The sports industry might be one of the most important branches for NFTs implementation. From rare collectibles to voting rights - NFTs revolutionize fan engagement.

Tokens come in 4 main types: security tokens, payment tokens, utility tokens and object of today’s insertion, non-fungible tokens (NFTs). Non-fungible meaning they are not interchangeable with other articles due to their intrinsic qualities. For example, you cannot exchange a fridge with a typewriter and vice versa. However, fungible items can be swapped, because they are defined by their value, not their unique properties. A prominent example would be Bitcoin or other cryptocurrencies such as Cardano which can be purchased and sold for money.

The boom of digital assets

Although initially, non-fungible tokens had limited popularity in the mass market, now they are advertised on billboards, stadiums, in media, and services. Public awareness rose with the proliferation of “Cryptokitties”, an online game where players can breed and collect virtual cats. $12 million raised in investments alone, some of the “cats” were sold for over $150,000 a piece.

Soon after, the videogame was added to the ERC-721, a free and open standard that trains users on how to build tokens on the Ethereum blockchain, thereby coining it for the first time as an NFT. Recording an overall sale of $250 million in 2020, Dap Radar’s data logged a staggering $2.47 billion in the first 6 months of 2021, an 888 % increase.

NFT space in a brief

NFTs vary in application, from digital art, gaming, music, and movies, now onto the final frontier of virtual reality, the Metaverse. The growing popularity of the token is that it provides an ownership alternative, enabling buyers to own items without having to compromise with media platforms. Ownership terminates only when the owner decides to sell the item. The key advantage is a unique and integrated blockchain mechanism that indicates effective ownership history and easily detects the authenticity of an NFT.

Moreover, the potential is believed to be transformative. As DLT economies grow and the benefits of decentralized economies become undeniable for key investment players, there will be a shift towards decentralized finance. Tokens, amongst which NFTs, are the “lifeblood of this new system” (Tech Crunch).

Where will non-fungible tokens take us?

In a standard economy, and therefore in a DLT transition, sport is a major business. Consulting agency Kearney estimates that the industry is currently worth circa $620 billion, growing faster than the global GDP, making it an el dorado for those seeking fortune. The value generated and the prospects it offers make what first appears as a strange “collaboration”, only a natural step in the next gen of value creation. That begs the question, how does this collaboration work and how can the NFTs increase the involvement of sports fans?

Fan participation framework

In the conventional, physical world, there are many ways to get involved in sports and all the entertainment around it. Some buy the merchandise, some wait for their heroes’ autograph in the blistering cold and some pass their time on collectibles, panini for example, a card cult in Italy. There is unquestionably a nostalgia and psychological dimension powering sports industry which attempts to merge innovative tech solutions to increase fans’ participation. The most recent examples of world’s most popular disciplines prove that.

Why sports fans are interested in NFTs?

The use of NFTs is purposed towards more meaningful fan-club interactions. Collectibles or player cards are virtual, allowing fans to gather and swap stickers with unique highlights from their athletes. These cards have levels of rarity, some entering the market with a thousand-dollar price tag. That excites supporters, as it has for decades in a non-virtual environment and are thrilled to buy cards of their favorite sportsmen, even if pricey.

Case in point is Dapper Labs’ NFT marketplace platform NBA Top Shot where the lowest asking price for Ja Morant’s dunk series 1 is $475,000. Lebron James topped his legendary 32 at $535,000. Derrick Rose’s legendary 59 is currently valued at 1 million dollars.

Where new technologies meet fan base

The list goes on. The assurance to the fan is that the card becomes a non-exchangeable unit of data, meaning it holds a stamp of authenticity through the blockchain, annulling potential for fraud or mistake. The fan can trade safely, and the athlete can in fact create a novel source of income. Tampa Bay’s tight end Rob Gronkowski recently launched his personalized set of digital cards which show himself in action, removing elements that may infringe image rights, but nevertheless good enough to profit almost $ 2 million in sales.

The next level of fan engagement

Other than a business-grounded optic, NFTs encourage athletes to redefine their relationships with the public. That can be in the form of exclusive career content or rewards for the best fans including personal visits, online contact, gifts etc…. At this stage, this is hypothetical talk but done correctly, can bring the stands closer to the pitch, a dream every supporter holds.

Fantasy sports leagues

In some cases, NFTs can also be used within fantasy sports league applications, with each NFT representing a player who could be part of a team entered into season-long competitions. In the Fantasy League, an e-sports platform where users set up their own teams based on existing clubs, NFTs radically transformed the way how digital interactions related to sports now occur.

