Work tokens require service providers to have "skin in the game" through staked tokens before being allowed to perform work. The staked tokens serve as collateral that can be slashed if providers act maliciously or deliver poor service, while honest work is rewarded through fees and token emissions. This creates strong economic incentives for high-quality service provision and helps prevent Sybil attacks by requiring upfront capital commitment.

This concept bears resemblance to web2 licensing and franchise systems, where businesses must meet certain capital and operational requirements to participate in the system. Within web3, work tokens emerged as a response to the challenges faced by early utility tokens, which struggled to establish direct and lasting links between token demand and network activity. Augur pioneered this mechanism in 2015 by requiring providers to stake their REP tokens to participate in outcome reporting and dispute resolution for prediction markets. Since then, work tokens like Filecoin and Livepeer have become widespread within Descentralized Physical Infrastructure (DePin).

Advantages

• Incentive alignment: Aligns token value with network utility, creating a sustainable feedback loop between participation and economic incentives.
• Sybil Resistance: Requires participants to have a financial stake, reducing the likelihood of attack by making it cost-prohibitive.
• Quality Assurance: Encourages high-quality work through economic penalties for misbehavior or underperformance.

Limitations & Risks

• Entry Barrier: High staking requirements and volatile prices may exclude smaller participants from participating.
• Centralization: Wealthy participants may accumulate disproportionate network influence through large stakes.
• Liquidity Trade-off: Participants must lock up tokens, potentially reducing liquidity and secondary market activity.

Design Considerations

• Stake Parameters: Define minimum stake requirements that ensure security while allowing broad participation. Consider dynamic adjustments based on network size or demand, where requirements fluctuate with available storage capacity.
• Reward Distribution: Implement performance-based rewards, using metrics like uptime, accuracy, or efficiency to allocate payouts. Use tiered multipliers or reputation scoring to favor consistent, high-quality contributions while penalizing unreliable participants.
• Slashing Conditions: Establish clear misconduct penalties, with different severity levels (e.g., partial slashing for minor faults, full slashing for malicious actions). Introduce gradual slashing to allow time for dispute resolution before irreversible penalties.
• Delegation: Consider allowing stake delegation to service providers, where passive token holders can delegate their stake in exchange for a share of earnings. Implement slashing delegation—where delegators share in provider penalties—to prevent misaligned incentives.
• Provider Caps: The set of active providers may be unbounded, statically bounded, or dynamically bounded based on network conditions such that sufficient supply is available while maintaining profitability for providers.