With the recognition of any value source comes some level of social emulation, where naturally it seems, the speculative pseudoscience arena flourishes. These pseudo-science fields are found in Gold investment, Forex trading, Housing market. And the speculative realm of the blockchain ecosystem is no different. What makes something worth it? In the below, we will discuss what are the economic properties of blockchain substances.
According to the United Nations, there are 180 current fiat currencies in use around the world, for a total market capitalization of M1 $48.9 trillion + M2 supply to be $82.6 trillion (GO Banking Rate, Nov. 28, 2022). Probably more currencies are in use in pocket communities, without official referencing or use cases. In history, currencies have come, have been greatly used, and are now long gone. Means of exchanges are generally time-period fashionable.
From the first practical implementation of digital currency in 2009, CoinMarketCap reports that within just a few years, approximately 22,932 cryptocurrencies were created, amounting to a total market capitalization of $1.1 trillion (Mar 15, 2023). In the context of blockchains, “cryptocurrency” and “tokens” are the subclasses of digital assets that use cryptographic technology upon which relies on the viability of cryptographic projects and economy.
Let’s first review some commonly used terms you will hear everywhere in the crypto-ecosystem:
Currency: Bearer of value (value: worth to some(one)), a medium of exchange for goods and services, ie. standardized and accepted. Note: the key here seems to be recognition (social adoption), and accessibility (access, exchange).
Crypto: acronym for cryptography. buzz word. Nowadays used everywhere. Most phenomenon on the blockchain is a result of some computer set of instructions using some kind of cryptographic protocols (a mix of mathematics (even physics), computing, and networking). Some even dare to coin the blockchain ecosystem the ‘crypto-economy’. It’s a hype acronym, and is generally used to convey such concepts as “immutability”, “unicity”, “privacy”, and “so hard-core you can’t understand a thing but just trust it”. But don’t be a fool.
A Blockchain: A global network of computers (a.k.a nodes). These computers are building, verifying, and approving all digital transactions happening on the network, eventually resulting in a chain of blocks (an immutable stamp of the processed data, as a result of the network consensus). This blockchain is publicly available (ie. has a public interface to query to), and therefore acts as a platform that stores data in a way that makes it nearly impossible to change, falsify, or replicate once a block has been written. The core idea is that these nodes are decentralized, resulting in a ledger with no central authority. Note that while anyone can create a blockchain, a blockchain that has achieved critical mass adoption usually represents a new technological paradigm in the evolution of these decentralized ledgers.
A crypto-currency: AKA crypto-coin. A native token? A blockchain could be summed up as protocols of interactions between computers. Most paradigm protocols use some native currency (built into the network protocol, by the team that created the network) to create incentives for using the network and other critical network operations. Ie. all cryptocurrencies exist on their native blockchain. The obvious examples: Bitcoin (BTC) is a cryptocurrency ( a.k.a crypto-coin ) on its dedicated blockchain, the Bitcoin blockchain. Same for Ethereum (ETH) on the Ethereum Blockchain.
A crypto-token: A.K.A a token. [ digital unit ] of something. Historically, this term was interchangeable with crypto-currency or crypto-asset, as any asset that is transferable through digital means (note: very general definition). Nowadays, a token seems to qualify as a crypto asset that isn’t built on its own dedicated blockchain, unlike a crypto coin. As in it’s a network applicative build, not a network genesis build. Hence their genesis emanates from some protocol or contract running on top of a blockchain (which potentially already has its crypto-currency). They are generally used to facilitate interoperability within the blockchain ecosystem, built for economic and structural reasons. Example:: For Ethereum, the native cryptocurrency of the blockchain is Ether (ETH), while the protocol is home to eg. USDT, MATIC, and LINK tokens operations. Note:: Tokens can be created as native elements of a blockchain protocol, and qualified as tokens should they not represent the main protocol’s currency.
Now that this is out of the way, let’s talk about tokens. In the following, let’s roll back the term to qualify generalized crypto-currency and crypto-token together, as they may share roughly the same socio-economic properties. With the evolution of the blockchain ecosystem and the complexification of application proposals, the term has adopted some standardization, classification, and even use cases.
Tokens, by nature, and their usecase in the crypto space, should have the following characteristics:
Programmable: Programmability implies that tokens run on software protocols that specify each token’s characteristics and functionalities, in addition to its blockchain laws and guidelines.
Permissionless: Tokens are permissionless digital assets, meaning any individual or entity can access crypto tokens and blockchain networks without specific authorization. It’s peer-to-peer based.
Trustless: Tokens are built on a trustless framework. This means the blockchain they’re built on isn’t owned or controlled by any central authority or regulator either. Instead, the blockchain and its tokens operate according to the network protocol algorithms.
