Rewritten Article:
Author: Mason Nystrom, Variant Fund Partner
Translated by: Luffy, Foresight News
Token incentives can attract supply-side participants to overcome the cold start problem in the market. However, not all supplies are the same.
Active supply refers to participants who must continuously participate in market activities, while passive supply refers to those that require initial guidance but rarely need ongoing maintenance.
Markets with active supply tend to be more defensive, while markets with passive supply are easier to scale. To understand this, it is necessary to understand their general characteristics, each of which has certain limitations.
Active Supply vs. Passive Supply
Markets with active supply are more sticky and defensive once they reach a certain scale because the composite nature of demand provides better economic benefits to suppliers. The one that reaches the maximum demand liquidity first wins.
On the other hand, markets with passive supply can quickly expand supply without equivalent market demand, but their stickiness is difficult to guarantee. Builders can take advantage of these characteristics while guiding tokenized markets, but they need to know how to balance them.
Active Markets vs. Passive Markets
Active supply markets tend to be defensive, while passive markets are easier to scale. To understand this, it is necessary to understand their general characteristics, each of which has certain limitations.
Human Resources and Resources
Active supply is similar to labor. So far, people cannot passively rent their intellectual capacity like renting storage space. For example, Braintrust is a decentralized professional network that requires a continuous supply of talent to meet employers’ real-time needs.
Resources, such as hardware, NFTs, and capital, correspond to passive supply. These are typical representatives of passive supply. For example, the car data sharing network DIMO requires users to purchase and connect DIMO hardware devices. After paying a one-time fee, the device will continuously transfer vehicle data to the DIMO network with little need for user input.
Opportunity Cost and Sunk Cost
In active markets, supply-side participants choose the market with the best income/profit and token appreciation potential. Axie Infinity promotes the play-to-earn model, where it competes with other users in markets where income can be earned through labor. If there is no strong organic demand, active markets must constantly compete with all other ways users spend time to earn tokens.
On the other hand, in passive markets, supply-side participants need to invest assets in the early stage, resulting in certain sunk costs. Therefore, as long as it is profitable, supply-side operators will passively provide physical assets to the market. For example, GPU owners have an incentive to provide their computing power to the GPU market. Even in the case of supply-demand imbalance, passive markets can use token incentives to support a large amount of supply.
Quality-Dependent Supply vs. Quality-Independent Supply
Expanding market size becomes much easier when you have a clear understanding of supply quality. Passive supply markets, with their physical supply, are more suitable for this situation than active supply markets. This is because their supply usually comes with quantitative constraints, making it easier to improve quality. For example, GPUs have different quantitative classifications (such as A 100 and RTX 4090s), which are closely related to supply quality.
This situation is rare in active supply markets because these markets need to deal with the problem of high differences in personnel capabilities. The excellence of gig platforms like Braintrust or Nosh depends on their workers, but demand-side has different standards for the quality of these workers.
Implications of Token Design
So how should builders guide and scale tokenized markets? How do market supply characteristics affect token design?
Active Supply Markets
For active supply markets, token design has several key points:
– Expand token incentive scale as demand grows
– Incentivize loyalty, quality, or reliability of suppliers
– Establish dynamic incentive mechanisms
In passive markets, supply can wait for demand to catch up (such as Filecoin). But in active markets, this is not the case because people face high opportunity costs. Therefore, builders must prioritize demand-side growth to remain competitive. However, tokens can help guide initial demand to attract supply-side participants to join the market.
One strategy to expand the scale of active markets is to dynamically expand supply-side incentives to closely align token distribution with growth. One related mechanism is to introduce supply in a licensed manner, which can provide a stable return rate for supply-side participants, thereby maintaining their participation and reliability.
In any case, the limitations of active supply markets actually make them stickier during development: as demand increases, they can provide more stable returns. From the perspective of incentive design, this tokenized market should focus on providing continuous rewards to maintain user activity on the platform. In addition, they should dynamically adjust these rewards to incentivize users who provide stable supply rather than those who may churn.
However, although token incentives are valuable for guiding supply and demand, some innovation may be required in terms of service, verification, and reputation to expand supply quality, which is an important characteristic of active supply markets.
In this regard, tokenized markets must learn from the experience of traditional custodial markets. For example, RealReal and StockX provide verification services to ensure the legitimacy of physical supply. Similarly, Braintrust acts as an intermediary and provides a quality assurance layer in its marketplace product while using tokens to help introduce supply.
Active supply markets that can leverage token network effects can do better. By using equity-based intermediary networks or token-incentivized verification and management layers, quality assurance processes can be enhanced, resulting in a more efficient market.
What about tokenized markets where supply and demand come from the same users? Like NFT markets or play-to-earn games such as Axie and Stepn?
For markets where these roles can switch, more flexibility is needed when adjusting token incentive measures because they are most likely to discover the speculative flywheel of tokens and confuse organic demand. Such markets can incentivize long-term participation by incorporating lock-up periods into token rewards, helping to mitigate the reflexivity of growth. Active supply markets should incentivize supply-side diversity to bring in more professional consumers and professional supply rather than retail supply, which may be more fickle.
Passive Supply Markets
For builders of passive supply markets, token design can also provide important insights:
– Actively expand the number of supply-side participants to achieve commercially viable scale
– Establish stronger defensive capabilities by locking supply-side through demand-side products (such as SDKs, APIs) or proprietary hardware
– Incentivize loyalty, quality, or reliability of suppliers
Passive supply markets usually need to reach a certain supply threshold to be commercially viable (i.e., generate strong demand), so builders should initially focus on supply-side growth. In addition, this supply is usually measured in quantity rather than quality. For example, data collection networks like DIMO, Hivemapper, and Wynd require a large amount of data to make the aggregated data or services built on them valuable.
Since all passive supply markets are easier to scale, new entrants will not ensure demand just by aggregating enough liquidity. Instead, it usually requires competition on the product by building SaaS components (such as SDKs and APIs) to help demand-side access the market. GPU markets like IO.net provide aggregation services that make it easier for end-users of computing to access GPUs. Similarly, DIMO has built a market that allows DIMO token owners to purchase services for their cars.
Another way to make passive supply markets more defensive is to transition from commoditized supply to proprietary supply. Wireless network markets like Helium and XNET are leveraging proprietary supply to build their telecommunications infrastructure.
Finally, considering the high sunk costs of passive supply markets, as long as the return exceeds operating costs, supply-side participants usually continue to provide services to the network. When sunk costs are high and opportunity costs are low (such as Blackbird restaurants accepting FLY tokens), suppliers are more likely to stay because they have intrinsic incentives to serve the market. On the other hand, when high sunk costs and high opportunity costs coexist (such as GPU owners providing services to the computing market), demand or token rewards may be the determining factor for suppliers to allocate resources.