Our first post gave a short summary of our tokens’ functionality. This post is intended to give more background and reasoning for design decisions.
Note: This post is out of date. Please see The Many Faces of an $OWL blog post for the latest on OWL use cases.
Background
One of Bitcoin’s critical innovations was the addition of an incentive model to a peer-to-peer network protocol. Using a native currency and Proof of Work dispersion mechanism, Bitcoin rewards its workers and makes it incentive compatible for disparate parties to work together toward a common goal. In addition, using a native currency allows for protocol monetization. With SMTP for example, most work is done on the protocol layer, however all value is created on the application layer. The rapidly evolving world of cryptocurrencies has wasted no time in innovating this concept into a variety of “app” or “protocol” token models. In the initial “altcoin” stage of these models, tokens are dispensed similarly to Bitcoin and there is no unique utility within the network for these tokens. More recently, protocols with unique applications have iterated on this design with new dispersion mechanisms and uses for the coins within the protocol itself. Gnosis will follow this approach, hopefully with a few successful innovations of our own.
Building a sustainable ecosystem for token holders, participants, and application developers on a platform level cryptoeconomic system is difficult to achieve. Smart contracts are only as valuable as people’s trust in their verifiable execution. In order to achieve this trust, the code almost always needs to be made open source. Even if not made immediately open source, once deployed to the Ethereum network the bytecode can potentially be read and decompiled. Once this code is open source, it can be easily replicated and deployed with its own incentive model. Herein lies the dilemma: what incentivizes new participants to use the existing network, rather than copy the code and remove the fees (or set their own fees)?
The developing answer to this problem is network effect. We use Bitcoin and Ethereum, rather than forks of these protocols, due to the benefits provided by interoperability with other applications, services, and participants on the network. This argument extends beyond cryptoeconomics to markets and money in general. Money and markets become more useful and competitive as more people use them. eBay charges an inordinate amount of fees, however buyers and sellers still use it due to the critical mass on the platform. This network effect enables buyers to connect to sellers and vice versa for specialized products.
While network effect serves as a fundamental component driving Gnosis platform use, we believe that it’s important to take this a step further.
The Gnosis platform will be composed of three primary layers: Core, Services, and Application.
The Gnosis Layers
Layer One: Gnosis Core
The Core layer provides the foundational smart contracts for Gnosis use: event token creation and settlement, a market mechanism, oracle, and a management interface. This layer is and always will be free and open to use. Creating new markets is near zero marginal cost, and to remain competitive fees will have to approach zero. Instead of grasping at the maximum possible fees while remaining competitive, we feel that it is prudent to eliminate fees at the most basic contract level. It should be in every party’s best interest to use the existing open source and feeless contracts instead of deploying their own version.
Layer Two: Gnosis Services
The Gnosis Services layer will offer additional services on top of Gnosis Core and will use a trading fee model. These services will include a state channel implementation, new market mechanisms, stablecoin and payment processor integrations, open source template applications, application customization tools, and the oracle marketplace. More features may be introduced as deemed useful. These components are necessary for most consumer applications building on Gnosis.
State channels are a prerequisite for betting and financial applications requiring thousands or more transactions per second. Without stablecoins, market participants are subject to the volatility of the cryptocurrency which the market is denominated in and the event outcome that they are predicting. Application templates, customization tools, and advanced oracle selection will allow us to execute on our vision of lowering the barrier to entry for new prediction market based applications by at least two orders of magnitude. While some applications and participants will interact with Gnosis on the Core level, we are confident that these services will provide a compelling reason for Services level use.
Layer Three: Gnosis Applications
On top of the Services layer (or in some cases, just Gnosis Core) is the Gnosis application layer. These applications are primarily front-ends that target a particular prediction market use case and or customer segment. Some of these applications may be built by Gnosis, while others will be built by third parties. Our vision for Gnosis is to have a wide variety of prediction market applications built atop the same platform and liquidity pool. These applications will likely charge additional fees or use alternative business models such as market making, information selling, or advertising. As we’ll see in the next section on tokens, many Gnosis applications may include token holding as a core component of their business model.
Introducing the Tokens of the Realm: GNO and OWL
The token sold during the token launch is known as the Gnosis Token, or GNO. This is the only time that these tokens can be created, and therefore the total supply of GNO is fixed.
Fees, similar to those of a trading market, will be charged to participants on the Gnosis Services and Applications layers (but as a reminder, not the bare bones Core layer). These fees will initially be denominated in cryptocurrency, namely BTC or ETH. Gnosis seeks to not only create interesting software, but also a community of those interested in sharing their wisdom on Gnosis markets. To do this, we needed to create a model that lowers the barrier to entry for repeat users (e.g. having to pay BTC/ETH repeatedly). Therefore, in addition to paying this fee in BTC or ETH, Gnosis ecosystem participants will be able to pay the fee in OWL tokens.
