What we expect while the market is picking up

Part 4 — A multi-part series in the valuation analysis of privacy coins

Analysis in the token economy

Blockchain projects realize economic incentive function through the design of the Token system, which generally consists of the total supply, emission scheme, the distribution system, and token demand.

The main role of the token in the sense of economic level is to support the completion of the transaction. Because token generally has 12–18 decimal, the absolute value of total supply is not important. However, the accumulation of transaction scale needs a longer period than the token emission which only needs a period of contract development, the design of the token economy always needs to address the mechanism of “deflation”.

Compared with the total amount, the emission scheme has more impact on the secondary market because of its direct effect on the supply of token. Based on the theory of money economy, the token volume in circulation should be compatible with the increase of transaction scale; otherwise, the economy will suffer “deflation”, which will eventually inhibit the transaction. However, there is also an exception to this rule, that is, if the core role of token is not for circulation but for storage, the deflation will become a positive incentive for the token demand and benefit to the economy. That’s what we see in Bitcoin nowadays, but we need to understand that deflation is not always absolutely effective.

In fact, the token also needs to play a role in stimulating the establishment of the ecosystem. So far, blockchain with certain ecological scale only include Bitcoin and Ethereum, so the key role of token economy in most projects is to inspire the communities, rewarding miners, incentivize technical developers and early participants.

1. Total supply

It can be seen from Figure 4 that Grin and Monero continue to release every year, the total amount of token keeps growing, and the other 4 coins have capped supply. Considering that the primary goal of economic incentive is to establish a community, the design of capped supply is more conducive to incentivize the early participants in the community by strengthening the concept of “deflation”.

2. Emission scheme

As can be seen from Figure 5, Grin has a constant emission scheme continuously, and the other 5 projects have to decrease emission schemes according to different rules. Zcash and Beam have a very similar emission scheme with Bitcoin, which takes halving every four years. Dash and Monero have decreasing emission schemes in the same proportion every year. Suter also has a similar emission scheme with Bitcoin but in a more radical way by taking halving every two years.

Further analysis of the inflation rate of the 6 projects over the years shows that, on the whole, the inflation rate of Grin is the highest among them, and that of Suter is the lowest one with decreasing rapidly. It needs 4 years to have Suter’s inflation rate decrease to 5%, while Monroe needs 5 years, Beam and Zcash need 8 years, and Dash and Grin need more than 10 years.

Due to being online for a while, Dash, Monero, and Zcash have basically completed the emission of majority token in 2020, and the inflation rate of them is between 10–12%. Zcash is about to meet the turning point of halving in May 2020. Grin, Beam, and Suter started to operate in 2019, with an inflation rate higher than the above 3 projects, but Suter is relatively the lowest among 3 new projects.

3. Token demand

The design of the token economy mainly reflects the supply factors, and the demand also has an important impact on the market. Token demand mainly includes trading demand, utility demand, and consensus demand. Among them, trading demand is mainly affected by market conditions, utility demand is mainly affected by application scale, and consensus demand is determined by consensus mechanism of blockchain.

From the perspective of token demand, Suter operates on the POS consensus. After token emission, Suter can be locked again through its staking mechanism, which plays a key role in reducing token circulation. According to the information on its official website, Suter’s staking participation rate has reached 75% by the end of Jan. 2020, and its automatic delegating plan (named bearish ark plan) has locked more than 50% of the daily staking rewards automatically. This approach is efficient for expanding token demand.

In addition, Dash has an original master node network which actually has a consensus mechanism similar to PoS. The master node needs to stake a certain number of tokens to have the opportunity to participate in the confirmation of transaction in the instant transaction and can obtain about 8% of the annual rewards. This mechanism of Dash is also equivalent to the realization of the consensus demand, which may be the main reason for its price increase under the expectation of the bull market.

Conclusion

To sum up, privacy coins represent the extension of the crypto assets trading business and the bridge of mainstream cryptos such as BTC and ETH between small geek groups with the traditional financial industry, which is expected to become a market hot topic in 2020.

The original cryptography technology is the ticket of the privacy coins and also reflects the competitive advantage in the long term. The iteration of technology mainly focuses on “trusted setup or not”, “proof efficiency” and “support smart contract or not”.

Building application models around mainstream crypto assets such as BTC and ETH, rather than separating the privacy protection function from them will open up the market space several times of the existing scale for the privacy coins.

The main purpose of the design of the token economy should encourage the community to expand. A lower inflation rate helps to form incentives for the early participants in the community, and the staking mechanism is more conducive to the flexible regulation of the token demand.