Meritocratic Token Distribution

"Either products do actually exchange in the long run in proportion to the labor attaching to them—in which case an equalization of the gains of capital is impossible; or there is an equalization of the gains of capital—in which case it is impossible that products should continue to exchange in proportion to the labor attaching to them."

One of the most advanced arguments against the trustless system is that such a system, as decentralized as it may seem, is only so on a level of its protocols. Such a network will presumably scale back into centralization when needed to reach certain decisions for continuous operations requiring social consensus. That once decision making is involved, it necessarily will lead to centralization if the system wants to be somewhat efficient. And despite the efforts of the crypto community to bring decentralization into the protocol governance itself there are still plenty of examples where this argument prevails. Bitcoin is still keeping its software code base in a centralized repository. Very few Ethereum and Bitcoin mining pools control most of the mining power of both networks. The blockchain foundations are everywhere, centrally running core development of their protocols and distributing grants to developers teams. Most of the newer proof-of-stake networks pre-sold their tokens to a few large venture investors and now control their grant system and protocol development. In general most of the leading blockchains tokens are controlled by a very few investors.

We will discuss how Everscale tackles all those issues throughout this paper. Let’s start from the most obvious one, how the tokens are distributed in the first place.

One of the characteristics of proof-of-stake (POS) design is that it requires validators to have a material stake in the network which they would be afraid of losing. This assumption provides basic game-theory ground behind POS. Participants are motivated to ensure the correctness of the blockchain by the possibility of losing their stakes if they don't.

Usually POS blockchains begin with selling their tokens to future validators to create a starting point of this game economy. In Everscale it was very clear to everybody from the very beginning that we would never sell tokens to anybody. The puzzle that we had to solve was how to distribute the tokens in a way permitted by the game theory of POS.

I believe we found a revolutionary solution to that problem. It’s something we call the Meritocratic Token Distribution (MTD) model. It starts with the community member proposing a Contest in which all other members of the community may participate. The contest is discussed and if agreed that the end result of this Contest will benefit the community and the network as a whole, the Rewards for it is voted for, the Jury is selected, the participants are providing solutions according to the contest specs, the Jury is voting for the solutions, and tokens are distributed to the winners. All those activities are concluded on-chain.

Pareto optimality is achieved as follows: token holders are distributing tokens for the perceived increase of the value of the network. This is obtained through the efforts of different active participants from decentralized communities which exchange their labor for native network token, thus turning themselves into token holders. Tokens provide an opportunity to participate in all projects that are being run on Everscale by representing a share of their governance. The Byzantine Fault Tolerance Governance (BFTG) is an ever-evolving set of rules implemented as smart contracts, ensuring that the system is not gamed by any kind of collusion between any kind of parties.

So, to summarize, instead of minting tokens by burning electricity or for production of empty blocks, the tokens are distributed meritocratically. Of course, Everscale is paying for empty block production as well, but the mechanism of such payment is quite different, as will be discussed below.

Yet even with probably the most advanced and decentralized method of token distribution, the question remains that if for a right market price (as high as it might be) the tokens will eventually end up with the same crypto investor, what difference does it make how they were distributed in the first place?

The difference between Meritocratic Token Distribution and public or private placement of those tokens is attributed to two facts: a) when tokens are distributed meritocratically it ends up in the hands of different entrepreneurs building the network ecosystem, not just in the hands of core protocol developers, resembling the deployment of venture capital. Needless to say, this is what empowers the economy; and b) it has a by-product: governance tokens of the project the entrepreneurs had created during the contest they participated in.

If entrepreneurs are in it for the long run with the project they created, they will need tokens to pay for gas and their bills. These tokens will end up on the market. Here usually lies the disconnect between the projects that were partially created by the meritocratic process and the usual token distribution. The value of that token is created only by the utility of that decentralized platform through the gas payment, unless the token itself also becomes a governance token for all the projects supported by it.

Let's imagine a community Giver that, as part of the MTD process, will ask contest participants to create a governance token for their contest submission and submit some portion of that token under that Giver's control in exchange for a contest winning payment. Now we not only have the Meritocratic Token Distribution mechanism but Decentralized Participation as well.

For example, a Decentralized Name Service (DeNS) is used as a basic filename and directory structure in the Ever OS file system. The rules of this governance token may allow those who hold it to execute certain rights regarding the project. By itself, they may or may not have any monetary value. Nevertheless, usually such tokens will give certain monetary rights in the project, such as the case with DeNS where they could be exchanged or burned against for a certain amount of EVERs collected by the project as payment for registrations of DeNames.

Now, if a governance token provides certain decision power in the project but can be exchanged or burned against the project's collected fees, we have a situation where a holder can not receive accrued fees until and unless she exits the project. The exit price may be automatically calculated as total native tokens collected divided by the total amount of governance tokens outstanding multiplied by the amount of tokens to be exchanged. Of course apart from exiting the project, the holder could trade such tokens with a premium on one of the Everscale decentralized exchanges. It may be wise to add a mechanism which would mint such governance tokens as a declining function (similar to halving) versus a fixed rate. Additionally, a mechanism could be imagined where users are able to commit funds directly to the project account to mint such tokens i.e. initial decentralized offering (IDO).

Let’s not discuss here the price discovery of any of those trades. What is important is that the Everscale native crypto currency is used not only as a store of value by the scarcity of its reserves but also as means to participate in all projects created directly as an outcome of the Meritocratic Token Distribution mechanism.

In sum, people who perform work will usually want to receive a perceived “stable coin” for the time and effort they spent, because they can easily spend these tokens for consumption. Of course, the “Stable Coin” name is a deception. In fact, we would rather call that kind of token a “DeValue” token because, as any fiat currency, it will, and should, gradually lose its value to be an attractive medium of exchange. The “Capitalist” is someone who prefers to hold onto a token which “stores” value. This is also deceiving because in order to be attractive this token needs to gradually increase its value over time in comparison with prices of goods and services. We call that token a Native Token. The entrepreneur is someone who creates value. The Native Token therefore is capturing not only the platform fees paid in gas, not only the general demand for a scarce resource, but also part of the value created by all entrepreneurs' projects which received tokens through the MTD process.

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