Imperial College examines crypto-economic flaws in ICO tokens

Imperial College and blockchain group Outlier Ventures are looking to improve the technical design and behavioural economics behind digital tokens, currently being sold as a way to ostensibly power the next generation of blockchain networks.

It follows Outlier's recent publication of a new framework called Community Token Economies CTEs, which allow for communities of startups and incumbents to build network effects and economies of scale more quickly via a collectively owned protocol and shared "Community Token".

One goal is helping avoid redundancy and competition over scarce technical talent in blockchain and crypto-economics that would otherwise lead to a tragedy of commons, a statement said.

A White Paper produce in accordance with the initiative provides a review of the current state of the ICO (initial coin offering) phenomena that has emerged since 2013, and has now gone mainstream in the early part of 2017. It discusses its benefits as an innovation, primarily to better enable open source communities to self-finance and realise new decentralised digital economies that are inherently less fragile when compared to traditional venture capital-backed models.

The paper looks pragmatically at the flaws of ICOs and how they can be improved upon. In particular, a trend where multiple parties join forces to realise a "Minimum Viable Community" (MVC) in order to achieve network effects more efficiently and rapidly compared to going it alone.

The team at Imperial College will run randomised control trials to experiment with various token design factors. This allows them to identify causal links about the expected behaviour of various parties, ensuring the right economic and behavioural properties are incorporated into the token's design. Examples include:

Building trust: Testing will focus on various trust-building tools via different reputation creation mechanisms, including: new governance and communication frameworks, new standards for investing, new risk stratification hierarchies for smart contracts, as well as building incentive structures for the governing blockchain protocols themselves.

Coordination & Cooperation: Experiments will examine the likely network effect and different cooperation mechanisms for the community as well as potential voting structures within a Community Token Economy. For example, 'should a community token economy should allow for individual app tokens to exist or be all-encompassing?'

Competition & Conflict: Imperial will investigate intra- and inter-group competition and conflict using game theory techniques to help identify the most effective way to structure a Community Token Economy.

Three of Outlier Ventures' portfolio companies are already currently planning Community Token Economies, including token sales, to fund continued innovation in areas such as open mobility and artificial intelligence.

Dr Catherine Mulligan, Co-Director for Cryptocurrency Research & Engineering at Imperial College, commented: "Our teams are looking forward to the chance to thoroughly plan, test and interrogate the various economic incentives that will foster sustainable micro-economies for Outlier's venture companies and their communities. Running experiments and randomised control trials provides a wealth of data to ensure appropriate token design."

Eden Dhaliwal, Head of Crypto-Economics, Outlier Ventures, added: "The technical, cryptographic and economic talent amongst Imperial's professors and PhD students is some of the finest in the world. It's essential for us that our Community Token Economies are designed thoroughly, we want to create sustainable economies with the wider community in mind from the very outset. All too often today token sales are rushed, without the necessary forethought."