputation management. Knowing the on-chain reputation of users would help prioritize high-value SPTs. For example, if Jane Doe is a famed climate change entrepreneur, if Jane creates a new SPT or supports an existing climate-related SPT, then that SPT should be fast-tracked for consideration from the wider community.
Prerequisites to SPTs: The Internet & Blockchain
To cheaply create an arbitrary number of immutable currencies that are each part of an interoperable whole is not possible in a non-digital environment, and would not be sustainable without a trusted distributed server. The internet and blockchain technology are the prerequisites that make such dynamic value assignments possible. The last decade of blockchain experimentation provides a toolkit to approach this type of project.
As I’ve been doing with RelevanceDAO for the past couple months, I’ll be seeking feedback on this SPT idea. If you see an obvious reason why SPTs can’t work, I’d love to hear from you. Join the Relevance discord channel here to chat.
Thanks for reading,