If you’ve been following blockchain and cryptocurrencies for any period of time, you’ve probably been part of a discussion at some point with someone that goes something like this:
Person A: So what gives Bitcoin its value anyway?
Person B: What gives anything value? If enough people desire it, and it has a limited supply, its price will go up as people compete over acquiring it. It is the same with Bitcoin.
This is a fairly simplistic explanation, and arguably correct, but communicates a common error that value and price are the same thing, which in most cases doesn’t hold true - the value in a virtual good can essentially be demonstrated by understanding its utility.
As we near a seminal moment in the evolution of Swarm - the launch of the first release of our investment platform with two pilot funds - we would like to take this opportunity to expand on a question that we are often being asked in social channels, at conferences and events.
What gives SWM - the Swarm token, value?
In the white paper we sketched the fundamental direction of the governance utility connected with the Swarm token. Following our token sale, members were immediately able to make use of it, with the liquid democracy vote on the Swarm token behavior. To layer on top, the time has come to announce the expanded token utility model and the incentives and mechanics within the Swarm network.
In general, incentives and counter-incentives - elements of Game Theory - are not new in blockchain projects, acting as core functions that encourage desired behaviour in a decentralized system.
Bitcoin’s Proof-of-Work (PoW) incentivizes miners to process transactions on the network, thereby securing it, in return for a monetary reward to the first miner that solves an arbitrary mathematical problem and hence creates a new block.
The 2nd generation model with Proof-of-Stake (PoS) is a more efficient protocol for validating transactions. New block creators are chosen deterministically, there is no block reward, and instead, the chosen block creator is rewarded proportionally to their wealth, or stake in the network. In other words, with PoS, incentives are constructed to buy and hold some of the coins being minted, with miners incentivized by transaction fees.
Now we’re seeing the rise of projects inspired by what Swarm founder Joel Dietz calls The Third Wave of Crypto - decentralized projects that provide incentives and rewards which promote deeper collaboration and real-world interaction, incorporate machine learning, artificial intelligence and bring real assets to the blockchain. We’re now moving on from incentives that encourage support of the network and proving blocks, to rewarding important value-adding services to the community of token holders in addition to the core value proposition central to the system.
NEO’s users are rewarded GAS to create a network that deploys and runs smart contracts. SIA tokens incentivize data hosts to stay online, building a network of decentralized storage with sufficient redundancy, and Tronix tokens have been touted as an “alternative global economy” by encouraging users to lock their TRX tokens in exchange for voting rights on the network, creating Tron Power tokens that cannot be transferred or sold.
Simply put, we’re seeing the first signs of blockchain based self-sustaining ecosystems that disentangle massive inefficiencies in the current economy.
In this spirit, the Swarm team has been working on a crypto-economic token model that we believe achieves far more than its core vision of democratizing finance. We’re going further than opening up alternative high-performing investment opportunities to all people rich and poor.
At Swarm we’re building a distributed system which is AI-powered, community-governed, and that will evolve into a self-sustainable and efficient global resource marketplace.
We are proud to present the Swarm token model and its incentives and mechanics.
Swarm Token Utility Model
If you’ve read our whitepaper, you’ll remember that Swarm has a three-token model consisting of:
● Swarm (SWM) tokens - The fundamental utility token representing the value of the network
● SUN tokens - Dollar-pegged value tokens used to allocate funds into investments on the Swarm network
● SRC20 tokens - Security tokens minted by the syndicate manager of each investment opportunity that represent ownership of that investment.
In this explainer we’ll be focusing on the SWM token, as it is the essential element which powers the Swarm ecosystem.
SWM has three essential functions on the Swarm platform, each of which add to its value in a unique way, and each incentivized by the network.
SWM as Gas
SWM functions as the core element that powers investments to operate.
On the investment side, fund managers are required to pay SWM when they launch new investment opportunities and to keep them operational for their duration. We call this Gas for Fund Operations (GFO), and it has the following characteristics:
● GFO is calculated as a percentage of Net Assets Under Value (in $USD) and is payable in SWM,
● GFO is withdrawn on an ongoing basis, as needed, in order to fund operations
● Subject to iteration by early adopters, initial GFO will be in the range of 0.6 - 1.0%
Fund managers are required to continuously maintain a positive balance of SWM to cover their expected GFO needs. Managers are able to plan their purchase of SWM at times optimal to them, taking into account market forces, their own expert analysis, and future investment requirements. In future iterations, this will be fully powered by A.I.. As an example, a real estate fund that expects to make a large investment in a year’s time may opt to front-load their purchase of SWM now, taking advantage of current prices and known market conditions.
SWM raised from GFO is automatically sent to a smart contract that acts as a Proof-of-Service pool. This pool is then used to reward third-party actors that provide additional value-adding operational services such as audit, accounting or marketing services, further adding value to the entire platform, promoting its growth.
On the other side of the equation, investors are required to pay SWM when they allocate capital to an investment. We call this Gas for Capital Deployment (GCD) and it can be thought of as a traditional placement fee, that in contrast to other private equity capital placements allows for tradeability and liquidity. However, rather than directly paying GCD to the fund, Swarm offers investors a strategic choice.
