Demystifying Tokenomics

When an industry starts growing, it inevitably brings with it new jargon. By now, some of that jargon has already made it to the mainstream — HODL is a good example. There are some concepts that have made their way into our lexicon as jargon but are misunderstood. With ICOs quickly populating the space, the concept of Tokenomics became one of those buzz words that everyone uses when they look at an ICO but not everyone understands. Using this word can make people sound incredibly knowledgeable, adding to its appeal. Therefore, it is time to break it down and explain the concept behind the word.

The Way Tokenomics are Perceived

Before anyone attempts to demystify Tokenomics, it is necessary to understand how it is often used as jargon. To many, Tokenomics is another word for ICO token distribution. When the Tokenomics are “good”, it generally means that the team has an acceptable balance in its token distribution break-down. Team members and advisors are not taking “too much” of the token share; they will not starve the market. That is basically how Tokenomics, the buzz word works.

Tokenomics: The Concept

The concept of Tokenomics however, should be deeper. Token distribution is just one of the elements the concept takes into consideration, but it is far from being the only one. A more rigorous approach to the word can give us an insight into what the concept really is:

• Tokenomics is basically the synthesis of 2 words: Token and Economics.
• Typing it into a Word document will prompt a spelling mistake, which means the word is not widely accepted or might not even exist, officially.
• Therefore, it is important to understand the meaning of the words that make up that concept
• Token: “A thing serving as a visible or tangible representation of a fact, quality, feeling, etc.” or “A voucher that can be exchanged for goods or services…” (from Google).
• Economics: “The branch of knowledge concerned with the production, consumption, and transfer of wealth” (from Google). Some would say Economics is “the discipline in charge of studying the allocation of scarce resources.”

Given the definitions above, it is prudent to take the meaning of the words “Token” and “Economics” and understand how they can be applied to the cryptocurrency space to understand the concept. The caveat is that once we do this, we might find that we don’t need this word at all to convey our message.

A System of Incentives and Rewards

If a token is a tool that represents something else within a system, or a “thing” that can be redeemed, and economics studies how that representation or redemption would work, then Tokenomics has to do with how a token works within an economy that was created through the implementation of incentives and rewards based on a given system — which in the case of cryptocurrency, the system relies on the deployment of technology, which we will not get into for the purpose of this article. Therefore, looking at the system through the prism of Economics, would help us understand how the “Tokenomics” of a given project work, in the short run and in the long run once the Token is deployed.

Looking at the distribution of the tokens after an ICO is one of the many steps needed to understand how this new economy will fare — yes, we are assuming that an ICO must create a new economy, however small or big it might be. Nevertheless, the share of tokens that team members take or the size of a token reserve, cannot be judged as “good” when the team takes a “small” amount or as bad when the opposite happens. Every project is different, and that token distribution takes place within a context. That context shows us how the forces of demand and supply might play out. Game theory can give us an insight of how different actors within that economy that may not have the same interests, will use those incentives and rewards. After numerous thought experiments people can conclude whether this new economy will work once the token is deployed or not.

An Example

CoinJanitor is a great example of how an economy can be created based on the deployment of a token and a proper balance of incentives and rewards for each prospective actor. The token distribution aims to reward project supporters first and foremost, but since the CoinJanitor economy will be based on dead coin buy outs, integration and amalgamation of dead coin communities and the processing of troves of data from hundreds of blockchains to produce new tools, the team must set a token reserve aside to incentivize dead coin holders to join.

Anyone who starts digging deeper would ask themselves how such an economy can generate value. The key is in the scarcity of the JAN token and its role as a unique resource within cryptocurrency markets. Dead coins as defined by CoinJanitor can’t be bought or sold on exchanges, so integrating their communities through a buy out can only be done if an appropriate resource — the JAN token — is created to do so. Given the fact that there are hundreds of dead coins out there — more than 3,000 are not traded on any exchange — there should be demand for this resource.

Once the token is deployed, the incentive to exchange dead coins for JAN tokens is clear. As more dead coins are bought out, JAN reserves will dwindle, while demand will still be high. This will create an incentive to replenish those reserves to keep on buying dead coins out. Given that the process of buying dead coins out will bring more resources into the CoinJanitor ecosystem, its economy will be able to diversify and grow in the long run. Its economy will develop way beyond the scope of its initial token distribution; this initial distribution will only set the stage for the economy to get started.

Tokenomics?

Beyond explaining how an economy can be created through the deployment of a token using cryptocurrency and blockchain technology, readers will be able to see that the word “Tokenomics” can be eliminated from the explanation altogether while the concept it should convey can be communicated through other means. Nevertheless, Tokenomics is bound to be used time and again, so it is important to demystify it and provide an alternative explanation to define it and make it more useful. Looking beyond token distribution and understanding the Economics behind a project should be the goal of those who use the term. Cleaning up the jargon that was created in the space, is just another service that CoinJanitor can provide for free, to anyone who follows our project!