Innovative Economic Model Introduced for App Tokens by a16z Crypto

a16z
Crypto
has
announced
a
groundbreaking
approach
aimed
at
transforming
the
economic
models
of
application
tokens,
introducing
cash
flows
for
app
tokens
to
create
more
permissive,
flexible,
and
compliant
fee
structures.
This
new
model
is
designed
to
enhance
the
value
accruing
to
protocols
while
ensuring
regulatory
compliance
across
various
jurisdictions,
according
to

a16z
Crypto.

Challenges
for
Token
Models

While
infrastructure
tokens
like
those
on
Layer
1
networks
have
well-understood
economic
models
based
on
supply
and
demand
for
block
space,
application
tokens
face
a
different
set
of
challenges.
These
tokens,
used
in
smart
contract
protocols
on
blockchains,
cannot
rely
on
gas
fees
and
must
develop
their
own
economic
models.
Legal
complexities
also
arise,
as
application
tokens
often
facilitate
regulated
activities
requiring
governance
by
token
holders.

Governance
Challenges

Application
tokens
often
come
with
governance
rights,
which
can
introduce
risks
if
Decentralized
Autonomous
Organizations
(DAOs)
control
protocol
revenue
or
economic
activities.
To
mitigate
these
risks,
a16z
suggests
reducing
DAO
governance
or
adopting
Wyoming’s
Decentralized
Unincorporated
Nonprofit
Association
(DUNA)
model,
which
offers
a
legal
framework
for
DAOs
in
compliance
with
U.S.
tax
laws.

Value
Distribution

Distributing
value
to
token
holders
while
complying
with
U.S.
securities
laws
is
another
challenge.
Direct
mechanisms
like
pro
rata
distributions
or
token
buy-and-burns
resemble
traditional
financial
practices,
raising
regulatory
concerns.
Instead,
a16z
recommends
stakeholder
capitalism,
rewarding
tokenholders
for
contributions
that
benefit
the
project,
such
as
running
a
frontend
or
participating
in
a
protocol.

Regulated
Activity

Applications
facilitating
regulated
activities
must
ensure
their
value
accrual
mechanisms
comply
with
legal
standards.
Protocols
should
collect
fees
only
from
compliant
frontends
or
APIs.
This
approach
helps
avoid
regulatory
pitfalls
and
ensures
that
tokenholders
do
not
profit
from
illicit
activities.

Fee
Traceability

Fee
traceability
is
crucial
for
ensuring
compliance
without
introducing
censorship
risks.
a16z
proposes
a
two-step
app-token
staking
system:
identifying
the
frontend
that
generated
the
fees
and
routing
these
fees
based
on
custom
logic.
This
ensures
that
tokenholders
receive
fees
only
from
compliant
frontends,
thereby
avoiding
legal
jeopardy.

Mapping
and
Routing
Fees

To
achieve
fee
traceability,
a
protocol
could
map
domains
to
public/private
key
pairs,
ensuring
that
fees
are
correctly
attributed
to
compliant
frontends.
Fees
can
then
be
routed
to
staking
modules
specific
to
each
frontend,
allowing
tokenholders
to
choose
compliant
fee
sources.

Implementation
and
Considerations

The
implementation
involves
establishing
a
registry
smart
contract
for
frontends
to
register,
validating
transactions,
and
distributing
fees
through
a
FeeCollector
contract.
This
system
minimizes
governance
burdens
and
ensures
compliance.

Additional
considerations
include
specific
fee
models
for
Layer
1/Layer
2
applications,
appchains,
and
application
rollups.
Each
type
of
application
may
require
different
approaches
to
ensure
that
fees
are
collected
and
distributed
in
a
compliant
manner.

This
innovative
model
by
a16z
Crypto
aims
to
provide
a
robust
economic
foundation
for
application
tokens,
similar
to
those
enjoyed
by
infrastructure
tokens,
while
addressing
the
unique
challenges
faced
by
application
protocols.

Image
source:
Shutterstock