With Sorare, you create Fantasy Football lineups using NFT cards that you actually own. When the players score on the field, you win real money. The match in Russia notched Anderson a prize of 0.25 ETH (now worth around $500) and additional NFTs – more player cards – now worth over $2,000. Sorare doles out these prizes constantly. “I saw the potential right away,” says Anderson. “This is fun and engaging, and I can win NFTs and [ETH] using my passion for football and sports.” Anderson is part of a rabid group of soccer fans (120,000 active monthly users) obsessing over Sorare – an addictive blend of fantasy football, collecting and the wheeling and dealing of crypto trading. He loves it so much he started The Sorare Podcast, where guests join him to geek out over strategy.

Sportswear as a digital product

A step further past collectibles is wardrobe. Now more than ever have fashion and sports been synonymous of one another. Nike has become a dominant force in streetwear apparel besides brands such as Puma, Adidas, and Champion. Buying sportswear is a fashion statement, one that NFTs are starting to introduce in digital form. For example, Gucci Virtual 25 replicates a shoe design that can only be used in augmented reality.

Gamers (including sporting players) buy “skins” to give themselves a unique look, one that makes them stand out, and this has been going on since 2012, so the idea already exists. Until now, the industry has topped at relatively basic gear and memorabilia but with the creation of the metaverse, nothing is off the table.

How did the championship ring become a digital asset?

In basketball, 15 years onwards from Miami heat’s first championship glory, the NBA commemorated the event with an NFT collection, where virtual championship rings of the time, alongside banners and flags were offered on their digital platform. In football, ACF Fiorentina delivered special edition merchandise of jerseys for their 95-year anniversary, 95 jerseys materially and digitally available. The project was conducted on the Genuino program, a fan engagement platform where fans can purchase digital collectibles, certified by blockchain technology.

All in all, the paradigm describes a parallel shift in engagement, from physical to digital, but NFTs can do more than switch scenery, they can so to speak, buy you that sunrise view.

Decision making in sports clubs

In Japan, clubs in the non-professional shallows up until first division (J1) are adopting the token model to manage ownership structures with fans, and the sponsorship deals that underlie them. YSCC Yokohama announced that they had sold half a million dollars of tradeable fan tokens from the beginning of May, promising fans the possibility to vote on matters such as uniform design, player of the week, attend pre-match meetings with staff and access to VIP tickets.

In Turin, Juventus’s stadium, the Allianz, blasted Blur’s “Song 2” every time the “vecchia signora” would score a goal. This was possible because fans on a blockchain ecosystem called Socios.com decided so. The platform sells tokens, and the more you own, the stronger your voting powers are. The founder Arthur Dreyfus discussed the globality of the sport and that this mechanism allows fans that are away to still be part of the event, especially in times of Covid.

In theory, a song played at the Olimpico di Roma or Rajko Mitić Stadium in Belgrade can be selected by fans in India or even the Mauritius. No limits – global inclusivity is the 1st rule. It must be clear that organizations are run by professionals, so boundaries are in place and they won’t budge. Fans must make content with their role as fans, but that doesn’t mean they can’t have their piece of the pie.

How we can use NFT in sports fan engagement

NFT fan engagement and the metaverse

A study by Deloitte predicted that by the start of 2023 already 5 million fans will have either acquired NFTs or received them as a gift. There is a lot of convincing evidence to believe that fan engagement will be bolstered by activity outside of sports. Art, music, gaming, the wider possibilities are what initially will drive the NFT model, but sports, with its billions of fans around the globe, will have its say.

As strange as it appears to purchase digital content, we must understand that it is a recent phenomenon, an oddity. But with the advent of gamer culture, this is no longer the case. In 2020’s second quarter, American consumers spent about $1 billion on gaming content. By 2022, especially in case of COVID induced lockdown, tens of billions of dollars will flow into purchases. In this context, we can only expect for tokens to increase in numbers, types, and functions, and expect them to enter our everyday lives in more ways than we first thought. The sports industry may be among the first ones to experience that radical change.

Applying Game Theory in Token Design

Kajetan Olas

16 Apr 2024

Blockchain technology allows for aligning incentives among network participants by rewarding desired behaviors with tokens.
But there is more to it than simply fostering cooperation. Game theory allows for designing incentive-machines that can't be turned-off and resemble artificial life.

