Work Tokens and Proof of Stake
What is a work token, and how to they fit into today’s crypto economy? Here we discuss what a work token is, and run through some illustrative examples.
Over the past two or three years, literally hundreds of cryptocurrencies or tokens have been launched. One way to classify tokens is by what they’re used for – utility tokens, work tokens, security tokens, and a few other types. The number and types of tokens that exist, and their popularity is constantly in flux. The most common type of tokens is probably utility tokens – basically like a voucher for future services, mostly bought at a discount. Today I want to talk specifically about work tokens – what they are, what they’re not, and talk about how work tokens related to Proof of Stake networks.
What is a Work Token?
A work token is a cryptocurrency or a token which gives the holder the right to do work, and, in return, receive a portion of the fees associated with the work done. There are all kinds of variations of that, including requiring a minimum number of tokens in order to get the right to do work, the type of work being done, and of course, staking.
Taxi Medallions – An Analogy
A concept some readers might be familiar with that exists in the fiat world is the taxi medallion used in many major US cities. Taxi medallions are transferable and fungible; they could be considered as tokens with zero decimal places. In you wanted to operate a taxi, you’d first need to purchase a taxi medallion (in New York, the price of these medallions peaked at over 1 million USD, but have since fallen as a result of Uber and other ride sharing services. Maybe we should consider Uber as a fork of the taxi industry?) and you’d need to hold the medallion the entire time you were operating your taxi. As long as you held the medallion, you’d be able to do some work for the network (by giving passengers rides) and maintain a share of the revenue in proportion to the work you did (keep the money they pay you.)
The Role of Proof of Stake
It would be ignoble to talk about work tokens without discussing Proof of Stake (PoS). Loosely, a PoS network derives its security because holders of tokens are allowed to make decisions about the network, such as deciding which transactions to affect, or which proposals to accept. Because users have to buy into the network in order to have that right, they stand to lose money if they make decisions which are not in the best interest of the network.
One nice example of this is the privacy coin, Dash; owning 1000 Dash gives you the right to operate a masternode, and all live masternodes are eligible to
- mix coins for private transactions
- approve instant send transactions
- make governance decisions.
Masternode operators are incentivised to approve valid transactions (and only valid transactions) because their 1000 Dash investment (which is quite a sizeable investment) would be devalued if it was discovered invalid transactions were being accepted, or if valid transactions were being rejected. In return, they receive 45% of every block reward (the remainder is used for other operations, such as paying miners.)
Other Work Tokens
Of course, not all work tokens are the native currency of their underlying blockchain. Some great projects exist on other blockchains which use a work token to help govern or run their project.
My first example of a work token is straight forward – SpankChain. If you’re not familiar with the project, SpankChain propose blockchain as a solution to the discrimination and inequity many adult industries face. They use a two-token model.
The first token is called SPANK, and it is a Work Token of a variable price. Users can buy SPANK, and stake it in an Ethereum smart contract. Users with staked spank are rewarded with BOOTY (to be explained next), and are given voting rights on Proof of Spank (PoSpank), which is an identity verification method unique to SpankChain.
SpankChain performers have to pay fees to the network – denominated in BOOTY, which is pegged to 1 USD. BOOTY paid to the network is burned, and new BOOTY is minted each period and distributed to the stakers in proportion with the size of their stake (and how long they stake it for), who can then sell it on the open market for profit.
A slightly more complex project is Livepeer. Livepeer is a decentralised video streaming service, where each round, a number of delegate node operators are selected, and the actual streaming work is distributed among these delegate nodes, based on their share of the total stake. Nodes get selected based on their total stake, and token holders who don’t run a node can choose to delegate their stake to a node operator, in return for a share of the collected fees (the exact share is determined by agreement between delegates and delegators in a kind of marketplace). Broadcasters pay a fee to the network, and that fee is taken by the delegate node that performs the work.
Like I said, there are near endless ways to use tokens to help run a network, and work tokens are just one that interest us here at Juri.