Tokenomics

Tokenomics is the combination of blockchain token and economics.

According to Lisa JY Tan’s Token Economics Framework, tokenomics can be divided into 3 segments, Market design, Mechanism design and token design.

Market design：Market design defines the environment of the token ecosystem. A good market design makes the market has enough market depth, has the ability to overcome the congestion of the network and has a safe enough environment.

1. Thickness：Market depth is crucial to make the market efficient. If there is no enough thickness in the network, the transaction might wait for a long time to be verified. Also, the offer can not be compared; the final price might not be reasonable.
2. No congestion：If the market has enough thickness, the network needs to have the ability to sustain the vast amounts of transactions at the same time. Otherwise, the thickness becomes meaningless.
3. Safety：Code is law in this kind of ecosystem. So even the participants want to damage the market, they can succeed as long as they follow the code of this system. Hence, building a network with high security and without vulnerability becomes of utmost importance.

Mechanism design：Mechanism design is just like the game rules. It defines how this ecosystem works. A proper mechanism design will provide adequate governance, include non-financial incentives to reach the Nash implementation theory, and make sure the design structure is feasible.

1. Governance：Most of the token ecosystems were built in a decentralized way, so governance becomes an integral part of the mechanism design. When there comes the issues or dilemmas, a good governance design can resolve them efficiently. Make the system develop better and better gradually.
2. Non-financial incentives：NFI can strengthen the incentive-compatible mechanism to achieve the objectives like the right of voting and allocation mechanism.
3. Structure：Structure can ensure the mechanism that the ecosystem runs efficiently. Use incentives to encourage good behaviors and use strategies to prevent bad actors from colluding. The structures also can involve various contract theories, resolving asymmetric information between participants.

Token design：Token rules are coded into the smart contract or the decentralized system. It includes the definition of token policy, the reward with financial incentives and the architecture of token.

1. Token policy：Token policy seeks to design how tokens will be managed. Based on the objectives of the token ecosystems, there are many different policies for token management. It can be mainly designed by the supply of tokens, the way of token distribution and the inflation or deflation policy.
2. Financial incentives, FI：The number of users is significant to show the network effect. FI is an easy way to attract massive participants in a short time. But the FI needs to be designed to a proper balance; otherwise, it would cause a system failure.
3. Architecture：Architecture is the design of the token structure. It defined the property rights of the token users or holders. It helps the ecosystem govern actions through property rights and establish trust by implementing token.

Reference：Token Economics Framework by Lisa JY Tan