Emergent Optimization

Game theory provides a robust framework for analyzing strategic interactions with mathematical models, which is particularly useful in blockchain environments where multiple stakeholders interact within a set of predefined rules. By applying this framework to token systems, developers can design systems that influence the emergent behaviors of network participants. This ensures the stability and effectiveness of the ecosystem.

Bonding Curves

Bonding curves are tool used in token design to manage the relationship between price and token supply predictably. Essentially, a bonding curve is a mathematical curve that defines the price of a token based on its supply. The more tokens that are bought, the higher the price climbs, and vice versa. This model incentivizes early adoption and can help stabilize a token’s economy over time.

For example, a bonding curve could be designed to slow down price increases after certain milestones are reached, thus preventing speculative bubbles and encouraging steadier, more organic growth.

The Case of Bitcoin

Bitcoin’s design incorporates game theory, most notably through its consensus mechanism of proof-of-work (PoW). Its reward function optimizes for security (hashrate) by optimizing for maximum electricity usage. Therefore, optimizing for its legitimate goal of being secure also inadvertently optimizes for corrupting natural environment. Another emergent outcome of PoW is the creation of mining pools, that increase centralization.

The Paperclip Maximizer and the dangers of blockchain economy

What’s the connection between AI from the story and decentralized economies? Blockchain-based incentive systems also can’t be turned off. This means that if we design an incentive system that optimizes towards a wrong objective, we might be unable to change it. Bitcoin critics argue that the PoW consensus mechanism optimizes toward destroying planet Earth.

Layer 2 Solutions

Layer 2 solutions are built on the understanding that the security provided by this core kernel of certainty can be used as an anchor. This anchor then supports additional economic mechanisms that operate off the blockchain, extending the utility of public blockchains like Ethereum. These mechanisms include state channels, sidechains, or plasma, each offering a way to conduct transactions off-chain while still being able to refer back to the anchored security of the main chain if necessary.

Conceptual Example of State Channels

State channels allow participants to perform numerous transactions off-chain, with the blockchain serving as a backstop in case of disputes or malfeasance.

Consider two players, Alice and Bob, who want to play a game of tic-tac-toe with stakes in Ethereum. The naive approach would be to interact directly with a smart contract for every move, which would be slow and costly. Instead, they can use a state channel for their game.

Opening the Channel: They start by deploying a "Judge" smart contract on Ethereum, which holds the 1 ETH wager. The contract knows the rules of the game and the identities of the players.
Playing the Game: Alice and Bob play the game off-chain by signing each move as transactions, which are exchanged directly between them but not broadcast to the blockchain. Each transaction includes a nonce to ensure moves are kept in order.
Closing the Channel: When the game ends, the final state (i.e., the sequence of moves) is sent to the Judge contract, which pays out the wager to the winner after confirming both parties agree on the outcome.

A threat stronger than the execution

If Bob tries to cheat by submitting an old state where he was winning, Alice can challenge this during a dispute period by submitting a newer signed state. The Judge contract can verify the authenticity and order of these states due to the nonces, ensuring the integrity of the game. Thus, the mere threat of execution (submitting the state to the blockchain and having the fraud exposed) secures the off-chain interactions.

Game Theory in Practice

Understanding the application of game theory within blockchain and token ecosystems requires a structured approach to analyzing how stakeholders interact, defining possible actions they can take, and understanding the causal relationships within the system. This structured analysis helps in creating effective strategies that ensure the system operates as intended.

Stakeholder Analysis

Identifying Stakeholders

The first step in applying game theory effectively is identifying all relevant stakeholders within the ecosystem. This includes direct participants such as users, miners, and developers but also external entities like regulators, potential attackers, and partner organizations. Understanding who the stakeholders are and what their interests and capabilities are is crucial for predicting how they might interact within the system.

_{Stakeholders in blockchain development for systems engineering}

Assessing Incentives and Capabilities

Each stakeholder has different motivations and resources at their disposal. For instance, miners are motivated by block rewards and transaction fees, while users seek fast, secure, and cheap transactions. Clearly defining these incentives helps in predicting how changes to the system’s rules and parameters might influence their behaviors.

Defining Action Space

Possible Actions

The action space encompasses all possible decisions or strategies stakeholders can employ in response to the ecosystem's dynamics. For example, a miner might choose to increase computational power, a user might decide to hold or sell tokens, and a developer might propose changes to the protocol.

