Tokenomics: A Case Study With The Ethos Token
How demand and supply dynamics affect token price
Demand and supply are the opposite extremes of the beam, whence depends the scale of dearness and cheapness; the price is the point of equilibrium, where the momentum of the one ceases, and that of the other begins.
- Jean-Baptiste Say
Demand and supply — the foundational pillars of economics — play a dominant role in the economics of utility tokens (tokenomics) and affect the present and future price of the token. This case study with the Ethos token provides a framework for projecting future demand and price for utility tokens. We introduce the Ethos Tokenomics Calculator that will empower the community to use their own projections to estimate future value of the Ethos token.
Utility Tokens — A Capital Structure Break-through
Traditionally, debt and equity (bonds and stocks) are the two main avenues entrepreneurs use to raise capital for their enterprise. Cash flows (interest payments) are largely predetermined in debt investing. Equities, on the other hand, give the investor exposure to cash flows (via dividends) and future demand for the products or services offered by the enterprise (as rising earnings lead to price appreciation). Although there have been several variants like convertible bonds, preferred equity, etc., over the years, the debt and equity based capital structure has existed for a long time. For context, stocks have been trading for over 400 years. The first recorded IPO (initial public offering, not to be confused with ICO, initial coin offering) occurred in 1602 when the Dutch East India Company offered its shares to the public.
Bitcoin, and several other crypto projects that have followed, expand the capital structure by removing cash flows from the equation, thus providing pure exposure to the growth of the project. The projects are funded with the expectation that the demand for the services provided by the project will rise in the future, and that will lead to a rise in the price of the native token. For those wanting a deeper dive, our previous article provides a useful metaphor for how a token economy built on utility tokens operates and thrives.
Present Value Of The Ethos Project
Market cap measures the present economic value of a project that investors collectively agree upon; it’s the product of the number of tokens in circulation, and the price of each token.
(Ethos) Market Cap = Circulating Supply * (Ethos) Token Price
It is important to separate the concepts of total supply from circulating supply at this point. Ethos has a fixed total supply of ~222 million tokens, of which ~78 million are in circulation. It’s the number of tokens in circulating supply that affect the market cap of a project. The total supply of Ethos tokens is fixed and will not change. The circulating supply, on the other hand, will be determined by the economic forces we describe in the next section.
Holding the present value (current market cap) of the Ethos project constant, we can imply that token price and circulating supply are inversely related. In other words, an increase in supply will result in a drop in token price, and a reduction in supply will boost the price.
Token Price = (1 / Circulating Supply) * Market Cap
Future Value Of The Ethos Project
The future value of the Ethos project can be determined by projecting any changes in the circulating supply and the price of the token.
Future Price: Holding supply constant, the price of the token is driven by the value the Ethos project adds through its products and services, and the overall crypto market performance — as the crypto asset class grows, the beta of the asset class will affect prices of all tokens including the Ethos token.
Change in Token Price ~Ethos Value Added + Crypto Beta
Future Supply: The future supply of the Ethos token is affected by the number of new tokens released for covering costs, and the number of tokens staked or consumed thereby removing them from circulating supply.
Future Supply = Current Supply + Tokens Released — Tokens Staked or Consumed
Tokens Released: Tokens are released into the circulating supply to cover the cost of building the Ethos platform — compensation, technology services, legal fees are some of the key components. Many of these costs are denominated in fiat currency, so the higher the price of the Ethos token, the fewer the tokens that need to be issued to cover costs.
Tokens Staked or Consumed: Ethos is building products and services that will create opportunities for staking and spending Ethos tokens thereby reducing the circulating supply of tokens. When users of the Ethos platform stake tokens, the tokens continue to be owned by them but not longer circulate in the open market. On the other hand, when users spend tokens on a service, the tokens are returned to Ethos and can potentially be taken out of circulating supply. Staking or spending does not result in burning of any tokens, and the total supply remains fixed.
The Ethos Rate Card details various products and services we have on the roadmap that require staking or spending tokens. A few key opportunities are highlighted below:
- Bedrock API Access: The Ethos Bedrock API enables developers and businesses to build secure Blockchain applications on top of safe and secure standards and protocols such as Ethereum. It is designed to be an architecture to both create a financial ecosystem for cryptocurrency, as well as bridge the traditional and blockchain ecosystems. Ethos hosts full blockchain nodes, and enables developers to create wallets, query balances, verify sources of funds and identities, enable payments, and other useful transactions.
- Verified Wallet Domains: A verified wallet address enables a registry to a public Blockchain Name Service (BNS) that creates and broadcasts a branded name and verified wallet. This is useful for companies that want to reserve their brand on the blockchain, or users who want to use their names for simple payments. Benefits include not having to use long-form crypto addresses, verified identity written into all Blockchain transactions, and reduced error and fraud rates.
- Robo Wallet & Automated Trading: As Shingo Lavine highlighted in his recent post describing the Ethos roadmap, we will leverage the Ethos platform and the research that has been conducted by the portfolio management team to build diversified crypto baskets — or “one-click diversification”.
Users will be required to stake or spend Ethos tokens to access these services which will effectively reduce the supply of Ethos token, resulting in an appreciation in the price of the tokens that remain in circulating supply.
What does this mean for investors?
The price is the point of equilibrium, as the French economist Jean-Baptiste Say correctly observed. The direction and momentum of the price is determined by the value added by Ethos products and services, any changes to circulating supply of the token, and the overall crypto market performance (crypto beta). We are building products and services that will increase user adoption, and drive demand for the Ethos token. We are also confident that demand for the broader crypto asset class, and commitment demonstrated by several projects like ours will positively influence crypto beta in the long run.
Tokenomics is a nascent and rapidly evolving concept. We encourage investors to make well-considered and well-informed decisions — to use tools like the Ethos Tokenomics Calculator to model their projections and estimate future prices.