Cryptocurrency is more than just a substitute for fiat money. It also uses a tokenization platform to tokenize assets, offers dApp development services, proves ownership, and encourages holders to participate more actively in decentralised networks.
Blockchain technology is one of the many breakthroughs that the twenty-first century has brought to our everyday lives. Thousands of blockchain-related projects are claiming to be tomorrow's most effective game-changers.
Because token economics is a relatively new phenomenon in the global economy, it might be difficult to grasp and avoid making mistakes while putting it into practise. Simultaneously, token economics may assist you in determining the true potential of any blockchain or DeFi development company, allowing you to select the one that is the most stable and has the greatest investment potential.
Token economics may make or ruin any crypto enterprise, so let's take a look at the most important elements.
Token Economics vs. Crypto Economics
Both concepts are logically linked to the blockchain-based economy and aim to establish economic incentives for stakeholders to participate in a specific process when it is required. However, there are certain distinctions between them that should be considered and remembered.
Incentive structures are used in cryptoeconomics to initiate transactions and ensure that the coin is validated by randomly selected nodes. The main goal of the Bitcoin blockchain development company is to motivate miners to validate transactions using the consensus protocol and mine additional Bitcoin. As a result, an increasing number of miners began to join in mining in order to receive a reward. As a result, the network became more secure, allowing for faster and less expensive transactions.
They are rewarded for this by transaction initiators, who pay a charge to have their transactions processed.
Cryptoeconomics is the study of the structure of a cryptocurrency supply chain, such as Bitcoin. Because cryptoeconomics can assess and forecast user adoption, asset price, transaction volume, and services, it can assist buyers, sellers, service providers, and other stakeholders in achieving better investment outcomes by selecting the optimal ccoin launch platform to participate in.
Because it must incentivize nodes by attaining Nash equilibrium, cryptoeconomics is closely related to game theory. The voting mechanism of consensus and incentives must also be synchronised to assure voting under the Arrow theorem in order to eliminate fraud and ensure an efficient quantity of coins produced during mining. It's a lot of work, and there's a lot of complex math involved.
Token economics, on the other hand, is significantly broader and, despite these flaws, allows for the use of various types of tokens outside currency. This means that token economics exists to ensure that tokens are used as intended in the ecosystem.
Despite its broad description, token economics is governed by simpler, non-mathematically based economic theories.
The most important aspects of token economics are token application, token supply, and token validation. Token economics examines how tokens are used and behaved not just during transactions but also after they are completed.
Token economics can be divided into two branches:
The parameters and the individual are the subject of microtoken economics.
Macrotoken economics encompasses the entire ecosystem of the DLT network and its operation, which is reliant on third parties such as an exchange or a regulator.
Microeconomics and macroeconomics are two types of token economics.
Token Economics: A Beginner's Guide
Cryptocurrency not only allows a blockchain development company to raise funds, but it also allows for the creation of entirely new business and governance models, such as token economics.
Token economics is a new area of economics that explains the structure of a specific blockchain ecosystem. It refers to the research, development, and implementation of blockchain-based economic systems. Each platform and blockchain application is built with its own token economy.
The following are the main characteristics of a well-developed token:
utility within the ecosystem inflation resistance scalability of consumption high value presence on exchanges possibility for usage growth
A utility token is a digital asset that grants users access to certain products and services on a network.
A security token is a form of token that derives its value from an external, tangible asset and grants a variety of rights, such as profit sharing, ownership, or equity in a legal corporation. There isn't much of a distinction between them.
Users can also construct a token that meets legal and technological requirements, based on the amount of money raised by token holders and the length of the token sale.
In terms of scale, a token can be fungible or non-fungible. Fungible tokens can be broken into small units and are interchangeable. Because each token is unique, non-fungible tokens are non-interchangeable and cannot be divided.
Supply and Demand for Tokens
Token supply and demand are at the forefront of any new product that enters the market. If a corporation designs too many products, it will delay purchases since supply will exceed demand. What will become of them? Their worth will dwindle. However, many initial coin offerings (ICOs) still pay insufficient attention to this crucial aspect of token economics.
