InWara - ICO Database, ICO review, Security tokens and more

Tokenomics - Most Comprehensive Guide (With Examples) - InWara

What is Tokenomics

Tokenomics definition

Tokenomics, also known as token economics, is derived by combining the words ‘token’ and ‘economics’. Tokenomics estimates the quality and/or value of the token which would contribute towards attracting investors to adopt it and help develop an ecosystem around the underlying project of that particular token. 

A token on the other hand, in real life serves as a tangible representation of an entity. Likewise, in the crypto verse a token represents an entity in its respective ecosystem. However, a token’s role is not limited to its native ecosystem. 

Tokens in the crypto verse could constitute an asset or a utility of a company that can be sold to investors.

Tokenomics is a vast topic that includes numerous components: we’ll be diving into the nitty-gritty of tokenomics and its meaning in depth.

 

Token Economics Explained - The Project Team

Every project needs to be backed by a team of motivated and reliable individuals. Their work is vital in determining if the coin stands a chance in gaining widespread adoption. 

A really strong will not only be critical towards running the company but also during the token sale, as investors generally tend to trust projects with more experienced leaders. let’s take the example of EOS which managed to raise $4.1 billion in its ICO.

tokenomics - project team
Source: InWara’s Market Intelligence Platform

 

Like our data? You'll love our market intelligence platform! Get started

 

Both CEO Brendan Blumer and CTO Daniel Larimer has several decades of combined experience in leadership roles between them. Naturally, there’s wisdom that comes with experience like this. Is this the only reason why EOS was so successful? Most likely not, but did it help? Yes.

 

Business Model

Projects with decentralized applications (Dapps) that aim to be more than simple payment systems require robust business models to get good returns unlike crypto coins such as Bitcoin and Bit Cash which are only used for payment purposes.

 

Legal Aspects

Due to the surprising amounts of money that ICO’s (Initial Coin Offering) have raised in 2017 and 2018 they have been subjected to increased legal scrutiny via various governing bodies. The project under consideration must be legally compliant to all the regulations of the country it operates in.

 

What is Tokenomics? - Token Allotment 

Allocation of tokens post crowdsale and their lock-up periods is a critical factor. These decisions are generally declared in the project’s whitepaper. Projects created in the interest of long-term potential have longer lock-up periods.

 

Want to see the different crowd sales that took place this month? Get started

 

Utility in the Real World

An apt perspective of the real world utility of the project needs to be gained. Is the project conveying any real-world value to the market? If the project’s platform is entirely dependent on the token then it is definitely worth investing in.

 

Community Building and Branding

Regardless of how fundamentally sound the cryptocurrency is, the project would be nothing without the support of a good community of potential buyers. Projects with the most active communities are inclined to have more stable tokens

 

Tokenomics Model - Token Structure

The token structure must be well constructed to fit the project and its requirements.

Tokens can be classified into different categories on the basis of:- 

 

Layers

The main blockchain that powers the token would be considered as Layer 1 and the Dapps/ICO’s built on top of this underlying blockchain would be layer 2.

A lot of projects are now attempting to reduce the level of dependency between layer 1 and 2. But, if a layer 2 application is doing well, it has a positive influence on layer 1. So layer 1 projects focus on attracting developers to their platform. A higher quality of the layer 2 application ensures better value for the layer 1 network.

 

Utility and Security

Most tokens qualify as securities since ICOs are investment opportunities which would act as a direct investment in the company itself. However, if the token fails to qualify the Howey’s test it is considered a utility token. A utility token provides users with a product and/or service offered by that company.

 

Find all the Utility & Security tokens out there! Get started

 

Fungible and Non-fungible

Fungibility can be defined as a good or asset’s interchangeability with other goods or assets belonging to the same type. Currencies would gain more value by their fungibility. No fungibility would be preferred when the token is a collectible as they gain value due to their uniqueness.

 

Original Chain and Forked Chain

In simple words, original chain would be an only layer 1 protocol. And a forked chain would be a branch of another protocol.

Examples of original chain protocols would be Bitcoin and Ethereum. Suitable examples of forked chains are ZCash, Bitcoin cash, etc.