Transparent: Decentralised blockchains allow tokens and transactions to be transparent. As a result, all transactions and exchanges on the blockchain are publicly observable and verified by all its computer systems (or anyone really) on the target blockchain network.
Tokens can be classified as follow:
Fungible Tokens : meaning: any token is the same as another one. Part of an asset class pool. Example: There are many bitcoins. Just like euro coins, it can be replaced**. Their are general types of fungible tokens as categorised by their use case:
Platform tokens - Platform tokens are native tokens of a particular blockchain platform or ecosystem. They are often used to pay for transaction fees, participate in the platform’s governance, or access certain features and functionalities of the platform. These tokens can be considered as the fuel or the utility tokens that enable the functioning of a specific blockchain ecosystem. An example is the UNI - Uniswap’s native token, used for governance and other utility purposes within the Uniswap ecosystem.
Utility token: An in-ecosystem currency, used as proof to access a blockchain specific a service or product- meaning that they have a specific purpose within a particular ecosystem. Utility tokens and platforms have a mutually beneficial relationship. The platform provides security and infrastructure for the utility token, while the token drives network activity and enhances the platform’s economy. Utility tokens are digital tokens that are issued in order to fund development of the cryptocurrency and can be later used to purchase a good or service offered by the issuer of the cryptocurrency. Example range from the BAT (Basic Attention Token) - Used to pay for advertising services and to reward user attention within the Brave browser ecosystem - to the Golem (GNT) - Used to pay for computing power in the Golem network.
Defi (decentralized finance) or Transactional tokens - used to reproduce traditional financial-system functions (lending and saving, insurance, trading) on a given ecosystem. It acts as a straightforward and fast way of transferring value. It is like some digital Dollar, Euro or Yen. Most states are now working on digital currency like a Government-Coin to allocate for digital based transactions. Note: Behavioural reproduction, non-compliant to any financial laws, could have added properties that real world money can’t. Governance tokens - Specialized DeFi tokens that allow holders to voice their position and influence the future rules and decisions of a given protocol or economics. Understand it as enabling democracy-interactions or a board of director in an ecosystem with no central authority. You can read more about Decentralised Governance procedures on our blog.
Security tokens (ERC1411) - a new class of assets showcasing compliance with financial law that aim to be the crypto equivalent of traditional securities like shares, bonds, debts or property titles. Eg. run an IPO, offloading shares without the need of a broker.
Rundown Fungible Token Comparison :
|Utility Tokens||Primarily provide access to specific applications or services within a project’s ecosystem.|
|DeFi Tokens||Primarily used within a specific DeFi protocol for governance, earning yield, or other protocol-specific utilities.|
|Platform Tokens||Have broader use cases including network governance, transaction fees, and sometimes can act as utility tokens themselves within their ecosystems. Pay transaction fees and computational services on the blockchain.|
|Governance Tokens||Voting and participating in the decision-making process of a protocol or DAO (Decentralized Autonomous Organization). Propose changes or improvements to the protocol.|
|Security Tokens||Represent ownership or a stake in an external asset or company. Provide holders with dividends, profit sharing, or other financial rights.|
|Utility Tokens||Often associated with a specific application or service. Not essential for the operation of the blockchain they are built on.|
|Platform Tokens||Have a broader scope and are often integral to the operation of their entire blockchain ecosystem.|
|DeFi Tokens||Narrower scope, associated with a specific DeFi protocol or project.|
|Governance Tokens||Tied to governance aspects of specific protocols, DAOs, or ecosystems.|
|Security Tokens||Regulated and compliant with securities laws. Often represent real-world assets or equity.|
|Utility Tokens||Value is derived from the utility or service it provides access to. Dependent on the demand and adoption of the specific project/application they are associated with.|
|Platform Tokens||Value is often tied to the entire ecosystem’s growth and the demand for the token in facilitating network operations. Their value can increase with the adoption of the network.|
|DeFi Tokens||Dependent on the success, adoption, and functionality of the specific DeFi protocol. Often yield-bearing, providing income streams to holders.|
|Governance Tokens||Empower holders with influence over the protocol’s future development and changes. Value is often tied to the level of control and influence they offer within their respective ecosystems.|
|Security Tokens||Tied to the performance and profitability of the underlying asset or company. Offer a bridge between traditional finance and blockchain.|
Non-Fungible Tokens (ERC721) : the token is unique in its property. Like an art piece, it can’t be replaced. They represents ownership rights to a unique digital or real-world (physical) asset.
Great! Now that potentially things may be a little clearer on the token landscape, let’s focus on value speculation. Tokens are exchanged, wealth being created. The critical question becomes : How to determine the value properties of the traded assets?
The taxonomical composite: Token + Economics. We have previously discussed Token, let’s turn to Economics. The field of Economics: There are various definitions out there, each taking a different colour or focus on the subject matter.