Gnosis OWL can be used to pay platform fees on the Services layer, subsidize the fees of other participants, provide initial subsidies for markets, or for market trading. OWL will be pegged to $1 USD worth of fees. In this way, OWL acts as a coupon for $1 of use within Gnosis.
Gnosis tokens (GNO) are the generator for OWL creation. OWL can only be created via activating the utility of the Gnosis (GNO) tokens. This is done via a smart contract system. The smart contract works as follows: GNO token holders agree to “lock” their tokens in a smart contract (30–365 days). A multiplier is added for longer lock durations. The smart contract determines the user selected lock duration and applies that duration to a formula that is designed to regulate the supply of OWL tokens currently in use. Prior to locking their GNO tokens in the smart contract, users will be able to see exactly how much OWL they will receive as a result of executing the smart contract. Once users execute the contract, 30% of their OWL will be distributed for immediate use, and the remaining 70% will be distributed proportionally over the locked duration. Once the lock duration expires, the locked GNO ceases to generate OWL and the GNO becomes freely transferable by the holder. There is no limit (other than duration) for how many times GNO tokens may be used to create OWL.
How Can Gnosis Remain Viable if Participants Choose Not to Pay in OWL?
A core value proposition of Gnosis (and decentralization) is to guarantee future characteristics of platforms to both users and developers without relying on the trustworthiness of an operating company. In order to do this, elements including fee rates, must be codified into the software itself. It is expected that OWL will be the overwhelmingly predominant method for paying fees in the Gnosis ecosystem. In the unexpected event that this is not true, and users are paying in BTC or ETH, the platform may become vulnerable to low-fee copycats or potentially even illegal forks of the Gnosis codebase.
These alternative platforms may logically cause erosion of the Gnosis userbase, subsequently triggering justified loss of developer confidence that their created markets and applications will remain viable on Gnosis. In order to avoid this scenario, we designed a fee-reduction mechanism to bolster competitiveness of the Gnosis platform. The result is added confidence for developers and partners that Gnosis is the infrastructure they should be building markets on.
NOTE: It is unlikely that this mechanism will be used as game theory and expectations point to users predominantly paying fees in OWL. In the event this mechanism is triggered, we expect the occurrence to be extremely rare.
Two core requirements for the mechanism is that it is both decentralized and costly. The mechanism must be costly in order to eliminate spam or manipulation. The core functionality of the mechanism is as follows: All fees paid in BTC/ETH/Tokens go to an auction contract outside the control of the Gnosis team. If fees exist in the auction contract, any GNO token holder can submit a bid, bidding their held GNO against some amount of fees contained in the auction contract. If the bid is accepted, the GNO will then enter the auction contract and the user will receive the fees specified. When the user’s GNO enters the auction contract, the fee reduction mechanism will be triggered causing a reduction in fees on Gnosis proportional to the total amount of GNO held in this auction contract. The auction contract is one-way and GNO cannot leave this wallet.
Examples of GNO and OWL Utility
Let’s take a look at several example uses for OWL:
- Alice is a Gnosis user who also holds GNO tokens. She locks down a portion of her Gnosis tokens for a year period. Every day she receives some OWL tokens. She uses these OWL tokens to pay her trading fees.
- BobBets seeks to build a sports betting application on Gnosis. BobBets purchases Gnosis tokens during the token launch. BobBets locks these tokens to create OWL. When BobBets creates markets, they also deposit a portion of OWL to the market to subsidize fees for their users.
- Claire likes to ask interesting questions. Markets on Gnosis must be provided with an initial subsidy to create shares. Claire funds these markets using OWL, and the platform matches (to a certain level) her OWL! Claire gets better answers to her questions because there is larger incentive for participants to provide insights.
Conclusion
We believe our dual token and Core/Services model is optimal to encourage adoption of the Gnosis platform. Adoption should be everyone’s number one goal toward the success of Gnosis as it both increases liquidity (leading to better odds, and encouraging a feedback loop leading to more reliable predictions) and awareness. By having the Gnosis Core layer fee free and with a pay once model by purchasing GNO for the Gnosis Services and Application layers, we can remain incentive compatible for all participants in the system.
IMPORTANT INFORMATION
GNO tokens are functional utility tokens within the Gnosis platform. GNO tokens are not securities. GNO tokens are non-refundable. GNO tokens are not for speculative investment. No promises of future performance or value are or will be made with respect to GNO, including no promise of inherent value, no promise of continuing payments, and no guarantee that GNO will hold any particular value. GNO tokens are not participation in the Company and GNO tokens hold no rights in said company. GNO tokens are sold as a functional good and all proceeds received by Company may be spent freely by Company absent any conditions. GNO tokens are intended for experts in dealing with cryptographic tokens and blockchain-based software systems.
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