Token Economics Model - Design Goals

 

Layer 1 Platforms

 

For layer 1 tokens their Tokenomics will boost by: incentivizing participants and from developing on the platform.

 

Incentivization

 

An example for positive incentivizing is the Bitcoins Proof-of-Work consensus protocol (PoW).  Miners are required to solve cryptographic puzzles to “mine” a block that can be added to the blockchain. This process demands an enormous amount of energy and computational usage and the puzzles are designed to be hard and taxing on the system.

Once a miner solves a puzzle, it is presented to the network for validation. If and when approved the block gets is included in the chain.  These miners are motivated to do a good job by rewarding every valid block with 12.5 BTC.

Negative incentivizing is proposed to be used by Ethereum through the Proof-of-Stake (PoS) consensus mechanism via Casper protocol.  Under this protocol validators are required to lock up some of their coins as stake. The validation process is conducted and the validated blocks will be added to the chain by placing bets. If and when the block is attached, the validators receive a reward proportionate to their bets.

 

Find all the Utility & Security tokens out there! Get started

  

If validators in Ethereum decide to act in a malevolent manner, a slashing mechanism is activated. This ensures that all participants act in accordance with the pre-established token flow.

But perhaps one of the most critical pieces of information available to an investor - is the company’s roadmap. A roadmap gives a clear idea of what the company intends to do in the future and when they’ll start executing these plans.

For example, investors can know when an ICO projects plans on finish developing its platform. Note that for many ICO projects, the main purpose of raising funds is to build a platform that provides some sort of service, or it could even be a product. Here’s a snapshot of EOS initial roadmap.

tokenomics - roadmap

Source: InWara’s Market Intelligence Platform

 

 

Like our data? You'll love the market intelligence platform! Get started

 

Platform Development

 

Real projects contribute more towards the development and growth of an industry. Bob Metcalfe, the inventor of Ethernet and co-founder of 3.com formulated Metcalfe's law which describes the relationship between creating more credible projects on a network and the value of that network itself. It states that “the effect of a telecommunications network is proportional to the square of the number of connected users of the system.”

The more the number of people involved in the network, the more valuable the network becomes. Networks tend to have a life of their own. As more people begin to use them it also tends to attract more people in the form of exponential growth.

Now to create an efficient internal economic token flow system that gives developers a better opportunity to create competent projects, platforms most commonly use these two methods: incorporating a gas cost and staking.

 

Incorporating a gas cost 

In 1936, Alan Turing deduced that there is no way to know whether a given program can finish within a certain time limit or not.  This causes a problem in smart contracts because by definition it must be capable of termination within a given time limit. The measures taken to externally kill the contract in order to avoid entry to an endless resource draining loop are:

  • Turing Incompleteness: This platform will have limited functionality and will be incapable of jumping or creating loops thereby serving the purpose.
  • Step counter:  A program can be created to count the number of steps performed or executed and terminate after a certain step count limit.
  • Fee-meter: This would incorporate a gas cost or a minimum pre-paid fee for every instruction executed. When the fee exceeds the pre-paid fee it automatically terminates the contract. Smart contract platforms like Ethereum use this method.

 

Tokenomics: Staking

The gas cost method tends to skyrocket and for this reason has been subjected to increased scrutiny. And hence the stalking method has been developed for developer interaction. The developers need to stake their tokens and are given an equivalent amount of resources in return. In the long run, the stalking method proves to be cheaper as compared to the gas cost method.

 

Layer 2 Platforms

Developers require sources of funding to get their projects running. They usually gather funds by holding public sales by ICO, STO or IEO. At these sales investors can buy native tokens of the applications and give developers funding in the form of those tokens that they purchased. 

 

Find all the Utility & Security tokens out there! Get started

 

For a successful public sale, the tokens will be required to be widely distributed within the ecosystem of that project. This would create a decentralized environment which is essential for growth.  This can be implemented by making sure that the so-called whales (wealthy crypto investors) don’t get the opportunity to hoard up on tokens. Crypto whales have the added advantage of front lines at the sale due to the premium gas fee that they pay.