Constraints and Opportunities

Understanding the constraints (such as economic costs, technological limitations, and regulatory frameworks) and opportunities (such as new technological advancements or changes in market demand) within which these actions take place is vital. This helps in modeling potential strategies stakeholders might adopt.

Causal Relationships Diagram

Mapping Interactions

Creating a diagram that represents the causal relationships between different actions and outcomes within the ecosystem can illuminate how complex interactions unfold. This diagram helps in identifying which variables influence others and how they do so, making it easier to predict the outcomes of certain actions.

Analyzing Impact

By examining the causal relationships, developers and system designers can identify critical leverage points where small changes could have significant impacts. This analysis is crucial for enhancing system stability and ensuring its efficiency.

Feedback Loops

Understanding feedback loops within a blockchain ecosystem is critical as they can significantly amplify or mitigate the effects of changes within the system. These loops can reinforce or counteract trends, leading to rapid growth or decline.

Reinforcing Loops

Reinforcing loops are feedback mechanisms that amplify the effects of a trend or action. For example, increased adoption of a blockchain platform can lead to more developers creating applications on it, which in turn leads to further adoption. This positive feedback loop can drive rapid growth and success.

Death Spiral

Conversely, a death spiral is a type of reinforcing loop that leads to negative outcomes. An example might be the increasing cost of transaction fees leading to decreased usage of the blockchain, which reduces the incentive for miners to secure the network, further decreasing system performance and user adoption. Identifying potential death spirals early is crucial for maintaining the ecosystem's health.

Conclusion

The fundamental advantage of token-based systems is being able to reward desired behavior. To capitalize on that possibility, token engineers put careful attention into optimization and designing incentives for long-term growth.

FAQ

What does game theory contribute to blockchain token design?
- Game theory optimizes blockchain ecosystems by structuring incentives that reward desired behavior.
How do bonding curves apply game theory to improve token economics?
- Bonding curves set token pricing that adjusts with supply changes, strategically incentivizing early purchases and penalizing speculation.
What benefits do Layer 2 solutions provide in the context of game theory?
- Layer 2 solutions leverage game theory, by creating systems where the threat of reporting fraudulent behavior ensures honest participation.

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Token Engineering Process

Kajetan Olas

13 Apr 2024

Token Engineering is an emerging field that addresses the systematic design and engineering of blockchain-based tokens. It applies rigorous mathematical methods from the Complex Systems Engineering discipline to tokenomics design.

In this article, we will walk through the Token Engineering Process and break it down into three key stages. Discovery Phase, Design Phase, and Deployment Phase.

Table of Contents

Discovery Phase of Token Engineering Process
Design Phase of Token Engineering Process
- Objective Function
Deployment Phase of Token Engineering Process
Time Duration
Required Skills for Token Engineering
Summary
FAQ

Discovery Phase of Token Engineering Process

The first stage of the token engineering process is the Discovery Phase. It focuses on constructing high-level business plans, defining objectives, and identifying problems to be solved. That phase is also the time when token engineers first define key stakeholders in the project.

Defining the Problem

This may seem counterintuitive. Why would we start with the problem when designing tokenomics? Shouldn’t we start with more down-to-earth matters like token supply? The answer is No. Tokens are a medium for creating and exchanging value within a project’s ecosystem. Since crypto projects draw their value from solving problems that can’t be solved through TradFi mechanisms, their tokenomics should reflect that.

The industry standard, developed by McKinsey & Co. and adapted to token engineering purposes by Outlier Ventures, is structuring the problem through a logic tree, following MECE.
MECE stands for Mutually Exclusive, Collectively Exhaustive. Mutually Exclusive means that problems in the tree should not overlap. Collectively Exhaustive means that the tree should cover all issues.

In practice, the “Problem” should be replaced by a whole problem statement worksheet. The same will hold for some of the boxes.
A commonly used tool for designing these kinds of diagrams is the Miro whiteboard.

Identifying Stakeholders and Value Flows in Token Engineering

This part is about identifying all relevant actors in the ecosystem and how value flows between them. To illustrate what we mean let’s consider an example of NFT marketplace. In its case, relevant actors might be sellers, buyers, NFT creators, and a marketplace owner. Possible value flow when conducting a transaction might be: buyer gets rid of his tokens, seller gets some of them, marketplace owner gets some of them as fees, and NFT creators get some of them as royalties.

