The 3 Stages of Kin’s Ecosystem
This is a personal thought-piece I wrote while thinking about Kin’s growth. It does not necessarily reflect the Kin Foundation’s views but it is how I see Kin’s economy in its current state.
How Apps Can Win in a Growing Kin Economy
Kin’s economy has been growing rapidly since its launch in late 2017. During this period, the Kin economy has gone through various iterations of the Kin Rewards Engine (KRE).
Ideal state of the Kin Ecosystem
There have been plenty of suggestions on ways to run the KRE and without doing all of them justice, I have examined recent proposals and the thinking that goes into selecting what is best for the economy.
Previous implementations focused largely on 3 things:
- Maximizing transactions (GDP)
- Selling Kin to users (Demand)
- Holding Kin (Scarcity)
Growth of Kin’s GDP
These factors have had different levels of success, with the key principle being they incentivized developers to first create breadth in the economy (number of Kin users), then depth (amount of Kin spent). An article by Tanner Philp dives into the importance of economic breadth and depth, where he states:
“I would argue that the most high leverage opportunity is to first grow the breadth of people in the economy and then grow the depth of what those people are spending on. Money has a network effect, the more redeemable it is, the more people will demand it.
So far, Kin has proved successful in this and continues to grow in terms of number of apps, users and transactions. However, the previous KRE still had issues of complexity and game-ability and were eventually replaced by the KRE 3 which uses Active User Balances (AUB) as a metric to reward developers.
Put simply, developers are rewarded to move Kin from the markets and create an economy amongst users. Apps that have the largest balances of Kin in their economy and most active users are rewarded the most.
The AUB incentive simplifies the principles of GDP, demand and scarcity without the complications of previous iterations. Moreover, it creates a tension where investors and developers compete to obtain Kin, strengthening its value over time.
Developers and Investors Compete to Obtain Kin
This intended flow of Kin has been detailed in: Cryptocurrencies and Exchange Rate Volatility which references further reading by the Bank of Canada.
Simplified, they describe the three components important for Kin’s exchange rate:
- The use of Kin to make actual payments — Apps
- The decision of investors to buy Kin — Exchanges
- The elements that drive consumer adoption — Growth
Basically, a growing economy on the left (green) pulls currency from exchanges and into apps, creating inflation inside the Kin economy and deflation in exchanges (red). Inflation in apps encourages spending while deflation outside increases the value of Kin.
This tension between exchanges and apps increases the value and stability of Kin.
Does the AUB incentive work?
Growth of AUB in Kin’s economy
The AUB metric has both maintained transactions and also increased the amount of Kin held in the app economy — increasing this tension. However, how can you tell whether this economic pull is working and how would it look in a winning economy? How can you tell if Kin is winning?
Kin’s Winning Economy
Kin’s economic growth can be divided into 3 stages:
- Priming (current)
- Break Even Point
- Maturity
Each stage has different markers of success and different strategies for apps to win by participating in the KRE. In each stage, apps acting with self interest can both profit while growing the economy and creating a win for everyone simultaneously. I examine the stages and strategies below.
Y + C — X = Z
The key to remember is the vector equation above that describes the flow of Kin (detailed here). In summary, increasing Y (demand) or C (scarcity) causes (Z) to increase. A higher Z increases the tension between investors and developers, both competing for the same amount of Kin.
A simpler way to think of it is X being a source of inflation with the KRE rewarding developers to grow the economy and Y being the sponge that soaks up the inflation. Kin moving into apps usually stays there since users (not investors) are more concerned with the UX enhanced by Kin rather than profit. These users either stay in the app and trade with each other or churn, which deletes their private key and effectively locks the Kin in the app forever. (like a coin burn).
Either way, a steady flow of Kin flows into apps with a portion that never comes back. At the same time, Kin is replenished by the KRE and increases inflation. This interplay of contraction (Y) and inflation (X) can be summed in a simple ratio — ΔY/ΔX. (Or Contraction/ Inflation)
The Contraction/ Inflation ratio
A ratio greater than zero means that all the Kin from the KRE (and more) ends up in the app economy and stays there. A lower ratio means the app economy is not (yet) large enough to consume enough Kin.
