Tokenomics. From Myths To Reality.
By Sergiy Golubyev (Сергей Голубев) on ALTCOIN MAGAZINE
It seems that the last 5 years in the global economy and science have become the time of the innovation boom. So many different things appeared, so often one began to use new terms and epithets, previously unknown to the public, that in fact it can be argued that hype and innovation are synonymous. One of these words was tokenomics. Something extravagant, innovative and frightening.
And it seems to many if one will pronounce the ‘’tokenomics’’ aloud for no reason at all — one immediately becomes the king or queen of the party. So what is it? There are many definitions and interpretations, here are just a few. Tokenomics — the system of formatting pricing policy for tokens. Nevertheless, Chris Snook (the founder of the World Tokenomics Forum) is sure that the blockchain will be the main reason for the transformation of the standard market economy into “tokenomics”. He promotes this term, which he interprets as transferring business interactions into the sphere of digital contracts and settlements. Physical assets will also become digitized over time. However, there is one larger definition of this process — “Tokenomics” means the fundamental economics of the token:
· First, among other qualities, tokens should have value, scalability, ability to withstand inflation and incentives to use them. Without a basic tokenomics, any token will not be funded.
· Another part of the definition of “tokenomics” means a financially sustainable business model. Every company needs a business model that needs to be logical and scalable. You need to know how your company’s future revenue flows (including the platform) work, and how these revenues can grow or change over time in the digital space. And if you cannot explain all this to professional (accredited) investors, they will not turn their investment attention to your project. We are talking about big money.
It is clear that tokenomics is a brand-new and growing field of financial new age literacy. Knowing the pros and cons of this exciting area will help you navigate the search for fundamental value in such projects. Without this knowledge, no way.
Only 10 years have passed since the beginning of the practical application of the blockchain technology, but during this time, there has been a significant technological and information leap in the development of the crypto industry. Terminology and many concepts in this rapidly developing industry are still at the stage of formation and refinement; absolutely new definitions appear as a result of the formation of a technological, informational and legal field. Therefore, the concepts introduced in various countries or by various experts are gradually modified, translated differently and do not always find an affirmative application. This is exactly the case of the mentioned above example. As an example, when using the concepts of cryptocurrency and token, mutual “confusion” often occurs, which is related to their diversity and the lack of “hard” established concepts and terminology. The unregulated release of cryptocurrencies or tokens has led to the emergence of cryptocurrency/tokens with a variety of properties, mechanics and functions that they perform, which also makes some confusion in the definition of tokenomics processes. And yet, despite the differences, I believe that the basics of economic relations and the coordination of interests between stakeholders and tokenholders of a crypto project are determined by the tokenomics of the project and nothing else. Therefore, I will take courage and give a definition that, in my opinion, more accurately describes the essence of tokenomics. Tokenomics — so far at this present stage of development of the blockchain, are the rules for the functioning of a token within an ecosystem (a system of economic relations between project users, tokens holders and project tokens — as means of accessing or receiving certain bonuses prescribed in the matrix of such an ecosystem of the project) created by the crypto project . At the same time, the token itself is a digital conditional virtual unit with a certain value, utility, and linkage to something that is issued by any issuer in order to simplify/reduce the exchange process in the project’s ecosystem of the issuer. When issuing a token, each project can provide it with a unique utility by linking to it a number of pre-defined semantic, economic and technically guaranteed functions used in the project ecosystem. An example of such functions can be: token as a means of accessing a service, as a means of payment, as a means of accounting for an asset, a means of exchange or hodling, as a means of earning income, and so on, before a rationale. Increasingly, in modern projects, a token can simultaneously perform several functions. Each project can create its own model of token circulation and allocation in the ecosystem. The main thing is to preserve the logic of turnover and the use of tokens. Therefore, there is an opportunity for tokenization (partial tokenization) of almost any business. But this question is most likely a topic for another conversation.
