Need of Blockchain Token Economics
Since the release of the Bitcoin whitepaper by Satoshi Nakamoto in 2008, the cryptocurrency market has grown remarkably. Despite the sharp price fluctuation from fall 2017 to spring 2018, the top three cryptocurrencies Bitcoin, Ethereum, and Ripple remain with a market capitalization of $160 Billion as of July 2018. This trading size is similar to the GDP amount of New Zealand which was announced by the World Bank in 2017. The cryptocurrency market grew this way, but most of the cryptocurrencies published and circulated in this market still had a lot of absences in the economic implications for their role in trading and functioning. For example, in the case of Satoshi Nakamoto’s Bitcoin whitepaper, except for the technical aspect that bitcoin is limited to 21 million coins and it can be divided into small units to many decimal points, there is a lack of economical explanation in why the coins should be limited to the total number of coins issued and why each coin should be divided into small units. Considering that the characteristics of cryptocurrencies, including Bitcoin, which are recognized by the US Securities and Exchange Commission and courts as an investment property and in part the currency used for payment and settlement, the lack of economic explanation is a severe problem in this field. That is, the economic role of cryptocurrencies which perform the role as investment assets and partially used for payment and settlement vehicles should be clearly explained.
It may be argued that cryptocurrencies are a new area of technology where the concept of economics does not apply. New technology and economics, however, are separate. Distributive ledgers using blockchain technology are obviously new technologies, but cryptocurrencies that perform functions as a definite investment asset or a limited role currency within an economic system. This role is an area of undeniable economics. Therefore, not the technical aspect of the cryptocurrency, but the usage aspect can be applied to the economic theory. For example, Paul Samuelson, who received the Nobel Prize in economics, explained the currency by using the Overlapping Generation Model in his 1958 paper (An Expectation-Loan Model of Interest with or without the Social Contrivance of Money, Journal of Political Economy). According to this paper, young people change goods made through their own labor with the assets that older people have accumulated — Money. After that, when they become old people, young people who have accumulated money use it again to exchange goods which are made by young people. In this case, money is a financial asset that does not pay interest or dividends. In this way, the equilibrium of the economy in which money exists is more Pareto efficient than the autarky equilibrium which does not have money. In other words, two people with different income raising periods can promote their welfare through money-based transactions. In this model, money does not have an intrinsic value, so it could not express its price, and its value cannot be determined. Thus, money essentially includes the character of a bubble. This is because money has exchange value with goods, even though it is a financial asset that has no intrinsic value and does not pay any interest or dividends. According to Samuelson’s theory, blockchain tokens also qualify for money. In addition, Narayana Kocherlakota (1998) argues that “money is memory.” According to this research, if all transactions in an economic system are fully recorded, payments and settlements can be made without money because of using the netting of these records. Since this perfect record is impossible in reality, money is being used, and in this respect, it is a kind of memory of transactions. In other words, if a blockchain could be a means of recording all transactions within an economic system, the cryptocurrency could also function as a kind of currency. Of course, there are still practical limitations, so in the presence of fiat currency, a cryptocurrency plays a limited role as a currency, and therefore could be considered to play a role as a kind of foreign exchange in an economy.
Taking into account the functions of a cryptocurrencies in an economic system, we can see why token economics is needed for a cryptocurrency ecosystem. Token Economics must be the base of the goal that the cryptocurrencies must achieve, such as a proper exchange rate between the fiat and cryptocurrency, the distribution and value stability of the cryptocurrency within the blockchain ecosystem and the activation of the role of cryptocurrencies through it, the basic goal that the cryptocurrency must achieve is the Token Economics, which is based on economic logic and analysis. The second-generation cryptocurrency formed after the first-generation platform cryptocurrency such as Bitcoin or Ethereum is a utility token that provides value by adding blockchain technology to the off-chain business through reverse ICO. If the first-generation cryptocurrency is focused on technological development, the second-generation cryptocurrency should now perform its economic function and role above the technical aspect of the first generation. Given this aspect, we could realize the importance of the token economy.
Cryptocurrencies without considering the token economics abandon their functions.
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