The CodexCoin Design and Economy
Token economic design, the incentive structures that drive the function of a network, is a central part of a blockchain project
Token economic design, the incentive structures that drive the function of a network, is a central part of any blockchain project. Getting it right is key to ensuring stakeholder alignment and future success.
After reading this blog post, you should be able to understand:
- The principles and rationale of our current approach to tokenomics
- Our utility and incentive system
- A concrete example of how this works in practice
Our team at Codex Protocol has spent a lot of time ensuring that the economics of CodexCoin further the goals of Codex. For context, our team has experience in finance, economics at Harvard and Oxford, and security systems at Microsoft. We have also consulted extensively with our advisors regarding token design. The design of CodexCoin has been a major focus for all of them.
CodexCoin (CODX) is the native token of Codex, it is used to interact with the protocol. In short, users and applications pay fees in CodexCoin to create, update, and transfer Codex Records. The Records themselves contain information about the identity of different assets. We use the fees paid to provide rewards and incentives.
Our Design Principles
- Onboarding new users should be easy.
- Heavy users should have stakes in how the protocol runs, and incentive to preserve the integrity of the network.
- Behaviors that add value should be rewarded and malicious behavior should be penalized.
Think of CodexCoin fees like gas in ethereum: Operations to read data are completely free, but operations to create, update, and transfer Codex Records have an associated cost. For most users, fees will seem minor.
Fees contribute to a community rewards pool, which we will discuss in greater detail below.
For professional stakeholders like app developers and auction houses who use the protocol for commercial use, these costs may become meaningful. To ensure affordability, users have the choice to stake rather than pay. This encourages professional users to hold tokens, which in turn ensures their participation in the governance of Codex.
What’s great is that often, users aren’t even required to buy CodexCoin directly. Applications can charge end-users in fiat or ETH for ease, and then convert to CodexCoin in the background. We covered this in another blog post on usability, which you can read here.
Our Incentive Structure
We use incentives and penalties to create the behavior that we want. These factors are also known as “levers” in tokenomics.
At Codex, we focus on the following levers:
We want individuals and companies to provide value to the protocol and its ecosystem of applications, so we incentivize them by paying out in tokens. App developers and validators provide a great value to the network, and so receive the greatest value from this incentive.
Validators create value for the network by contributing and verifying provenance information (information about the identity of an item and it’s chain of ownership). They include appraisers, auction houses, dealers, gallerists and creators/artists. Validators may get rewards for creating new Records, providing well-researched historical provenance, and attesting to Records created by end-users.
Application Developers create value by increasing adoption or providing special value to the network. For example, we intend to reward application developers based on user activity around records they have created.
Initially, rewards are distributed on a discretionary basis. Over time, we will develop a system for algorithmic distribution. The Consortium and reputation applications from the ecosystem will guide this system. Reputation applications will be the subject of future blog posts.
To keep recipients motivated to maintain the network and promote Codex to their clients, any tokens we award will be subject to vesting.
Discounts & Staking
The protocol will give users credits for maintaining a stake of CodexCoin. Staking is an explicit operation where token holders deposit CodexCoin into a smart contract. When a user stakes CODX they receive credits equal to the amount they have staked. Credits are based both on the size of the stake and the amount of time it has been active.
Staking allows frequent users of the protocol to have the most affordable rates, while incentivizing them to hold tokens for extended periods of time. This is critical, because it means they will have a say in governance and Codex Protocol will become increasingly decentralized over time.
This design also encourages application developers to educate their users and promote CodexCoin. The more users stake and pay CodexCoin directly within a given application, the less the application developer has to purchase, convert, and stake themselves. Thus, we expect application developers to pass along credits to their users in the form of secondary incentives for using and staking CodexCoin.
Penalties & Staking
Key players like application developers and validators will be required to stake CodexCoin that can be penalized for bad behaviour. For example, validators may receive penalties for spamming the network or intentionally contributing false information. Application developers may be penalized if they don’t adhere to the privacy and data portability policies of the protocol.
We don’t want this lever to create a barrier for new validators and developers. So instead of forcing them to pay up front we plan use the first rewards they earn to load their staking contracts CodexCoin.
Our goal is to create an open community that governs a decentralized system. Early direction of the protocol will be at the discretion of the Consortium and Codex Labs, Inc, but will be given over completely to token holders, and contributors to the network.
To enable this we will put in place an on-chain voting system. It allows everyone who stakes tokens to have a say in the evolution of the protocol, and those who stake for a long time to have a greater say. In addition to the stake, contributions to the network and other behaviors will play into voting mechanics.
Example in Practice: An Auction House Joins the Protocol
An auction house has decided to start providing Codex Records for all the items they sell. Their position in the industry means that they act as a validator. They create Records, acting as a source of trusted information.
They receive rewards for this because they are adding quality information to the network and encouraging adoption of the protocol. They can treat the rewards as profit or use them to pay future costs. Whichever they choose, these rewards are locked up for months. This both satisfies the auction house’s initial penalty stake so that it’s easy and free for them to get started as validators, and also ensures they have a say in the governance of the protocol and a reason to ensure its integrity as quickly as possible.
In addition, the auction house decides to transfer Records to their buyers. A given auction house may transfer 300 Records following a single auction. The auction house has the choice to pay 300*X CodexCoin for these transfers (where X is the price per transfer in CodexCoin), or it can stake 300*x*y CodexCoin for two months (where y is the required staking factor). This auction house chooses to stake. In exchange, the auction house is able to transfer all the Records for free. Critically, because the auction house has staked CodexCoin for two months, they have a say in governance of the protocol for that period. We expect auction houses will simply rollover this stake, engaging them in governance on a continual basis.
This post represents our current plan for the CodexCoin economy, but changes may occur in this model. This could be due to advances in the field of token economics, or modifications required by user behavior. Thus, we encourage you to focus on our design principles rather than the specific design. In the long run, we see exciting possibilities as CodexCoin moves beyond transactions with our registry, and becomes a shared currency for our whole ecosystem.
Codex is the leading decentralized asset registry for the $2 trillion arts & collectibles (“A&C”) ecosystem, which includes art, fine wine, collectible cars, antiques, decorative arts, coins, watches, jewelry, and more. Powered by the CodexCoin native token, the Codex Protocol is open source, allowing third-party players in the A&C ecosystem to build applications and utilize the title system. Codex’s landmark application, Biddable, is a title-escrow system built on the Codex Protocol, which solves long-standing challenges in auctions: non-performing bidders, lack of privacy, and bidder access. The Codex Protocol and CodexCoin will be adopted as the only cryptocurrency by The Codex Consortium, a group of major stakeholders in the A&C space who facilitate over $6 Billion in sales to millions of bidders across tens of thousands of auctions from 5,000 auction houses in over 50 countries.
Want to learn more? Visit our White Paper