Investors choose between:
● Liquidity: Investors can opt to keep their investment liquid and tradeable, in which case the corresponding GCD is forfeited, but they receive regular returns on their investment, or
● Commitment: Investors can opt to lock their investment for a fixed period of time, correspondingly locking their GCD for the same amount of time. Capital, returns and the full amount of locked GCD is fully refunded at the end of the locking period. Note, that investors could choose liquidity at first and once they gain comfort with the investment, they can later move into a commitment on a lower basis, as some of the GCD will already have been released on a prorated basis. Subject to iteration by early adopters, initial GCD will be in the range of 1.0 - 1.5%
Strategically opting to lock one’s GCD acts as a Proof-of-Commitment, and brings enormous benefits for both investors and fund managers.
● Fund managers can act on investments with far greater certainty knowing investor funds are committed, and can recycle and reinvest capital rather than paying returns out regularly, giving them a higher stock to negotiate with their assets,
● Investors who lock their GCD also benefit from potential appreciation in the value of SWM once their chosen locking period has ended.
Swarm’s Proof-of-Commitment is so powerful that we’ve introduced a further incentive mechanism to encourage it, especially for those funds to whom capital commitment is strategically important. Fund managers are given the option to match an investor’s GCD commitment with their own, in any ratio they like. This greatly amplifies investors’ potential returns at the expiration of the lock. As an example, a solar installation in California, for whom capital commitment is important, may offer 2-for-1 GCD matching as incentive for a 3-year lock, meaning that investors who choose to commit their investment receive a bonus of double their locked SWM tokens at the end of the locking period.
GCD Proof-of-Commitment allows investors to effectively neutralize their placement gas and therefore boost their returns, while giving plannability and certainty to managers. Both win.
SWM as Voice
Perhaps the most revolutionary feature of the Swarm platform - and the one we are very passionate about - is its Liquid Democracy voting module. Swarm is built with governance designed into the core, and at every level. Blockchain is maturing beyond payment systems, stores of value, and distributed applications (Dapps). We are entering the age of real assets on the blockchain. Art installations, marijuana plantations, and community-funded infrastructure are all going to be conceptualized, debated, crowd-funded, realized, and managed on the blockchain. None of these functions can be performed without a layer of governance, arguably the most fundamental and important utility of SWM.
Direct governance of investments is necessary and important, as we are not building Swarm to be another middleman. The ultimate goal is to found an ecosystem of independently governed engagements, an upgraded iteration of the DAO.
The community of token holders will vote on issues affecting the direction of the entire platform as well as on individual investments, enabling minorities and previously disenfranchised stakeholders to have their voices heard.
Governance is inherent to Swarm. It cannot function without it. To facilitate engagement, on the Foundation level Swarm will allocate budget to a Proof-of-Participation pool. Individuals are rewarded with SWM tokens for voting and taking actions to improve the system. Propositions are submitted by a contribution of SWM, separating the wheat from the chaff, yet all quality proposals have their fees returned, and only those considered spam forfeit this fee. The same will be replicated on the investment level, so that the members of each respective token pool are directly able to govern amongst themselves.
Through Liquid Democracy, votes can be delegated to others with domain-specific knowledge. Delegation grants better-informed individuals greater voting power coupled with a reward incentive, but is counter-balanced by accountability, transparency, and the immutable power that every participant has to change their delegation at any time. We can see this evolve into a new governance model, in which meritocracy leads to expert governance with far more dynamic and better decision making. This is the democracy we’ve been waiting for.
SWM as Value
SWM’s value derives directly from its powers as incentive and reward; powers that combine asset management with resource efficiency; powers that strengthen community engagement, and powers that derive and keep value within the platform.
Optimal behaviour is clear within the system - for all actors - and is summarized in the table below:
● Investors choose between two powerful strategies when allocating their resources.
● Fund managers plan and optimize their operational requirements according to their specialized knowledge, and further compete through matching incentives.
● Infrastructure and service providers are incentivized to continuously innovate and pursue the virtuous competitive cycle of delivering more at less.
While initial monetary policies for gas prices will be set by the foundation, future policy will be voted on and iterated by early participants. Successful interaction amongst all stakeholders will, over time, permit the Swarm Foundation to act as mentor and guide, moving on from its role as architect and administrator.
At Swarm, our vision is clear. Since its first iteration in 2014, we’ve been singularly focused on fulfilling our mission - making Swarm the blockchain for private equity - and we’re now ready to launch our MVP. In a few short weeks, we will start delivering on our promise to bring high-return alternative asset classes to everyone, to leverage blockchain and A.I. to continuously improve investments, and to employ a revolutionary governance model that has sustainability and innovation at its core and results in a distributed and resilient network compatible with the real world. All of this powered by SWM, the core utility token of the Swarm network. And we firmly believe, that whether you’re a crypto insider, a family office or an everyday investor, there is a use case for you using Swarm to either invest or launch your investment portfolio today.
Continue reading about Swarm and its possibilities here