In the process of transferring the business model of a project to a token, a lot of legal, economic and technical subtleties arise that need to be taken into account, namely: assess the risks for all project participants; to assess the possibilities of applying designed tokens in various jurisdictions, to determine the compliance of the process of their creation and registration with the laws of various countries; estimate the costs associated with the turnover of tokens, and the technical needs for speed, scalability, security and the level of decentralization of certain types of blockchain. The process of business tokenization allows you to attract additional funds for the development of the project’s ecosystem, but it is advisable to do this only on condition that the potential business development opportunities increase and the costs and risks associated with its tokenization are significantly lower than under the condition of using other models of raising funds. In this case, the purpose of tokenomics is to consider possible options for creating a token business model and answer the question about the feasibility of tokenizing a business. If the project’s tokenomics business model increases reasonable costs for the sake of tokenization, then there is no point without a profit and tangible profitability just to invest and develop a project for the sake of hype. The development of the token allows for the transfer of key aspects of the business model of the project to the token, laying into it maximum opportunities for use in the project ecosystem and thereby creating and increasing its value and usefulness in the eyes of both potential users and investors.
If you noticed, several times we mentioned theses about the presence of a value in the project, which conveys a similar property to the tokens emanating from the product of the project. After studying “public opinion and blockchain project accounts” on Twitter, one research group found (Chinese Academy of Information and Communication Technologies CAICT) that by the fifth month of its existence, only 44% of the projects continued to operate. Unfortunately, there are many reasons for such dismal statistics, but one of the main factors is the use value of the product, or rather, its absence in the project. Value, in this case, means satisfaction from the consumption of a good or service. Often there are products that do not have any significant utility. This means that we should not expect a high demand for them. Without a comprehensive understanding of the needs of your target market, you also cannot receive funding. Having developed a minimally viable product (MVP), one can judge its actual usefulness. Smart investors want to see the attractive force of the product, otherwise, they will not attract. But at the beginning of the project life cycle, attention is attracted by annoying marketing, but in the next phase of project implementation, marketing should be replaced by the already growing demand for your real tested (beta version), at least, project product.
Another feature of tokenomics is the possibility of communication not only between people but also between robots or other automatic systems (IoT). Under such conditions, tokenomics turns into robonomy (robotic tokenomics). Thanks to this, the concept of smart cities has become possible. Since programmable smart contracts allow to establish mutual settlements in cryptocurrency between different system objects. So far, tokenomics is a little-studied and rather abstract concept with many facets, which allows untested information to be dominant and becomes a fake. Of course, tokenomics allows you to raise capital with the help of ICO/IEO/STO, and also makes it possible to transmit value via the Internet, bypassing intermediaries and reducing transaction costs. Again, all this is also possible with a guaranteed minimum availability of elements of value in the product of the project and in the token, as a provider of such digital, as if not perceived ephemeral value. The economic model of the token allows you to create a certain value in the context of the crypto market by supply and demand for it (the old classic basis). Also, thanks to the blockchain-architecture, not only humans, but also robots/devices can communicate with each other, which makes the concept of smart cities, not a future, but a reality. However, to be able to earn money at the junction of the fiat system and the crypto market, it is necessary to study thoroughly the ways of creating value in economic models of the token. In turn, the process of tokenomics maturing requires the involvement of specialists of different profiles and having the different sectoral experience to work out from scratch new concepts, terms, and provisions for the functioning of tokenomics. What we are now is the formation of a myth. What should be the result of the coordinated work of such specialists is the birth of the reality of the functioning of tokenomics. There is no single method for doing this. Some things need to be developed from the beginning, having not only basic practical knowledge but also imagination and fantasy.