Investopedia coins it as follows:
“Economics is a social science that focuses on the production, distribution, and consumption of goods and services, and analyzes the choices that individuals, businesses, governments, and nations make to allocate resources.”
Another institution gives it a different colour:
Economics is the study of scarcity and its implications for the use of resources, production of goods and services, growth of production and welfare over time, and a great variety of other complex issues of vital concern to society.
Note from the author: To keep in mind: It is arguable that one could consider Economics a pseudoscience in the sense that it is an irrational ideology that remains impervious to evidence, logic, and common sense. (just like the thermodynamics of entropy and the finality of the earth resources in the generally accepted economic model where growth metrics prime ). It is equally highly subject to social (crowds) properties and emotional feelings, where circumstances rapidly evolve. However, whether you want it or not, the field of economics directly determines one life’s condition and opportunities. Hence the subject becomes one of the most complex but also most critical to appreciate.
One could summarize the field of tokenomics as an attempt to derive a framework of understanding over the use and value of a specific token in a reproducible manner in a rapidly evolving environment. While most of the focus in the advent of the tokenomic hype is about the determination of token value properties, practically translated, as “when to buy and sell”. The academic spectrum of interest reaches many further considerations, such as the provision and distribution of scarce resources, interaction of the crypto-system in its environment, economic efficiency of the system under scrutiny, incentivization of economic agents, etc.. All of these, when combined, draw out some socio-economic-technologico characteristics, prospects, and viability of any project, like a crypto-token-proposal. In short, the framework would consider the relationship between whatever asset’s supply and policies, distribution, utility, and accessibility to analyze and try to best predict its success.
Such framework research would start with the structural properties of the cryptocurrency’s economic and technological proposal, as designed by its founding team and encapsulating its creator’s sensitivity and endeavors towards the usage and behavior of the currency. These translate to some overall portrait or strategy, a kind of economical life or model for a token, disclosed at inception and/or evolved by the community over iteration for anyone to witness. This introduces any type of game theory paradigm, where the provision of a set of incentive would eventually result in some optimal market behavior for network/exchange participants. Structural properties are set intentionally (or not) and can be analyzed and fed to framework analytical properties or guidelines, translated to some metrics or actions.
Note from the author: Needless to say, the below traits have to remain in constant consideration as essential to building a long-term investment thesis, and their analytics would arguably endure the short-span focus and hunger of the social arena, as the value of a social something does not necessarily correlate to its use and value throughout human history. ( Consider the following: Some bitcoins were originally given for free (while now being worth about 1 = 30k USD) and are an official currency of Venezuela, and People loved trading Dogecoins as if there were no tomorrow).
Here below are some (non exhaustive) properties constituting the build of these economic model:
Token supply: The What. Some ground up economical concepts from which we can theoretically derive value. Supply and Demand are accepted pillar components of evaluating any good or service. Some critical metrics to measure the supply of a token are :
Maximum supply: Limited ( hard cap on the number of coins or tokens that will ever exist) vs unlimited supplies - tokens are effectively resultants of computer programs, and hence potentially have pre-set, algorithmically created, issuance schedules set by project’s fundamental product and objectives. How many coins will have been created by a certain date in time should be predictable and calculated quite accurately. ****In the lifetime of the token, is there a maximum number of tokens that can exist (eg 21M for Bitcoin) or is it unlimited (eg. Polkadot, Ethereum). How does this affect scarcity rate over time? Note: For fiat currency, the state apparatus and central banks do the same with monetary policies and printing the given currency. But on the blockchain, it’s all transparent and very predictable.
Circulating supply: As in available to the community for exchange. Token can be minted (creation), burned (destruction), locked away by introducing some inflationary or deflationary policies
- Token mints: What is the, if any, inflationary strategy? If issuance schedule is a predetermined thing, owners will know to what degree their asset will be created in a predictable way (arguably with more predictability than government printed fiat currency). Are tokens being minted recurrently and what does this mean across the lifetime of the token?
- Token burns: What is the, if any, deflationary strategy? Are tokens being permanently removed from circulation (deflationary strategy) or “burned”. Reducing a token’s supply may make circulating tokens worth more, as remaining tokens in circulation become more. scarce.
Token Utility: The Why. The number of stated and achievable use cases for a token. Some common use case are powering a blockchain, paying transaction fees, community utility token, enabling product, staking, governance ( holders have something to say over the token’s politics/protocol), stores of value (security token, )
Token Distribution, Token allocations and vesting periods: The How. The market value for a token eventually depends on its distribution across all wallets / stakeholders - which somewhat directly translates into how the token is likely to be traded. And there are multiple types of holding depending on a few factors. An efficient token distribution model reduces market fears around possible hyperinflation in the circulating token supply that will dilute the value of assets held by participants.