In the Vernon Smith experiments, an appropriate approach for supply-and-demand estimation is provided. This was the first initial coin offering (ICO) without the use of blockchain technology. His method allows for the prediction of how tokens should be launched, the direction in which they will consolidate, and prospective demand levels. As a result, it's simple to analyse token supply and prospective price variations.
Distribution of Tokens
One of the most important aspects of token economics is token distribution, as it has a significant impact on your project's success. Making token distribution fixed, as it is issued at a specific point in time, would be a massive mistake. Consider the following scenarios:
when to issue the token and how much to release in the first case the connection between present and projected distribution, utilisation, and value
Investing of funds
Token distribution is crucial because, due to token price volatility, a project that relies solely on its utility tokens would constantly have cash-flow constraints.
Value of a Token
Token value, like the value of any other product, is unpredictably variable and subject to change. Do not be startled if the market determines the worth of your asset independently of your projections.
Consider the scenario in which people want to exchange their token for a certain service. That implies you'll have to establish a new, adjusted price if the market price for your token declines.
Another point to consider about listing on exchanges: if a cryptocurrency is listed on numerous respected exchanges, it is a sign that it is well-known and has a high market value.
Whether it's a blockchain solution for DeFi, a tokenization platform, or a dApp, a token shouldn't only be a profitable addition to your project. It should also serve a larger goal. The majority of ICOs offer worthless tokens. They're simply attempting to take advantage of blockchain technology's benefits and expedite their company's funding. If this is true in your instance, but you want investors to participate in your coin launch platform rather than just acquire it, you'll need to design a token that serves a purpose other than funding.
People must grasp the value of your token when reading about it. Finally, you want investors to desire to utilise your token rather than merely buy it for the sake of speculation.
The Token Ecosystem's Architecture
Creating a token ecosystem entails foresight and the development of drivers that will encourage people to visit, remain, and interact with the platform in the future. The ecosystems of many blockchain-based projects are poorly built. Tokens are distributed in an asymmetrical manner. With a hard cap on issued tokens, the ecosystem may fail because there will be insufficient tokens available.
Token ecosystem architecture can be divided into two categories: dual and basic. Several things influence the decision:
the alignment of interests between users and investors, which are essential players in token evaluation, demand estimation, token flow speed, and price fluctuation evaluating the mechanisms for preventing volatility
cost of development calculation of reserves and reserve release regulations (for example, listing tokens on exchanges)
the project's true objective and the token
Create an ecosystem for your coin launch platform that meets all of these requirements. A simple token structure will work best for some projects, while a dual token structure will work best for others.
Because this can have a negative influence on token economics, it's critical to create stabilisation tools to deal with threats and link them to a crowdsale bonus. Different bonus systems are possible. However, some initiatives reward early-bird investors with large incentives (up to 80%). However, be cautious about offering such large bonuses to investors, since this might have a significant impact on coin price stability. If one investor owns the majority of the project's revenue, he or she will most likely be driving the 'vehicle.'
Policy on Money and Credit
Token economics is based on a preset monetary policy that incorporates special measures to ensure currency stability. There are three widely regarded instruments for ensuring monetary policy stability:
alter the credit policy in accordance with the practises of other banks
To impact the money supply, acquire or sell government bonds and foreign currencies.
Bank reserve ratios should be changed.
Every token ecosystem must have the appropriate monetary policy in place. A deflationary system will be more effective for a lucrative environment if there is stability in a non-profitable ecology.
Economic Models for Tokens
Token economics models are being developed in preparation for the launch of new cryptocurrencies. Define the role of your project's native token to design the most appropriate model for token economics. This necessitates your thorough examination, as any flaw will eventually affect the entire network's performance. As a result, the economic model must be excellent.
To begin, select a consensus model. There are other various consensus algorithms that can be used to establish a coin. For example, Ethereum, a solidity smart contract development, uses proof of work, which means miners are in charge of protecting the network and confirming transactions.