In general, the skills of the following specialists may be useful in:
· People with a broad outlook to build the architecture of tokenomics (that is, business models, as discussed above);
· Mathematics for the development of mathematical models created by business models;
· Macroeconomists who can understand the functioning of the entire system and offer their options for the modernization and cyclic development of the ecosystem in your project;
· Game designers who have already developed similar tokenomics in games. Their experience needs to be transferred to digital assets in order to adapt the world of real needs into the world of virtual digital being;
· IT specialists, blockchain experts — people who can transfer the meaning and logic of tokenomics to the project code (smart contract, and so on)
· Marketers, how can we be without them, despite all the distortions of marketing dominance in tokenomics, as you need specialists who are able to demonstrate the effectiveness of your business model of tokenomics with clear and accessible tools
Then with the involvement of such specialists, what is tokenomics in general? And this is the whole set of possibilities for encrypting information into blocks, distributing them and then decrypting them, which allows managing and controlling the economy within the project ecosystem. Money has already fulfilled its role as the equivalent of the value of goods and services in the historical development of civilization, now they are becoming obsolete. Fiat money is already working on the inertia of thinking, traditions and, in general, the overall slowness of the already constructed structures. The next step in the development of civilization in this regard will be a gradual and smooth departure from the presence of an equivalent, to the direct accounting of everything that is produced and distributed. And a token is best suited for this: not only as a unit of account but also as a block of information containing all the diversity of information saturation. No wonder the transition from smart contracts to tokens took zero time. Compressing important information into a token and storing tokens in immutability and communication with other tokens in an environment that tends to universality (loss of value expressed in units of equivalent values) is taking into account what is happening at so many levels and in such a range of functionality that is possible and necessary to people. For example, many ecosystem participants are concerned with the obligation to fulfill their commitments. Tokenomics gives the answer: information is recorded, encrypted, inserted into the indestructible environment. Then, as needed, it is extracted from there and injected into the ecosystem through a token. The other participants are concerned with counting the necessary resources. There are no problems either: a chain of token blocks is taken, which statistical bodies will soon begin to create, the necessary blocks are decoded and implemented into the ecosystem.
And so on. Information goes into the category of necessary and not very necessary. The necessary is encoded, encrypted, packed and stored in digital storage. As needed in it, this information is extracted from there. Unnecessary, as now, hang out until someone needs it tomorrow. Tokenomics do not at all claim the laurels of the economy, does not seek to occupy its niche, it rather displaces the managerial aspect of the economy, replacing it with itself. When tokenomics reaches the level of replacing more than half of the functions of existing management and control (in the field of information), this will mark the transition to the era that is called digital (after post-industrial). Its distinctive features will be a drop in the overall required level of management and control. It is quite natural and very objective (by the nature of things) phenomenon. It will be enough for a person to press ENTER at the beginning of the work of the management structure of the tokenomics, which will then itself give commands to the real economy of production, really assessing the resources of materials, energy resources, resources of necessary machine processing, creating a product, transporting it and subsequent redistribution. It is important to understand that the “known” and “familiar” needs of a person include only a few areas: food, transport, housing, clothes and shoes, everything else that may not be adjustable tokenomics due to the lack of standardized justification. What prevents the development of tokenomics now?
What are the Myths and Problems? Four Things Interfere:
· the first is the inertia of people who are accustomed to living in certain conditions, where tokenomics is perceived as being either overly simplistic or cautious
· the second — the difference in the psyche of people in which one is better to exist in the hierarchy, while others are drawn to freedoms
· The third is the “false” path of Artificial Intelligence, which will lead to nowhere or will lead nowhere.
· There is another big “obstacle” — the existence of national jurisdictions with their different rules and restrictions. And tokenomics contradicts some of the “rules” and “laws”, as well as provisions and structures. Mainly in the field of management, of course, and a little in the redistribution of resources.
Therefore, the following conclusion becomes obvious: we need a clear systematic process to design a token and form a tokenomics in a project. The following algorithm may be such a process:
1. Make a description of the project and product. We determine their value and consumer characteristics. We try to describe as accurately as possible all the results of the project’s activities and what part of these results we plan to tokenize.
2. We identify all stakeholders, i.e., persons potentially interested in the project, as well as parties that may have an impact on the project (near and far surroundings): investors (tokenholders), product consumers, customers, developers, partners (logisticians, suppliers, and intermediaries), regulatory bodies.
