Why we need tokenomics

I am a firm believer in the power blockchain. Blockchain unlocks the economy of trust and can revolutionise many sectors, from healthcare to banking. However, I believe that in order for ICOs to reach their full potential, there is one important element missing: an established theory of tokenomics.

I recently published an article in the Journal of the British Blockchain Association, called “Why do we need tokenomics?“. It is my firm belief that moving forward with blockchain will require us to advance the current state of tokenomics analysis. We are currently standing in uncharted territory. While economics has been a discipline for centuries, artificial economies are not particularly studied. I have promoted the use of agent based modelling as a tool to analyse token economies, but there is still much more work to do, and I believe the study of token economies to become an integral component of ICOs.

So, why study token economies?

In my article in the JBBA, I argue that tokenomics are important for two main reasons.

First, with the advent of blockchain we’ve seen many startups using market business models. These models allow the incentivisation of all sorts of outcomes. For example, a health-related startup can incentivise users to be more active in their every day life. A startup working in retail can incentivise particular consumer outcomes. A government-operated blockchain could incentivise users to pay their taxes through blockchain. Understanding how to promote the best incentives through an economy requires proper economic models of those token economies.

Secondly, token economies can suffer from all the problems that real economies have. Inflation, volatility, crashes, all these are issues which can affect the long term viability of a blockchain business. However, token economies also make it possible to automatically collect data on transactions and calculate useful metrics such as the total traded volume or the velocity. The tokenomics research community needs to utilise the unique opportunities offered by blockchain, in order to better understand how to solve some of these challenges, such as volatility.

Open questions in tokenomics

There is much work to do in tokenomics. Here are some topics that I believe urgently require more research. Feel free to add more ideas in the comments section or directly mail me about them.

Understanding token pricing

There is no clear answer to how tokens should be priced or how many should be issued. There is some work on the use of the equation of exchange in order to derive valuations for cryptocurrencies, elements of which can be used to better understand token pricing at ICO. However, currently, there is no proper model around this topic. My personal belief is that this is by far the most important topic currently in the study of tokenomics.

Understanding the long term viability of token economies

Many ICOs have opted in for a model where the tokens are burnt as they are used, and supply is limited. Hence, it is likely that the price will increase. This incentivises investors and speculators, but says nothing about the long term viability of the token economy. How can we create token economies that can be economically viable in the long run?

Controlling speculation

While speculators have caused a great deal of trouble, they are also one of the driving forces behind the surging popularity of cryptocurrencies. Trading and speculation are not bad per se, except when they get out of control and cause market crashes. How can we . For example, Steem has come up with the mechanism of Steem Dollar as a way to offer stability but also allow for speculation at the same time.

Tokenomics are the economics of the future

With blockchain becoming more and more pervasive, it is clear that it will become an integral part of our lives. ICOs have raised more than $6 billion to date. However, without a proper model of token economies many of them are destined to fail in the long run. As ICOs are maturing, the same is required by tokenomics. Understanding topics such as token pricing is crucial for the long term success of blockchain as a whole.

This is why I believe that tokenomics will soon be recognised as an integral component of any ICO.

Related

Originally published at thedatascientist.com on May 28, 2018.