Protocol Tokens and Growth

If the traditional revenue and expense business model does not apply to protocols how should we think about growing protocols and the role of tokens?

Properly designed protocols should align incentives so that uncoordinated actors are rewarded for growing the protocol. A protocol token is a primary method of doing this.

As an example we can look at the first blockchain protocol – Bitcoin. As of this writing, there are ~900 new Bitcoins minted per day and automatically distributed to “miners” who help grow the protocol by securing the network. At $42,000 per Bitcoin that is $15.3 million per day being distributed to miners. The two key distinctions is that it is distributed automatically and for work being done. Think of how different Bitcoin would be if instead all of that Bitcoin was taken as fees by the protocol, put into a wallet, and Bitcoin holders subsequently voted on how to disburse it? It’s doubtful Bitcoin would have ever achieved growth.

The goal of the protocol is not to generate revenue for token holders. It’s the exact opposite, the goal of the token is to generate growth for the protocol.

The key attribute of the Bitcoin blockchain is network security, for that reason, Bitcoin tokens are rewarded to “miners” that secure the network. Tokens should be distributed to actors who enhance the core functions of a network.