 

These are a few pointers to promote token flow in the project’s ecosystem:

  • The project team  members should feel valued and paid for their efforts ,time and dedication to the ecosystem.
  • Early adopters must receive special benefits for their faith.
  • Waiting periods need to be enforced on the token so that that cannot be cashed out  right away.
  • A reasonable amount of funding must be gathered at the ICO. The company could have an estimated capital or minimum capital requirement to have sufficient funds.
  • An increase in the value of tokens improves the credibility of the company and will therefore attract more investors. It also rewards the present investors with increased profits.

 

Estimation of a token’s value

A token’s value is evaluated based on its intrinsic value and speculative value. 

  • Intrinsic value is the value of the token from gained from the credibility and utility of the project. 
  • Speculative value is the value of the token that is gained from the speculative traders. They are the once that expect the fluctuation of price in the future. 

 

Tokenomics of a Single Token vs Double Token 

One of the other factors needed to consider in a project’s token system is whether they are going to opt for a single token system or a dual token model. 

 

All in all, this makes one wonder, for what reason are new businesses looking into dual-token models? 

Basically, consistency issues. 

In the course of the most recent few years, ICOs have, gone under a ton of investigation from administrative bodies. Before this, there was no proper difference between security and utility tokens. 

Presently, several projects have begun offering two tokens, one security token is offered to an accredited investor and the subsequent token is a utility token offered to a client/customer.

There are three models that are used to create dual token offerings:

  • RATE- Real Agreement for Tokens and Equity: In this type of model the companies are issuing two tokens. One token being an equity compliant with securities laws and the other token is being offered to the investors as a bonus.
  • FACTS: This uses both a security and a utility token. The security token is first being offered through a crowdsale to accredited investors. The utility token is distributed later once the crowdsale is done as a property dividend to investors. The utility tokens are created per the quantity of security tokens issued.

 

Example of Single Token Tokenomics: Ethereum

Ethereum has planned on becoming a decentralized supercomputer for every developer around the world. Anyone and everyone can build a decentralized application on top of the blockchain. Ethereum's token is ether and it is used to build up the entire ecosystem.

 

Example of Dual Token Tokenomics: Neo

Neo is known as China’s Ethereum. The Neo system has two types of tokens:

  • NEO which was known as Antshares (ANS)
  • GAS which was known as Antcoins (ANC)

The NEO holder gains the right to vote, manage decision and make decisions for the community. GAS is the fuel of network. It gets the things done and fuels the smart contracts. GAS is the token that is going to be exchanged as currency in the system. NEO is not divisible and the least possible unit is 1. Whereas GAS is divisible and the least unit is 0.00000001.

 

Example of Triple Token Tokenomics: Steem

 

A Triple token system also exists and Steem is an example of it. Steem is a blogging and social media website which is built on blockchain. 

It has 3 different Cryptocurrencies: STEEM, Steem Power, Steem Dollars.

  • STEEM: In the Steemit network, STEEM is the primary crypto. It can be exchanged for various cryptocurrencies such as Bitcoin and Ethereum. In order to cast votes and have some kind of governance in the system it is required to convert STEEM into the second token, the Steem Power token. This conversion method is known as powering up. 
  • Steem Power: As STEEM can be converted into Steem Power. One unit of STEEM which converts into one Steem Power which will equal to one vote in the ecosystem. The more tokens you have, the greater your influence in the system. 
  • Steem Dollars: These are valued with US dollars at 1:1 ratio. These are used to represent short-term debt. 

 

Tokenomics: Price Stabilizing

ICOs reward their early investors with a bonus which sometimes tends to get out of control. This is true when whales have captured most of the tokens. This is the case in which an individual investor will have a high influence on the whole ecosystem. 

  • To ignore such cases a strong monetary policy is required. As we all the central bank uses 3 methods to achieve currency stability that is: Buying or selling of government bonds and foreign currencies to change the money supply.
  • Change of credit policy.
  • Change of reserve ratio for banks.

 

Find every blockchain project in the world on our platform! Get started

  

This money supply option seems like the best option, but how is it going to work? This can be understood by the basics of supply and demand.

