Token Economics and Monetary Policy

Many new ICOs have performed badly in the aftermarket, despite the promise of capped monetary supply. On the other hand, there has been very little actual inflation in the western world, despite trillions of dollars of new debt. Let’s dive deeper.

The simple answer as to what drives inflation or deflation is supply and demand of the currency. If you keep printing money like Zimbabwe, and that money ends up directly in the hands of consumers, the result is over-supply. Merchants wise up, stop accepting bills, prices rise, and you end up with hyperinflation.

In the western world, it’s more complicated. Yes, there are trillions of dollars of debt created, but there is also demand for those trillion dollars from the Fed (doing buybacks and moving it to their balance sheet) and by banks. It’s not long term sustainable, but in the short term, it seems to be working.

On the other hand, if you look at ICO returns by vintage, the results are not encouraging.

source: http://woobull.com/data-visualisation-118-coins-plotted-over-time-this-is-why-hodl-alt-coin-indexes-dont-work/

Other than Ethereum and Bitcoin, most older ICOs have performed very badly over time, despite almost all of them having fixed monetary supply.

The reason? Demand.

Bitcoin has found it’s killer app: storing money and moving it across borders. Ether’s killer app is creating ICOs. But most other new tokens have failed to create long term demand past the actual token sale.

It’s not enough to declare a product “decentralized”. Consumers don’t care. If it doesn’t solve an actual problem, there won’t be a demand for the product, or the token. And without an inherent, growing demand for the token, the initial investors will try to sell, pushing the price down.

Companies creating “tokenized” products start out at disadvantage to companies using stored credit cards. It’s more convenient to use Uber with a stored Amex card than to buy Uber “tokens” at a variable price. On the other hand, if tokenizing the offering results in dramatically lower prices, or some other advantage, the “decentralized version of Uber” could work. A similar thought process applies to customer service and dispute resolution. AirBnB does offer some recourse in the case of severe fraud etc.. There is buyer protection. If you create a decentralized version of AirBnB (such an attempt exists), you start out a severe disadvantage without some form of centralized dispute resolution.

ICO Analysis

Looking at some recent ICOs, let’s see how this applies. If Filecoin does, as it claims to do, dramatically reduce the price of storage subject to maintaining high standards, I think there will be good demand for the Filecoin token. If on the other hand, Amazon and Google compete on price, I can’t see the fact that it is decentralized being much of a savior.

Propy has a coin that could possibly change how real estate is transacted. It’s a long shot, but they have great backers, and the tech is sound. If it does take off, people will need to own propy to buy homes.

Kin is a coin that is trying to enable micro-transactions within the Kik network. There are 15 million people active in that network, so it’s a possibility. However they are mainly teens, and most of them probably have no credit cards or means of buying kin. It remains to be seen how this translates into an appreciating coin, especially with massive coin giveaways for “network growth”.

Coin buybacks

Coin buybacks are another way to generate demand. If you issue 100 million coins at 10 cents, and buy most of them back at 5 cents, you have effectively reduced the money supply dramatically, amplifying future demand for your token.

I think companies buying back their own coins is an extremely positive signal, and shows that they actually care about the future price. This matters directly if they hold on to a substantially amount of coins for future issuance. One of the smartest things about the civic ICO is that they hold back an equivalent amount of coins from the ICO for secondary issuance. This way, they have a real aligned interest in buying back coins if the price drops too much.

Coin buyback programs also add liquidity to the market. This is the stated goal of the Bancor token, but as has been demonstrated, you can achieve the same result manually without a token.

Whale and pre-sale discounts

One of the more disturbing features of the new ICO marketplace is the increasing discounts given to pre-selling. It is no longer uncommon to sell 50% or more of an offering to “whales” at a 50% discount. Add to this, unpaid coins given to “advisors”, and you can have an enormous overhang of supply day 1. Anyone who is familiar with small cap nasdaq stocks knows this does end well. On the other hand, civic took that stand of offering no discounts.

“Civic gave no discounts to large purchasers of their tokens. Giving preferential pricing to anyone in either the pre-sale and crowdsale can attract the wrong type of buyers — financial speculators who don’t plan to be users. Instead, Civic’s pricing uniformity is fundamentally more fair and is designed to attract supporters who intend to be users.”

Monetary policy

Buybacks, keeping a supply of coins for future issuance, restricting discounts and setting price targets on your token is all part of monetary policy. You want to be the Fed or the Central Bank of Switzerland, not the bank of Zimbabwe. If you are able to build a real ecosystem with a real viable token, the price will go up. If you just write a white-paper, don’t think about the problem from a consumer point of view, and sell out your ICO to whales at a 50% discount, I am guessing your token will trend down.

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