A small economy can only absorb so much Kin distributed by the KRE. Even with a buy module, Kin would end up flowing back into exchanges (as seen in previous KRE iterations). Conversely, a large economy would demand more Kin than is available, forcing developers to buy it from the markets and sell it to users through advertising or fiat ramps.
The current contraction/ inflation ratio can be seen below:
Kin’s economy is young as seen above with a mostly negative ratio. The red bars dominate where inflation goes higher than contraction.
As Kin’s economy grows, contraction increases to the point that it consumes more Kin than is being produced by the KRE.
There are 3 stages of the contraction/ inflation ratio.
Stage 1 — Ratio < 0: Inflation is dominant (current)
Stage 2 — Ratio= 0: Net zero inflation
Stage 3 — Ratio > 0: Deflation is dominant (future)
Each stage presents different opportunities and challenges for apps and the ecosystem.
Stage 1: Priming (contraction/ inflation < 0)
This is the current stage of the ecosystem. The KRE initially focused on creating breadth and depth and recently changed to increasing the balance of Kin in the App economy as well.
Kin has spent this time iterating on these principles including the background work of making everything run smoothly. This has included developer feedback sessions, improvements on SDKs and migrating blockchains to improve UX.
During priming, the goal is to:
- Introduce innovators to the idea of an additional revenue stream (Kin)
- Introduce users to the idea of a real in app currency
- Iterate on reward and incentive mechanisms and growth strategies.
How do you Incentivize Visionaries to Integrate Kin?
Apps integrating Kin take on the risk of a new monetization strategy and stability of incentive mechanisms. However, they benefit from sharing a large pool of valuable Kin between few developers.
The growth strategy is to focus on apps with a higher risk appetite, offering significant gains as early adopters.
At this point, the amount of Kin consumed is less than the inflation. This creates some sell pressure but is also the perfect scenario for early adopting developers in terms of potential gains.
Note this is no different from mined currencies like Bitcoin where inflation is mostly soaked up by speculation with apps being analogous to miners.
App Monetization strategy
Given the surplus of Kin available (due to a smaller economy and fewer apps), the barrier to entry is low and apps are free to innovate different strategies of success. Over time, winning strategies become apparent and apps start to copy each other.
During this stage, apps are trying to answer the questions:
- How can I get my users to desire Kin?
- How can I get them to earn as much Kin as possible? (Active User Balance)
- How can I get them to use Kin as often as possible? (Active User)
Success with the above criteria creates a pull of Kin into the app’s economy and increases its Active User Balance. Early adopters become a template for new entrants to copy and iterate on.
Buying Kin
In this stage, users and by extension developers do not need to buy Kin. The supply from the KRE is enough to reward users for certain actions and also provide apps with enough Kin to sell to exchanges to cover operational costs. Like miners, apps balance speculation vs the opportunity cost of selling to cover costs.
Holding Kin
Over time, the amount of Kin a developer receives first flows into the app economy, increasing the developer’s AUB and future rewards. Once the developer’s economy has reached maximum capacity (100K * AU), the developer begins to save the surplus Kin until they reach their desired holding capacity. After this, the developer is more incentivized to sell than to hold.
Users and apps have a maximum holding capacity and each pool overflows to the next
The KRE discourages selling during times of high volatility by reducing inflation with a volatility cap.
Crossing the chasm
Early adopters create the momentum, the bandwagon effect, to push the ecosystem over the adoption chasm. Early adopting apps have had the opportunity to hold plenty of Kin for speculation and also monetize in an environment with little competition. They have also created templates and case studies for incoming apps to emulate.
Kin is now poised to push towards the break-even point.
Stage 2: Break Even (contraction/ inflation = 0)
Down this path, additional apps joining have created a bigger pool of users to be satiated with Kin. At this point, all of the KRE’s inflation is either consumed by users, or developers wanting to save for speculation.
The KRE keeps supplying Kin but all of it is absorbed by the economy, leading to net zero inflation. In effect, this means that the total circulating Kin remains constant for all practical purposes.
The barrier to entry where app economies with the largest stake win is also higher. The amount of Kin distributed per app is also less due to increased competition.
Apps and users begin to feel the pinch of Kin becoming a rare commodity.
At this point, new apps would probably need to be subsidized to be able to compete.