- The Launch - Was it a fair launch (no early private allocation before minting and distribution to public), or pre-mining launch (minted and distributed to a select few for various incentives before ICO) ?
- The Distribution: Is the token predominantly held by Institutional investors or retails / individual investors? Is an outsized portion of the token held by a few large organisations? What behaviour do these organisations usually have? Does the founding team still hold a considerable amount? Stakeholder’s alignment shows “skin in the game” by following a long-term vesting schedule for allocated assets. Example: A large concentration among early-stage institutional buyers without a carefully crafted release schedule could result in a downtrend in the token’s value when these holders exit their position at a significant profit.
- The Lock Ups & Releases schedules — Lock-ups and releases refer to the predetermined time periods during which certain tokens are restricted from being sold or transferred (locked up) and the subsequent periods when these restrictions are lifted (released). Knowing the lock-up and release schedules is crucial for potential investors. If a significant portion of tokens is about to be released, it might increase the supply in the market, potentially affecting the token price. To contextualise, here are a few things to watch for:
- Purpose: Prevent Market Dump: One primary reason for lock-ups is to prevent large token holders (like early investors, team members, or advisors) from selling all their tokens immediately upon listing, which could lead to a sharp price drop. Long-term Alignment: It aligns the interests of the team and early supporters with the long-term success of the project. If they believe in the project’s future, they won’t mind waiting for their tokens. Staged Liquidation: Releases allow for controlled liquidation, ensuring that not all tokens come into circulation at once, which can help in price stability.
- Types of Lock-Ups: Team/Founder Lock-Ups: Tokens allocated to the team or founders might have a lock-up period to ensure they remain committed to the project. Advisor Lock-Ups: Tokens for advisors might have different lock-up periods based on their agreements. Early Investor Lock-Ups: Early backers or investors might have their tokens locked up for a while to prevent immediate selling. Bounty/Airdrop Lock-Ups: Some projects might lock tokens that are distributed as bounties or airdrops.
- Release Schedules: After the initial lock-up period, tokens might not be released all at once. Instead, there could be a release schedule. For instance: Vesting Period: A common method where a certain percentage of tokens is released periodically (e.g., 10% every month). Cliff Period: A duration where no tokens are released, but after which a significant portion becomes liquid. For instance, a 6-month cliff would mean no tokens can be sold for six months, but after this period, a lump sum (like 50%) might be released.
Token Incentives: What are the incentives for short term / long term value fluctuations?
- Value generation tooling and participatory incentives : Beyond the buy, what can users do with the platform to maximise profit and/or protocol involvement (eg. mining, minting, staking, pooling, yielding etc) - eg. The economics of some protocols would have people minting, where other platforms offer high yields to incentivize people to buy and stake tokens. Tokens are staked in liquidity pools – huge pools of cryptocurrencies that power things like decentralised exchanges and lending platforms. These yields are paid out in the form of new tokens.
- Product incentives: market value appreciation of the token. Characteristics, wide-ranging from token product feel, build quality ( technological proposal, eg. reliability, safety measure, and more…), time to market, marketing claims, composability (augmented additions or add-ons, etc)
Token Interfaces, ie. base layer and cross-chain accessibility: How does the token or solution interact with external economic processes (eg. other blockchains, Dapps, token?)
Token disclosures :
- Security audits : legitimate tokenomics should draft policy to enlist third-party security firms to recurrently audit token code or core protocol contracts.
- Token distribution data from early stage allocation to current stakeholding meta state
- Token social outreach What is the outreach strategy and hires are they being transparent? An irrational investment landscape means a lot of worth is happening on the social platform. Not every participant in an exchange has the time and expertise to perform surgical inspection over the core technological proposal. Hence a lot rely over the social hype, and product-to-market strategy. It’s great to have a sense of this when considering buying.
- Community outreach platform : building and nurturing community that supports and propels the token’s ecosystem. The transparency, engagement, and communication strategies employed in this domain are as significant as the token’s technical prowess by fostering open communication, education, and collaboration. Example: Educational Content, Interactive Forums, Transparency Reports, Community Events, and more.
As you may know, the cryptocurrency space is young, the social experimentation is extensive, and the technological boundaries are evolving year by year. Needless to say that these tokenomic models have seen iteration upon iteration from their inceptions ( first tokenomic model set by bitcoin proposal in 2009), newer versions branching, and/or forking and/or improving from the others depending on the creators intentions. Some tokenomics designs have faltered, some don’t always go to plan (remember, it’s irrational behaviour out there), and some succeeded to endure the test of time.
We hope that the above has provided you with some foundational understanding of the landscape and potential framework necessary to appreciate the field of tokenomics. It’s fun. Get out there, consolidate, investigate!