3. The interests of the parties are determined. Tokenomics should allow maximum consideration for the interests of all parties to the project through the introduced mechanics. The influence of the mechanic can have a different impact on the organizers and other project participants. At the same time, it is always necessary to seek a compromise in reconciling conflicting interests. For example, by giving large token holders additional bonuses or discounts on the purchase of tokens, we can partially compensate for this by freezing them for sale. The task of tokenomics is to take into account the usefulness and value of the various results of the project’s activities for each of the parties, as well as to ensure the greatest intersection of the project’s audiences with each other.
4. We determine the type of token, the functions of which to a greater extent can ensure the interrelation of interests of all stakeholders, meet legal standards, and its technical characteristics (the same dilemma — utility, security, cryptocurrency, equity, hybrid)
5. Determine the blockchain platform on which the token will function: Ethereum, Stellar, NEO, NEM, Waves, BitShares, Omni, etc.
6. We form models of token turnover within the ecosystem. We define the basic mechanics that will provide the motivation of token holders and stakeholders. We list some of them: “burning”, cashback, a discount when buying, voting, “freezing”, holding and charging interest, encouraging active actions. Then the token model is checked for compliance with the jurisdiction of the countries of its circulation.
7. Determine the real costs of the project and its structure. Consider options for business development with different amounts of attracted invested funds. The structure and volume of expenses should correspond to the roadmap of the project.
8. Distribution of tokens, i.e. token distribution structure. Due to the issue of tokens, the project has two sources of funds for business development. These are collected funds from the sale of tokens, as well as the project tokens themselves, which are partially distributed among the tokens holders, and partially distributed among the team, advisors (adviser) and/or the project community.
9. Formation of a predictive financial model of tokenomics. A good tone for the project is the elaboration of the financial model. This suggests a detailed calculation of preliminary costs, an understanding of the functions and mechanics of an ecosystem. However, it should be noted that the general trend of capitalization of the crypto market has a significant impact on financial calculations. Moreover, we must understand that not one financial model will be perfect and accurate in terms of the presentation and argumentation of forecasts.
Usually, a detailed description of tokenomics is presented in white papers of the projects. With the design and issue of tokens, each project has the ability to create unique tokenomics that can ensure the success of the project. If until 2016, when emitting tokens, all possible functions and mechanics were fairly freely used in the process of tokenomics formation, then after the rapid growth of 2017 and the increased interest of regulators to the crypto market, more attention was paid to legal issues, and after a noticeable drop in the crypto market in 2018, more attention is paid to the formation of a correct working business model. Now, experts have developed more than 3,000 models of tokens, but far from, not all of them comply with the laws of different jurisdictions and are cost-effective, since the above algorithm was initially ignored. Making a good tokenomics model is extremely difficult. However, you should pay attention to:
· High growth (or high growth potential).
· Measures to encourage ecosystem participants who are willing to hold tokens, or vice versa — enter a long transaction processing time so that there is an incentive to hold tokens. Alternatively, it is possible to encourage those who hold tokens, as well as impose commissions for their elimination.
· Acceptable transaction turnover (or the possibility thereof) in relation to market capitalization
The true goal of any ecosystem is to make all parties at the same time buyers and sellers. On the marketplace, it is necessary for sellers to find out buyers of tokens themselves, and not just exchange them for fiat or other cryptocurrencies. Therefore, the main conclusion is the development of a business model of tokenomics is a question necessary for solving, but the model will not always be able to guarantee the expected results. Tokenomics is first a business model that should be clear and understandable, but at the same time adaptive for the mandatory correction. At this stage, the tokenomics is still under the shadow of myths, for reality — you need more practice, experience and be prepared for failure, otherwise, the implementation and application will not come close to reality.
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Sergiy Golubyev (Сергей Голубев)
EU structural funds, ICO/STO/IEO projects, NGO & investment projects, project management, comprehensive support for business
