https://future.com/reputation-based-systems/
Reputation systems present an opportunity for platforms to recognize—and thus incentivize—participants’ high-quality contributions, including content creation, moderation, community building, and gameplay. This is crucial to the growth and sustainability of any web3 project. Yet designing reputation systems requires complex considerations around reputation supply, distribution, credibility, and more. So while many are exploring this space—from DAOs like FWB to play-to-earn games like Axie Infinity and new social platforms like BitClout—builders have yet to agree on the best way to design these reputation systems.
Drawing on our knowledge of economic theory and game design, we argue for a reputation system design based on a pair of tokens—one for signaling reputation and the other for offering liquidity—which could serve as tangible representations of meaningful contributions.
The underlying premise behind reputation systems isn’t new. Since the beginning of civilization, we’ve assigned markers of reputation, such as awarding badges for merit or service. In the corporate world, employees are assigned titles or “levels” to indicate their position in the hierarchy—such “tokens” typically determine one’s salary and other benefits.
Gaming has long been a pioneer of digital reputation systems, as well. Players accrue “points” during gameplay that they can convert into in-game “coins” to spend on new skins, weapons, characters, and so forth.
In general, reputation tokens in the crypto world have taken the form of social tokens. These tokens—which can be issued by a variety of entities including people and communities, as well as games and apps—can be used to acquire social capital, access services, and/or translate into rewards (financial or otherwise). Importantly, in the crypto context, social tokens can often represent ownership and uniqueness (in the case of NFTs) and, because they are decentralized and portable due to blockchains, social tokens can be used across the global internet economy, rather than just within the confines of a single platform or decision maker.
Reputation tokens on digital platforms typically serve two purposes:
Yet these two roles are in opposition to each other. A token needs to be exchangeable in order to be liquid. But the more liquid a token is, the less effective it can be as a pure signal of reputation.
To illustrate this point, imagine that reputation tokens are freely transferable. If the tokens were to serve as a trusted signal of reputation quality, then their trading value would be high, making holders willing to trade them. But as soon as the tokens start trading, ownership loses its signaling value, destroying the reputational capital the tokens nominally convey.
For example, a charity could start minting NFTs that it awards to people who’ve completed over 500 hours of community service. But if those recipients can sell their NFTs to whomever they want, then any time you come across a holder, you have to wonder: “Did that person earn their NFT or buy it?” Even if nobody trades their community service NFTs publicly, the possibility of private sale reduces the signaling value. And in a fully liquid market for such tokens, the signaling value washes out completely.
This presents a paradox: if a token can be transferred easily, then those without reputation can simply purchase it, which reduces the token’s ability to serve as a reputation signal.
Remember when it was easy for people to buy followers on Instagram? That made the follower count a much weaker measure of reputation, to the point that brands started looking for engagement metrics that were much harder to “buy.”
That said, high prices can also reduce transferability. For example, CryptoPunks are now so expensive to purchase that nearly all holders must have bought early. This might appear to undo the paradox — restoring the reputation value of the tokens — but since some people are willing to buy CryptoPunks at exorbitant prices to acquire the appearance of reputation, the signaling value may still degrade. There’s also currently a natural boundary on the number of people able to enter the space; imagine this issue at scale when more people embrace crypto.
Moreover, a decline in reputational capital attached to a token can feed back into the market value of the token. If the token loses its ability to signal reputation, then people become less interested in trading it. Indeed, as people started buying Instagram followings in bulk, those followings lost their signaling value, which made them less interesting for influencers to buy. That opened up the markets for buying other forms of reputation, including likes. An “I’m Rich” NFT that nobody believes actually signals wealth isn’t really worth buying.
Making reputation tokens transferable not only reduces their ability to serve as a signal of reputation, it can also diminish their ability to serve as valuable compensation. Thus, establishing reputational capital requires fully (or at least mostly) non-transferable tokens. The question, then, is how to translate reputation into liquidity.