‘Tokenomics’ is a term that is often overused yet its meaning and application is still largely obscure today.
Just like a newly established country, the central bank has to take several considerations into account before the first release of the currency – how much to release, how to release and its denominations.
In this post, I will discuss about the determinants that surrounds tokenomics.
Fungibility of tokens are crucial in determining a token’s utility. One important question to consider when one is drafting the design of the token is “what kind of services and products can a user exchange for when using the token?”
For instance, Stellar Lumens is not confined to exchanges with other tokens and cryptocurrencies only. It can also be used to exchange for other fiat currencies, which has high fungibility since money, per se, acts as a medium of exchange for goods and services.
We observe that Stellar Lumens has two primary domains of function – first, its own ecosystem and the other one that can be traded on exchanges for other crypto-tokens or currencies.
Now, let’s zoom in onto the utility of token on its own exchange. Token design should encourage increased usage within its ecosystem. BeeNest is an exemplar to illustrate the crypto-ecosystem as it gives 0% commissions to hosts and guests utilizing BEE token. This increases users’ revenue and at the same time incentivizing users to adopt its usage instead of fiat or other tokens. Usage of fiat and other tokens on BeeNest will incur additional fees.
Furthermore, the “arbitration” aspect of BeeNest ensures that misbehavior is dealt with in a proper fashion, which thus improves the credibility and reliability of the platform. Hence, we can see how increased usage of tokens can be designed when its utility is aligned with the user’s goals and incentives.
As the demand for service increases, the adoption and usage of tokens increases as well. This will spur the velocity of the token as it is now transacted at a faster rate, greater volume. As a result of Fisher’s formulation, MV = PT, the value of the token will naturally increase.
In the context of HotX, we intend to use our coins as a measurement of speculation whereby users get to vote on whether the coin’s value will increase or decrease the following day based on what they think.
HotX tokens will be rewarded to users who participate. Tokens rewarded to these users will increase exponentially as they make accurate guesses within a short period of time. These tokens will be interchangeable for services and products of tokens that are listed on the Katalyst Decentralized Exchange.
According to Metcalfe’s law, when the number of users increase, speculations of prices will be of much greater accuracy and reliability, thereby helping the user to make more informed decisions when it comes to investing in crypto.
Having established the value of the token, the next thing to consider is the structuring of its allocation and incentives that will be sustainable for the platform.
Let’s take a look at Bitcoin’s mining and rewards system. Bitcoin encourages transactions and activities on its Blockchain by rewarding miners with varying amount of Bitcoin and it throttles excessive traffic by increasing the difficulty level of authenticating each transaction.
Allocation of total supply of tokens is crucial in determining the success of company. The objective of token allocation is to ensure that the tokens distributed are enough to circulate in a large ecosystem of users, and at the same time implementing a rewards structure that encourages new users to join while retaining the current user base.
Here are 2 scenarios to look at, with the assumption of the following:
- Total supply of tokens: 50,000
- Total number of tokens (reserved for rewards): 25,000
- All clicks have a small base reward, regardless of whether the guess is accurate or not. Total rewards allocated to clicks, however, are limited to 2000 tokens only.
- 12,500 tokens reserved for ICO/sale
- 10,000 reserved for operations and management team
*Tokens released across 5 years
*Tokens released across a span of 10 years
By analyzing both scenarios, we should ask ourselves: Will users be more incentivized to join our platform knowing that there is an initial pool of 10,000 tokens up for grabs? Or 5000?
And the answer is obvious: 10,000!
At the back of our minds, we must constantly think about how to structure the allocation of tokens in an enticing manner, how to motivate more accurate guesses amongst our users, whether the participation rewards are enough to retain the mostly-inaccurate-guess-users to stay on our platform, and the sustainability.
We have to keep in mind the value of the service that we are bringing to our customers at all times. Only then are we able to ultimately determine the number of tokens to release, the method of releasing, and its denominations!
Written by: Soh Qiling, Data Analyst Intern, Katalyst.