 

Tokenomics: Supply and Demand

 

The demand and supply concept is pretty simple. The grater the supply of the product, the demand for that product falls with the fall in price. The greater the demand for a product is due to the lesser supply with higher prices.   

The point where the supply and demand curve meets is known as the equilibrium. Supply and demand can simply be the reason for the pricing of any asset. This factors into tokenomics in different ways. Various projects increase their total token supply by introducing more and more new tokens into the system. Also, various other projects use token burning cryptocurrency method to remove their token permanently from the system.

 

Tokenomics: Token Burning

Token burning has various steps in the following order:

  • First a coin holder decides and calls for the token burning, and states the amount of token to be burnt.
  • The contract will at that point check if the client has more than expressed number of coins they want to burn.
  • The token burning doesn’t take place if the coins required are not available.
  • The token burning will take place if they have enough coins. The coins will then be burnt from the wallet and the token total supply will be updated.
  • The coins will be destroyed forever and can never be recovered once the tokens are burnt.

Once the burning of the cryptocurrency takes places doesn’t mean that the price of the token will increase. The less token circulation doesn’t mean that the buyers are willing to pay a high price for the existing tokens.

 

Tokenomics: Token distribution 

A wide distribution of tokens in the system is required for a successful decentralized model. The last thing required among specific individuals is a higher concentration of wealth. The wealth concentration in a system can be measured utilizing the Gini coefficient.  The higher the Gini coefficient, indicates the more concentrated wealth. 

When contrasted with FIAT currency, the Gini coefficient is altogether higher in cryptocurrencies as the number of investors is less.

 

Types at Token Distribution Events

 

Crowd Sale

ICOs are generally the most common method for token distribution which made themselves useful in the beginning but haven’t been that effective.

 

Find all the Utility & Security tokens out there! Get started

 

Airdrops

Airdrops is a process in which organizations distributes its token to the wallets of explicit clients, without any fees being charged. Layer 2 tokens can be airdropped to clients in proportion to their current holdings of the layer 1 tokens. As we have seen with the Gini coefficient with well-established layer 1 blockchains like EOS, Ethereum, and so on are generally well distributed. Organizations can exploit that circulation via airdropping their tokens to the holders of the parent blockchain token.

 

Merkle Mining

The Livepeer network an open protocol provides permission-less, decentralized video trans-coding was live on May 2018 which used a method called Merkle mining.

Merkle mining is like mining, instead of running hashes to discover a hash esteem that is underneath some limit, Merkle mining requires Merkle miners to produce Merkle confirmations showing that a particular Ethereum address was in the arrangement of records that had at any rate X ETH at some square tallness.

 

Tokenomics: Token Velocity 

 

The token velocity in mathematical terms is equal to the total transactional value divided by the average network value. Which means that the greater the token velocity, the lesser the average network value. 

 

Find all the Utility & Security tokens out there! Get started

 

This can also be described simply as greater the transactional volume, greater the token velocity.

 

How can Token velocity be reduced?

  • Profit-share model: The clients of a specific system can be. Rewarded with their native token for doing some work for them. So, how is profit-sharing model going to work in reducing the velocity? Since the tokens are created from the benefits made, if the estimation of tokens is low, the profits incurred will to be low and the other way around.
  • Proof-of-Stake Protocol: In this methods the users are required to lock up few of their token in order to gain rights in the system. When the token is locked up it cannot be spent which will lead to reducing the velocity of the token. 
  • Gamification: This encourages and motivates the users to hold on to their token for different reasons and benefits.
  • Store of value: This is extremely uncommon and just the most prominent of cryptocurrencies that have figured out how to turn into a real store-of-value. There are two types of token that have the capability of being true store-of-value
  • Firstly, ventures with solid essential and robust token design. The estimation of these tokens will increase with time. Bitcoin is an incredible case of store-of-significant worth token which will increase with time
  • Besides, we have stablecoins. Dai, for instance, is a stablecoin. Clients can change over their crypto profits/benefits to Dai and keep the value stable irrespective of the market behavior.

In both these cases, clients have the motivating force to clutch on to their tokens rather than simply sell them off.

Register for a free trial

The Most Trusted

Market Intelligence Platform

Get Started