Tokenomics in real life: A brand new and improved business model
Photo by Adi Goldstein on Unsplash
For all the promise of crypto’s technology, it may have been argued there isn’t much of a real-life use for cryptocurrencies at this stage other than speculation about the future and moving money around.
Until now.
The edge is in a new type of incentive structure. The issue of tokens, if done properly, aligns a provider of products/services with its users in a way that has the potential to be more powerful than anything we have ever seen.
While many protocols have been using a token structure incentivising early users to rapidly scale their networks for some time already, this occurred inside the crypto system and the users were all crypto native.
We think that Crypto may have finally found its fit in real life.
The best way to illustrate this is through the story of a seemingly ordinary company called Helium.
This is the story of how they used token economics to align incentives and bootstrap the foundations of a global wireless network.
How to bootstrap a global wireless network
Wireless telecommunication networks are notoriously complicated and obscenely expensive to set up. For those who study the telco space, ongoing battles over leasing land to build towers, ferocious bidding for wireless spectrum and legal tussles with landowners and equipment providers over costs are par for the course. Running a telco is hard and expensive work – setting one up from scratch is even harder. Especially in a deeply penetrated, mature, oligopoly.
So imagine what went through our heads when we read about a business which is building a global wireless network to support the growth of the “Internet of Things (IoT)”. How would the requisite land, spectrum and equipment be placed in sufficient density to create the coverage needed for such a network to exist? And how much would it cost?
Helium Inc’s “The People’s Network” is a global wireless network whose initial aim is to set the networking foundations for IoT.
Just as Bitcoin coordinates self-interested miners into a system that secures global value transfer, or Ethereum coordinates self-interested miners into a system that performs complex computation in a decentralised network, Helium coordinates self-interested miners into a network that secures and provides long-range, low-power and low-cost network coverage, allowing an IoT network to materialise in a way that no other business model could do before.
Their success to date is laudable: 24,000+ wireless hotspots placed around the world, largely located in the US and Europe, building a network that is truly on the path to being global in nature. Yet Helium has so far only raised about US$51m of funding to achieve not just network coverage, but also the development and manufacturing of its own hotspot hardware – a drop in the ocean compared to the capex budgets of most single country telcos.
What is even more fascinating is that Helium not a new business. It is not at a crypto-native business. It is seven years old and for most of those seven years, they struggled to gain adoption in a fiercely competitive arena. At least until they adopted a tokenised incentive model to bootstrap the growth of their network around 2 years back.
The results are astounding. By putting in the right incentives and implementing these incentives with crypto economics, Helium is growing at an astonishing rate and its “competitors” can’t keep up.
Coordinating incentives
Two years ago, we wrote in our paper The Theory of Nachas about the potential for crypto token economics to create a new asset class distinct from equity and debt which represents various parts of an entity’s (not necessarily a company) economic structure: from revenue to cost of goods all the way down to EBITDA or any intermediate level in between.
Theoretically, any part of the economic benefit can be shared. In the same way equity allowed alignment of the owners of a firm with say employees or management who were granted shares, tokens can be used to form alignment with suppliers, customers, users and other stakeholders.
Helium offers us a prime example of how the coordination problem of network-building can be overcome with the right incentives.
It isn’t hard to see how a “startup” telco would need a budget in the tens of billions to even have a chance of success: the massive upfront costs, not to mention the adversarial rent-seeking relationship the telco has with its counterparties for telco tower construction and maintenance, mean that without the assurance of future profits, few would undertake the risk of such an endeavour.
To date, despite all the advances in wireless technology and mobile coverage, the Internet of Things hasn’t materialised. The reason is that the type of network needed is very different from the high bandwidth, high speed mobile networks we are familiar with. In contrast, IoT requires low-power, long-range networks that transmit tiny packets of data from a multitude of sensors and small devices. To see how this makes little economic sense, consider how much it would cost to insert even a £4/mth mobile SIM onto an array of thousands of sensors to report on say air pollution levels in London.
If the traditional telco model were to be followed, an IoT network would require countless hotspots to be laid across the world, with full backhaul and maintenance support to keep the network up, while keeping the price of data access low enough for IoT and its multitude of sensors and small devices to make sense. It simply wouldn’t be worth any company’s time.
By introducing crypto token economics into the picture, Helium incentivises (through its Helium Network Token, HNT) individuals to purchase, install and maintain a small hotspot device in their homes, providing the nodes required for the network to be formed. Its success to date numbers north of 24,000 hotspots and counting.
The mechanics of HNT are a beauty to behold and documentation can be found on their website, but the gist of it is as follows: individuals purchase a Helium Hotspot device and install it in their homes or offices, and each device not only provides coverage for data transmission, it also serves as a node which validates the network through what Helium terms “Proof of Coverage”.
Individuals earn HNT tokens by helping to transmit data over the network (paid for by Data Credits which are purchased by the end user of the transmission service), as well as by sending and/or fulfilling challenges to prove that the network is indeed as it claims to be (i.e. that each hotspot is functioning at the location at which it is supposedly located). The HNT tokens earned can either be sold for cash or retained, benefiting from future usage of the network as other HNT tokens are “burned” or removed from supply when Data Credits are used up.
The best part of it: everything runs on code. Payments are coded and automated, and the individual “miner” does nothing more than make sure the hotspot is plugged in and running. Literally a case of set it and forget it, and when things go wrong, support is available from Helium to get things back up and running (and earning).
The key insight and innovation here is the token, HNT, which converts what would have been adversarial “suppliers” of real estate, bandwidth and electricity (a couple of square inches, about 1kbps and 5W of power, respectively) into partners, offering them a share of future network value and an ongoing income stream, in exchange for them investing in the hardware and ongoing maintenance of the network.
The 24,000+ nodes (coverage map here) are a testament to the success of this incentive mechanism, a system which is itself further augmented by the keen participation of many miners and developers who now have a stake in the network’s ultimate success.
Of course, Helium has a long way to go, but the approach they have taken is not only novel, it is a stroke of genius in taking the blockchain and token economics out of the realms of the theoretical and into the closest thing to a “bricks and mortar” (or in this case, “cables and antennae”) business so far.
With Helium, users can look at their hotspots as an investment and a source of income, incentivising them to support, maintain and grow the network as a stakeholder rather than just a “user” or “customer”.
Crypto’s “killer app” moment
As argued by Tushar Jain of Multicoin Capital, one of Helium’s key investors and co-founder/president of the DeWi Alliance which oversees the governance of the Helium Network, the magic of crypto token economics is in making disparate actors with their own self-interests behave in a coordinated manner in support of a greater good.
This is by far the most tangible case study of our Theory of Nachas being put into practice: a brand new asset type that creates alignment of interests and incentives like nothing before it. One can only imagine the potential for other businesses to bootstrap network effects in a similar way. The prospects are tantalising.