The proof-of-stake technique is used by Dash and NAV, which implies that cryptocurrency holders stake their holdings in a wallet to solve blocks. The quantity of holdings you have determines how many blocks you can solve and how much money you can earn.
The incentive – something that motivates individuals to act – is at the heart of these consensus models, which are the engine that drives any token ecosystem.
Incentives, according to incentive theory and human behavioural theory, determine people's behaviour, motivating them to contribute to the network and grow the blockchain ecosystem.
Tokens are used as incentives in token economics to encourage users to act in ways that benefit the platform. The network establishes rules to encourage members to contribute to the platform by offering personal rewards. Because tokens have monetary worth, the majority of incentives are monetary in nature. People put their money into cryptocurrencies, and the value of the token is determined by the quantity of investments. Everyone wants more, and if you pay them more, they will give you more.
Inflation, on the other hand, is caused by a rise in the value of the currency. As the supply grows, the value of the token declines, but demand remains constant. Every consensus model has its own inflation rules. For example, the miner receives 12.5 Bitcoin for each Bitcoin block solved.
The reward is likely to be 6.25 till all 21 million Bitcoins are mined in 2012, according to forecasts.
Most cryptocurrencies have a finite supply to prevent the effects of inflation. As a result, the number of coins available is restricted, and there is no means to make more. This will assist to keep the token price under control. It is also favourable in comparison to the current system, which has an infinite supply of fiat currency. Individual currencies lose value as a result of this. People are protected from such a catastrophe by the cryptocurrency market.
Stick and Carrot
Users have a good probability of receiving a reward from developers for their participation in the improvement process of any particular project. Participants who break the platform's rules or whose acts are not accepted by curators, on the other hand, may be banned.
Fortunately, the blockchain has more carrots than sticks. Token holders are logically more motivated to create the project if they possess platform tokens – in other words, if they have a personal financial stake. The value of the token holder's share rises in tandem with the platform's worth. To raise their personal financial stake and encourage them to improve the platform, the network rewards tokens to the most influential contributors.
Token holders have numerous possibilities to share in the platform's revenues. For example, they have the ability to vote on the platform's direction. They can suggest changes and updates to the network's content. Token holders are thus included in the network's governance process.
Token holders can invest their shares in the PoS and Delegated PoS methods. When we talk about staking, we're talking about storing cryptocurrency in a private blockchain wallet. The network is more secure as a result of the staking process, and the price of the cryptocurrency is stable if token holders trade less than these tokens. Token holders are also rewarded for staking.
Users who participate in staking can use the amount of the token to validate their transactions.
Nothing is free. To complete a transaction, users must pay a transaction charge. This fee is usually paid to the blockchain miners who complete the transaction, but it can also be paid to the network. If you wish to send some cryptocurrency to another wallet, for example, you'll have to pay a percentage of the transaction to the network to cover asset supply.
The ICO Side of Token Economics
Many ICOs make the error of assessing a project and assuming that the ICO will be the sole way to fund it from start to finish. Only little and medium-sized projects should rely solely on your hands; a long-term prospective firm with bigger goals should not.
Blockchain technology is the best option for achieving this goal. Within the crypto world, crowdfunding is now a very popular method of generating funds. An ICO launch, which is aimed to engage cash to a project, is one of the most prevalent and profitable forms of crowdfunding.
On the global market, the number of crowdfunding projects is increasing every day. The number of ICOs launched between June 2017 and June 2018 is shown below:
ICO number on a monthly basis
Are you aware of the success rate of initial coin offerings (ICOs)? And, as a result, how many of them fail?
Countries with the most ICOs in 2017 (based on funding volume)
More than 90% of ICOs fail, according to experience, and experts believe this is quite typical. Also, investors and project developers should keep in mind that 90–95 percent of ICOs will be worthless in three years, even if they appear promising now.
