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Tokenomics: a Guide by Shapeshift

Despite increasing awareness about cryptocurrency and blockchain technology, the general public is not very much aware of how the economic model underlying digital coins work. It is imperative to understand the economics of tokens to reap maximum benefits from the token economy. The term token economics can be defined as the processes and forces that come into action when a particular token is used as a means to create an economic model.

What makes these economic models a little difficult to understand is the ever-evolving nature of the cryptocurrency and blockchain technology. The industry is nascent and fledgling, which essentially means it keeps on changing every other day. Especially in the year 2017, we have witnessed several initial coin offerings (ICOs), with each coming up with its economic model using different blockchain platforms and own consensus algorithm. These large numbers of ICOs were good for the large scale adoption though also somewhat confused the public of the different business models.

Token Economics:

To study and understand token economics, we need to focus on the design, implementation, and analysis related to the economic ecosystem based upon tokens, which in turn is based on some specific blockchain technology. The number of the ecosystems is quite large, and there are thousands of blockchain iterations you can have out in the cryptocurrency space.

The fundamental premise behind the token economics, just like any other economic model, is the incentive theory. The theory assumes that human behavior is driven by the desire to have a specific benefit, and the same logic can be applied in token economics too. The person who follows the rules and regulations of a particular blockchain network will ultimately be rewarded with the digital coins, and that drives the adoption and consumption of the model.

Key Prerequisites:

One of the key prerequisites to have solid token economics is the safety and security of the business model. The infrastructure has to be completely foolproof, and in the case of any laxity found in the model, it is going to be detrimental for the future of the token economics.

Designing such a model with high safety and security is a difficult task and requires extraordinary levels of competence and skills. A group of skilled mathematicians, network administrators, and programmers need to come together for accomplishing such a task. Among others, one of the basic steps required to design a new model includes choosing an algorithm; two popular algorithm examples include proof-of-work and proof-of-stake.

Use Case Examples:

More importantly, the economic model manifests its benefits in terms of use cases, and we have several examples on that front. The most popular use case of the economic model is value exchange, with Bitcoin and Ethereum being the popular cryptocurrencies used in exchanging the value.

Staking is another use case where value is kept in a wallet, and the process aims to keep the things fair while sharing the value. Similarly, the economic model is utilized in many governance applications, and businesses utilize contribution to various kinds of projects and services based on the blockchain network across industries. Many cryptocurrency exchanges provide the facility of profit sharing that is another use case application of the token-based economic model.

Concerns and Challenges:

Despite growing awareness and acceptance of the economic models based on tokens, there are fundamental challenges that cryptocurrency and blockchain space continue to face. Some of the key hurdles include the democratization of the coins and their operating mechanisms, security concerns about the procedures, and continuous operation from the federal agency of different sovereign nations on the veracity of these token-based economic models. Especially, the opposition of nations with a large population is something that doesn’t bode well for the future of token-based economic models.

Pulling It Together:

We will be able to witness the growth in the digital coin space only when a large number of populations will be able to adopt cryptocurrency for their routine practices.  It is imperative to have cryptocurrency integrated into our daily usage that will help the blockchain network to scale up for wider adoption. The concern related to safety and security also needs to be addressed, and sporadic events related to breach, theft, or cryptocurrency fraud deliver a very heavy blow to the overall reputation of the economic model of a specific token. In sum, if developers can alleviate some of these concerns, the future of the economic models based on tokens is going to be brighter with more and more people joining the digital revolution.

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David Cox

David is a finance graduate and crypto enthusiast. He projects his expertise in subjects like crypto and Blockchain while writing for CryptoNewsZ. Being from Finance background, he efficiently writes Price Analysis. Apart from writing, he actively nurtures hobbies like sports and movies.
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