KOIN Tokenomics part 2: how to assess real value based on mana

This is the second part in a series of articles on the design of the KOIN token. This is not necessarily meant as a summary of the whitepapers published by the Koinos Group but instead provide a different perspective on the design of the token.

In the previous article I explained how the KOIN token combined with the Koinos Proof of Burn consensus algorithm allow for a natural inflationary/deflationary dynamic which is superior to the current monetary-economic framework. In this article we take a look at the function of mana in the economic framework and the link it has to real value (also known as intrinsic value or fair value). The key point I’m making in this article is that mana as an inseparable part of the KOIN token allows us to valuate the KOIN token and overall Koinos economy in a more transparent and sound way than is the case in current financial markets. This results in an overall healthier economic and financial ecosystem with more reliable prices.

A quick recap: mana and utility curves

In my first article on mana bonds I explained how we can use the current and future price of mana as a means to construct a utility curve. A utility curve shows the relationship between the average price a consumer is willing to pay for a certain good at a specific time. We value the current utility value of a good higher than its future utility value. An intuitive example of this is the pricing of (online) subscriptions; as the subscription term become longer the price per month goes down. A utility curve looks more or less like this:

The creation of mana bonds makes it possible to trade mana on the open market and reach a market consensus. These market prices mimick the utility curve of the average consumer. The entire area under the curve is equal to the agreed upon value of having access to one unit of mana in perpetuity, i.e. owning one KOIN token. The mana system allows us in a very natural and intuitive way to derive a utility curve, something which is unique to KOIN. This method is the closest way we can get to approximate the fair (‘real’) value of KOIN.

Mana and the costs of running a business

On the Koinos blockchain developers need mana to keep their dApps available for end users. This means that the total valuation (market cap) of KOIN should approximate how much all developers/businesses are willing to pay to guarantee the availability of their dApps. You can also think of this as the (fixed) costs of businesses, i.e. the resource usage of the blockchain.

But developers also have to account for other expenses like variable costs and salaries. This is were meta-mana can come into play. These are tokens which have mana of their own but with a slower regeneration period than the KOIN token. As pointed out by Andrew in the Koinos Discord server tokens with meta-mana can be used as a control mechanism to regulate mana usage and help developers monetize the demand for their dApp without introducing a fee. In this manner they can account for additional operating expenses and profit margins. The result is that the total value of all KOIN tokens held by a certain business is equal to its total costs.

When we put all of this together this means that the intrinsic value of all KOIN tokens is equal to the cost of all economic activity (current and future) on the network. Accordingly, the value of a mana bond with a certain maturity date reflects the costs of future economic activity for the duration of the bond. For example: if the price of a one month mana bond is $1, this means that the cost to keep the entire Koinos economy running for one month is equal to $100 million.

This ties into the point I made in the previous article about inflation and deflation in the Koinos ecosystem. The inflation or deflation of KOIN is a natural means of decreasing or increasing the cost of economic activity on the network (= regulating growth).

An economy based on real value and vice versa

The market cap of KOIN is thus the lower bound of the value of the Koinos economy. In the short term the actual value of the economy fluctuates and can be higher (higher profit margins) or lower (developers pouring more capital into their dApp to anticipate future growth). In the long term the KOIN market cap converges towards the value of the economy (In a competitive open market system profit margins shrink as new competitors enter the market).

The strong link between the KOIN token and the Koinos economy might seem trivial but it has profound implications. This means the valuation of the system is more transparent. It also means that monetary and financial systems built on KOIN become more reliable and they strengthen each other. For example, a currency with a strong connection to the KOIN price stands strong as it is correlated with the real value of the Koinos economy which ensures a high level of trust. You can say that such a currency would be ‘backed’ by the Koinos economy.

Come join the Koinos Discord server if you want to take part in the discussion. Feel free to reach out to me if you have any questions, feedback or want to help design the monetary and financial system on Koinos.