1kx Partner: Challenges and Solutions for Designing Token Networks

By: Peter 'pet3rpan'

Compilation: Deep Tide TechFlow

Creating a sustainable token network is multifaceted and requires coordination and operations among participants. However, since the founders are mostly only good at technical aspects, it is difficult to achieve this kind of coordination and operation, resulting in the sustainability of the token network being affected. In this article, 1kx Partner Peter 'pet3rpan' will focus on these issues and offer some solutions to deal with them.

The operational focus of most token networks can be summarized in 3 areas:

• generate supply
• Create demand
• Resource allocation

Network building is hard. Every network needs to solve the same problem. Here are some observations and reflections to address these questions:


We can model most token networks as markets (supply and demand) of actors working in coordination to produce an end market that would be impossible for one person alone, be it a product, service, Economies or platforms (provide services to suppliers and consumers).

Most of the problems come from a lack of a real sense of how decentralized networks of participants coordinate at scale. This is a skill that most founders usually don't pay much attention to in the early stages (more focused on product development).

The network needs a supply that is better or cheaper than the alternatives to generate demand. Supply does not arise without demand or incentives to participate. You need to incentivize and spend based on bootstrapping such a network.

Most issues can be debugged through this lens, and most of the key network building challenges also arise in these areas:

1. The network coordination is too naive;

2. Poor resource allocation and governance controls;

3. Unsustainable network engagement fit.

Too naive about network coordination

Product development and web building are fundamentally different fields. Many founders are good at technology, but few are good at network orchestration, which requires a paradigm shift.

Before decentralization, centralized companies were often responsible for generating most of the supply and demand for projects. However, when you launch the network, it is the participants who drive supply and demand from then on, not the core team.

Too many teams launch tokens with the mentality of "build the network, token, and users will come" without actually thinking about how to leverage their network to grow in a more scalable way that the team can't.

Many teams end up creating token incentive models that don’t actually meaningfully scale network growth — well… because they never really think about how to get network participants to contribute to network goals.

As a result, they spend capital on poorly designed participation programs, which tend to result in some increase in supply or demand due to token incentives, but overall unsustainable unit economics.

In many cases, growth is much less efficient and has negative value units compared to every dollar spent on centralized teams. TLDR; better to keep it centralized.

Teams need to think about how to properly coordinate network participants before launching a token and launching a network.

This means implementing coordination frameworks that are able to replace work that was previously driven by a core team of supply or demand generation workforces.

Whether through human-based coordination, or engineering programmatic approaches to replace core team work and processes to incentivize contributions, effectively building such a network of participants takes a long time.

Too many teams are naive enough to think that launching a token is the ultimate goal when in reality it is just the beginning. In fact, the moment you launch your token - you have just turned on the spigot of funds pouring rapidly from your network.

Suddenly you have a funding problem that needs to be solved in a few months, and you're trying to build a solution that actually took at least 2 years to properly cultivate. This ultimately leads to loss of network, failure to grow, failure to gain market share, etc.

Poor resource allocation and governance

Without an operational framework for how token holders should make decisions and spend their money, most networks will keep producing rather irresponsibly, causing the purchasing power of tokens to decline over time.

Ideally, every $1/eth spent on tokens or capital will result in a one-unit increase in supply or demand. We should measure the output of spending and ideally increase it over time.

In many DAOs, there are annual budgets for spending by different functions - in my opinion, this is a horrible way to spend capital, and we don't need marketing for marketing's sake.

We should fund growth, not just work for the sake of work.

Only when you start measuring output can you identify and root out incompetence within your contributor network. This is an epidemic that has affected most DAOs, the worst of which is that DAO decisions are not made objectively but politically.

Unsustainable Network Engagement Fit

It is easy to mistake network participation in this state of affairs for truly sustainable supply/demand when there are token rewards to subsidize participants.

While token incentives are very powerful in guiding initial participation or as a means of retaining participants over the long term, it often gives networks a sense of security that they have built a sustainable network - especially during bull markets, which is wrong of.

Network Participation Fit: It means that when the network is created, there are participants to participate without any subsidy incentives, and it naturally has inherent economic incentives to participate in the network.

what does it look like It might look like a community-run NFT loan underwriter DAO that brings together knowledge, capital, and strategy to generate profits on NFT lending platforms.

It may look like KRPDM, an art collection DAO, driving the volume of art collection transactions on fxhash, while generating profits by collecting and selling their own works. Or like Ribbon Finance's vault, bringing volume to Opyn's options protocol.

The key point in all of these relationships above is that there is a symbiotic relationship between the participants and the network itself, where everyone has a natural economic incentive to participate in the network/protocol.