Reputation systems using crypto

Dec 03 2021

Interesting article by A16z about online reputation systems. They propose a two-asset system to track reputation online while giving liquidity to contributors.

Problem:

Humans have always created ways of tracking each other's reputations. One notable example is job titles, which (not perfectly) signal the history of your contributions and skill level.

Online, such systems are harder to design. If you design a system in which users accrue points for good contributions, there's only value in those points if users can trade them for something valuable. But the moment they trade their points with someone else, the points lose their power as a reputation tracking system.

For example, Reddit's Karma is a measure of someone's reputation. If people could freely transfer their Karma with each other, you wouldn't know if someone "earned or acquired" their points. This is a similar problem Instagram faced when accounts started buying followers.

To make the incentives work, a reputation system should separate social capital from financial capital.

Solution:

A two-token system, based on points and coins.

  • Points are gained by making good contributions
  • Points yield dividends in Coins that can be spent or traded.

If people want coins, they need to get points first, and in order to get points, they need to contribute positively to the system.

Important design considerations:

Size of dividends:

  • Users need to understand the rules of earning points: how much effort is needed to get points. Youtube, for example frequently changes payout rules, which frustrates many top contributors.
  • Points do not necessarily need to be scarce, but coins do, because they need to feel like a real, tradeable currency. This can be achieved by reducing the size of dividends or spacing them out over time.

Supply/timing of dividends:

  • In platforms where people participate to earn a living, rewards should be regular, so people can rely on them as income. In other models, this can be designed in other ways, such as only yielding coins if the whole community achieves a common threshold.

Distribution of dividends:

  • The easiest way is to divide up linearly: 1 point = 1 equal share of dividends
  • To reward older cohorts, the ratio should be convex (increase with time)
  • To attract and reward new contributors, the ratio should be concave (diminish with time)

Incentives to keep contributing must be ongoing

  • Problem: Earlier contributors are not necessarily the most helpful, but they could accrue a majority of points just because they were in early.
  • Solutions: Dividends could be proportional to point age, or even more simply, points should expire over time.

Points shouldn't replace product/market fit.

  • Gamification doesn't solve for a bad product. So putting this system in place wouldn't ensure user engagement. But product/market alone fit also doesn't: reputation and liquidity systems can help maintain engagement.
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Lucas Neumann
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