Incentive Mechanisms Canvas

The last part of what we consider to be in the Discovery Phase is filling the Incentive Mechanisms Canvas. After successfully identifying value flows in the previous stage, token engineers search for frictions to desired behaviors and point out the undesired behaviors. For example, friction to activity on an NFT marketplace might be respecting royalty fees by marketplace owners since it reduces value flowing to the seller.

_{source: https://www.canva.com/design/DAFDTNKsIJs/8Ky9EoJJI7p98qKLIu2XNw/view#7}

Design Phase of Token Engineering Process

The second stage of the Token Engineering Process is the Design Phase in which you make use of high-level descriptions from the previous step to come up with a specific design of the project. This will include everything that can be usually found in crypto whitepapers (e.g. governance mechanisms, incentive mechanisms, token supply, etc). After finishing the design, token engineers should represent the whole value flow and transactional logic on detailed visual diagrams. These diagrams will be a basis for creating mathematical models in the Deployment Phase.

Token Engineering Artonomous Design Diagram — _{Artonomous design diagram, source: Artonomous GitHub}

Objective Function

Every crypto project has some objective. The objective can consist of many goals, such as decentralization or token price. The objective function is a mathematical function assigning weights to different factors that influence the main objective in the order of their importance. This function will be a reference for machine learning algorithms in the next steps. They will try to find quantitative parameters (e.g. network fees) that maximize the output of this function.
Modified Metcalfe’s Law can serve as an inspiration during that step. It’s a framework for valuing crypto projects, but we believe that after adjustments it can also be used in this context.

Deployment Phase of Token Engineering Process

The Deployment Phase is final, but also the most demanding step in the process. It involves the implementation of machine learning algorithms that test our assumptions and optimize quantitative parameters. Token Engineering draws from Nassim Taleb’s concept of Antifragility and extensively uses feedback loops to make a system that gains from arising shocks.

Agent-based Modelling

In agent-based modeling, we describe a set of behaviors and goals displayed by each agent participating in the system (this is why previous steps focused so much on describing stakeholders). Each agent is controlled by an autonomous AI and continuously optimizes his strategy. He learns from his experience and can mimic the behavior of other agents if he finds it effective (Reinforced Learning). This approach allows for mimicking real users, who adapt their strategies with time. An example adaptive agent would be a cryptocurrency trader, who changes his trading strategy in response to experiencing a loss of money.

Monte Carlo Simulations

Token Engineers use the Monte Carlo method to simulate the consequences of various possible interactions while taking into account the probability of their occurrence. By running a large number of simulations it’s possible to stress-test the project in multiple scenarios and identify emergent risks.

Testnet Deployment

If possible, it's highly beneficial for projects to extend the testing phase even further by letting real users use the network. Idea is the same as in agent-based testing - continuous optimization based on provided metrics. Furthermore, in case the project considers airdropping its tokens, giving them to early users is a great strategy. Even though part of the activity will be disingenuine and airdrop-oriented, such strategy still works better than most.

Time Duration

Token engineering process may take from as little as 2 weeks to as much as 5 months. It depends on the project category (Layer 1 protocol will require more time, than a simple DApp), and security requirements. For example, a bank issuing its digital token will have a very low risk tolerance.

Required Skills for Token Engineering

Token engineering is a multidisciplinary field and requires a great amount of specialized knowledge. Key knowledge areas are:

Systems Engineering
Machine Learning
Market Research
Capital Markets
Current trends in Web3
Blockchain Engineering
Statistics

Summary

The token engineering process consists of 3 steps: Discovery Phase, Design Phase, and Deployment Phase. It’s utilized mostly by established blockchain projects, and financial institutions like the International Monetary Fund. Even though it’s a very resource-consuming process, we believe it’s worth it. Projects that went through scrupulous design and testing before launch are much more likely to receive VC funding and be in the 10% of crypto projects that survive the bear market. Going through that process also has a symbolic meaning - it shows that the project is long-term oriented.

If you're looking to create a robust tokenomics model and go through institutional-grade testing please reach out to contact@nextrope.com. Our team is ready to help you with the token engineering process and ensure your project’s resilience in the long term.

FAQ

What does token engineering process look like?

Token engineering process is conducted in a 3-step methodical fashion. This includes Discovery Phase, Design Phase, and Deployment Phase. Each of these stages should be tailored to the specific needs of a project.

Is token engineering meant only for big projects?

We recommend that even small projects go through a simplified design and optimization process. This increases community's trust and makes sure that the tokenomics doesn't have any obvious flaws.

How long does the token engineering process take?

It depends on the project and may range from 2 weeks to 5 months.