Supply of Tokens
Prepare to deal with the Bitcoin dilemma of always dealing in fractional transaction amounts if you set your maximum token supply too low.
Divide that figure by your intended maximum token supply in circulation if you have a skilled, experienced team and your ICO joins the top 20 coins in terms of market cap (currently, the cap is at least $1.5 billion). This will increase the value of your token in USD. If your maximum supply is 300 million tokens, allocate half of them to circulation.
However, previous experience has shown that some ICO investors avoid companies with a large total quantity of tokens. Others think it's a bad idea. The overall supply of tokens is irrelevant due to the way token economics operates. The truth is that seven of the top twenty coins have capitalization over one billion dollars.
Pricing of Tokens
As a mathematical example, token pricing can be simply estimated.
You must do the following:
determine an ETH theoretical hard cap (if ETH is the currency your project is working on) based on market pricing at the time of writing
Make your own bonus scheme.
Prepare a token distribution plan for your pre-sale and main sale.
Now for some math:
Assume you're in charge of Project S, which issues its own token, M. The hard cap has been set at $50 million USD, with a total token supply of 2 billion.
The total number of tokens available for purchase is one billion (50 percent of the max token supply).
Step 1: Let's figure out what the theoretical ETH cap is.
As of November 27, 2018, $50 million is equal to 474,721 ETH (1 ETH is roughly $105,325 USD). (Keep in mind that the bitcoin exchange rate is constantly changing.)
Step 2: A bonus system for early contributors will be implemented.
It is suggested that you only allocate 15% of your budget during the pre-sale period.
Pre-sale is the third step.
Typically, project creators set aside 20% of the sale tokens for the pre-sale. That's a total of 200,000,000 M tokens.
During the main token sale, a total of 800 million tokens will be available.
Step 4: Determine the price of the base token
TS/EC = x
x = Token Sale Allocation; TS = Token Sale Allocation; EC = Ethereum Cap.
This provides us a token price of M tokens as a starting point. That's a nice number to use, but if yours isn't quite as nice, just round it up to the next most visually beautiful number. The following step in the calculation is entirely up to you.
It's worth noting that these figures are from the age of the "wild ICO market," when anyone could propose a utility token without considering the token's economics or impact on the business model. At the moment, the scenario is evolving toward the separation of utility tokens, which are essential for goods and should be delivered as a service, from tokenized securities, which are used to raise cash for further growth. Tokenized securities are essentially a blockchain-based version of common securities, hence they have nothing to do with token economics. Those coins are extremely dependent on project financial projections, P&L estimates, DCF models, and multiple-based valuation if someone is experienced enough to address all features.
DeFi Token Economics has been dubbed the "next crypto revolution" because of its blockchain solution for DeFi. Numerous hacker attempts, on the other hand, demonstrate its immaturity and incapacity to entirely replace traditional banking tools.
As a result, blockchain development for DeFi necessitates a stable and secure economic model. DeFi tools, due to their complexity and intricacy, can deliver higher benefits to the blockchain development company and its users. However, its complication provides a plethora of opportunities for self-serving subjects to engage in fun behaviour.
Levels of particular algorithmic criteria that must be met exactly in order to generate, transfer, close, or destroy financial instruments can be either a hallmark or a source of financial vulnerabilities in a DeFi development organisation. Developers and designers of DeFi platforms are responsible and compelled to provide platforms that are both commercially and technically sound. Accurate economic audits are crucial for blockchain solutions for DeFi so that users do not lose money.
Token economics elucidates how a token will be utilised on a platform. The demand for a cryptocurrency will decline if it is solely utilised as a means of involving additional money in project development.
A thorough examination of a cryptocurrency's token economics can aid in determining the currency's viability. The more remarkable use cases a project has, the more likely it is to see increased demand.
If you have any questions concerning the economics of your token, the Cryptoauxiliary team is here to help! We are a DeFi and blockchain development firm with competent blockchain advisers and smart contract developers on staff. Cryptoauxiliary will publicise your ideas and handle everything to the highest standard!