Tokenomics

It is a token-centric method to control an ecosystem, a group of agents, to produce a specific set of behavior that increases the probability of a specific outcome. Tokens represent access and rights and are implemented on a blockchain, using a smart contract. The idea is to have a pre-set logic that ties rewards to actions. It uses game theory.

With the advent of cryptocurrency, individuals can now create micro-economies. Tokenomics essentially takes what central banks use as monetary policy and apply it in blockchain networks.

History

The idea of the token economy was propounded first by the Harvard psychologist B.F. Skinner in 1972. He believed a token economic model could control behavior. the use of tokens that represent something valuable (see value) to incentivize positive actions and vice versa.

Applications

Tokenomics is used in DAOs, or decentralized autonomous organizations.

Patterns in tokenomics

Concerned with supply (minting and burning), distribution (among holders, staking, etc.) and incentive structure (encourage usage or participation).

• DEFI - users are rewarded with tokens for activity (borrowing/lending), or tokens are created as synthetic versions of other existing cryptocurrencies
• DAOs - token holders get voting rights within Decentralised Autonomous Organisations, new digital communities governed by Smart Contracts
• Gaming/Metaverse - where game activity and in-game items are represented by tokens and can have exchangeable value

Supply

Important concepts: schedule, metrics

About metrics

• Maximum Supply - A hard cap on the total number of tokens that will ever exist. In the case of Bitcoin 21 million.
  • Disinflationary - Coins with a maximum supply are described as disinflationary or deflationary, because the marginal supply increase decreases over time.
  • Inflationary - Coins without a maximum supply are described as inflationary because the supply will constantly grow - inflate - over time, which may decrease the purchasing power of existing coins.
• Total Supply - The total number of coins in existence right now.
• Circulating Supply - The best guess of the total number of coins circulating in the public’s hands right now. Some tokens can be blocked for a given periode, see staking.
• Market Capitalisation - The Circulating Supply multiplied by current price; this is the main metric (proxi) for estimating relative importance of a cryptocurrency, just as it is for public companies which multiply share price by number of tradable shares.
• Fully Diluted Market Capitalisation - The maximum supply multiplied by current price; this projects an overall Market Capitalization of the fully supplied token, but based on current price.

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Distribution

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Incentives

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Problems

Not everything can be quantified or tokenized

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Gaming the game

Once activities and outcomes can be measured, evaluated and tracked, i.e. once we adopt a formal quantitative system to guide activity, at the same time we create the possibility for gaming, i.e. for cheating.

Crowding out

Once we associate a clear benefit to an action the action may become less appealing for potential participants.