App Monetization strategy
Apps still need to focus on growing their user’s AUB. To maximize their earnings, they should also sell Kin to their users preferably at a premium. In the previous stage, Kin was so readily available that they had more than enough to hold, offload to exchanges and share with their users. If an app received 100 MM Kin and its economy could only absorb 1MM Kin, the motivation to sell to users was small. With Kin increasing in value and scarcity, selling Kin to users becomes a valid strategy.
Buying Kin
Users could either buy Kin through advertising or fiat ramps. Either way, the user economy would be competing with exchanges for newly inflated Kin, and developers would be incentivized to sell it at a premium to their economies. For example, a user could watch advertising worth $0.10 in exchange for Kin worth $0.01
An app using this strategy earns both from advertising, reselling Kin and rewards from the KRE for its AUB. This is more profitable than a company selling virtual, non crypto coins to its users.
This would make Kin a profitable supplement to advertising or in app purchases.
Stage 3: Deflationary (contraction/ inflation >0)
Kin is valuable and the price is fairly stable. At this point, speculation has a lower effect than demand from users. As a de-facto monetization method, the demand from the app economy is so large that apps have no choice but to pull it from exchanges and forward it to users. Note also that the rate of inflation by the KRE also reduces over time.
App Monetization strategy
Apps follow the same strategy as the previous stage, except that pulling Kin from exchanges and selling it to users is no longer optional. Apps effectively become resellers, moving it from exchanges into users’ hands. Profit is higher than pure in app purchases or advertising. At this point, the only way to integrate Kin is if an app has purchases or advertising. Kin quite literally becomes a valuable commodity.
Buying Kin
An independent buying module would reduce friction and handle the complications of transfer. Kin would become a common currency in a mature economy of apps with both breadth and depth of spending. Apps would win by integrating Kin, a proven monetization method and users would win from improved UX experience and engagement.
Are Break-Even or Deflationary Stages Possible with Kin?
Consider that a single app can produce hundreds of millions of dollars from in-app purchases. Consider also that a pull of this size would end up in the app economy and remain there, like moving Kin to a burn address.
Kin’s daily inflation rate is only K250,000,000 and reduces over time. To reach break-even, the app economy would need to absorb as much daily. Note that this absorption comes from growth of users of different apps, not a static AUB. This is similar to how an economy would experience net zero inflation if its economy grew proportionately to inflation. Conceivably, an economy could experience deflation if its economy grows faster than inflation.
Every new Kin user would need to obtain an amount from the market. Most Kin that goes into the economy would tend to stay there, being traded from peer to peer.
If the average app user holds 10,000 Kin, a growth and churn of ~25,000 users would reach the break-even mark. Naturally, as the value of Kin increases, the average user would be able to hold less and less Kin. At this point, the KRE could adjust its inflation in proportion to the growth of the ecosystem and the moving average Kin balance of users.
Inflation Cap = f(growth).
Trivially described as: average_balance * (growth) = cap
This inflation cap would be useful once the economy matures and apps joining already have buy modules implemented. This would enable users to continue absorbing sufficient Kin to push the economy through the different stages.
Wallets can play a part
An interesting addition to the KRE would also be to reward wallets to participate, only to the extent that they act as buy modules and funnel Kin into the app economy, increasing other apps’ AUB.
Money for the digital world
Kin is money for the digital world. Like any new economy, it needs to go through different stages of development. Like terraforming a planet, entrants in each stage of the economy end up changing the environment, and making it more suitable for new apps to enter the market and iterate on monetization.
Kin’s growth is a virtuous cycle, starting first by growing the breadth of the economy, where each new entrant adds value to the entire ecosystem. After some time, users see the benefit of spending Kin and realize they can spend it in different ways and apps. At this point, we see economic specialization start to happen where users (not just apps) also get creative in ways they can earn Kin.
At some point, Kin’s economy should be stable enough that it cushions volatility that comes from speculation in other crypto currencies. This model predicts that, as a virtual currency becomes established, the exchange rate becomes less sensitive to the shocks of speculator beliefs and their movements in the markets.
To borrow a quote from the Sovereign Individual:
“Something new is coming. Just as farming societies differed in kind from hunting and gathering bands, and industrial societies differed radically from feudal or yeoman agricultural systems, so the New World to come will mark a radical departure from anything seen before.
As crypto ushers in an era of decentralized governance, power and money, Kin is at the forefront in the push to bring digital, feeless money to everyday users.
