Part 2

What, really, is tokenomics?

Tokenomics is a portmanteau (a fancy word for mash-up) of the words “token” and “economics” — that is, it is the application of economic theory to the tokenisation of a blockchain-based micro-economy. This may seem like a bit of a mouthful — so, let’s break it down into each component.

Economic theory

Economic theory covers an incredibly wide array of ideas, disciplines and methodologies. At its most general, it is the study of the production, distribution and consumption of goods and services. It includes the analysis of microeconomic issues, such as supply and demand dynamics and their impact on prices, as well as macroeconomic concerns such as monetary supply and inflation. Each of the above examples — what they mean in the context of cryptocurrency, and how they fit together — are vital to constructing and understanding a robust tokenomics model. But first, in order to make sense of such an analysis, we need some background on economic modelling.

Modelling is a process of combining real-world data with various assumptions, in order to create an abstracted representation of some system (such as a business, or an economy). Models enable us to better understand relationships between important variables, such that we can make cause-and-effect predictions for inputs and other events within that system. It is important to note that these are always approximations. They are not replicas of the real world; we are not, unfortunately, omniscient. There are always numerous limitations and resulting simplifications that need to be made, ranging from the availability of data to the sheer complexity of the system being modelled. This is important to keep in mind when analysing the Karuschain — or any other — tokenomics model.

Tokenisation

Tokenisation, at its core, involves the transformation of a thing into a digital asset or utility. The “thing” in question can be almost any kind of good, product or service — from internet data bundles to precious metals. The token then represents fractional ownership of the thing that has been tokenised, which in turn provides the owner with income, utility, or some combination thereof.

This bears some similarities to conventional market stock. The value of the stock — or token — moves up and down depending on how much people are willing to buy or sell it for. This in turn reflects the current and expected value of the company (or platform) — the whole pie that the stock is a piece of. The market price, much like with stock, is thus a rationally weighted combination of how much value has already been tokenised, i.e. intrinsic value, and how much value is likely to be tokenised in the future, i.e. speculation. At least, that’s how it’s supposed to work… the precedent set thus far for quantifying intrinsic value leaves much to be desired.

Blockchain-based microeconomy

Now on to the blockchain-based microeconomy. Let’s start with the “micro-economy”. As per our earlier definition, an economy is the sum of activity relating to production, consumption and trade of goods/services in a given region. Each economy has its own systems of governance, meaning that each is unique. Every economy has a GDP — the sum of the average price and quantity of goods and services transactions within it, and a monetary supply — which in conventional market economies, is controlled through the monetary policy of the central government, or a central or reserve bank.

Blockchain-based microeconomies share many of the same characteristics — each has a GPD, which represents the sum of transactions occurring on the blockchain, and monetary supply — represented here by tokens. Each is unique, too, as a result of its programming and supply schedule. Together, these can loosely by thought of as its system of governance. Here, though — owing to being blockchain-based — we start to see some important divergences. Being decentralised, peer-to-peer networks, crypto microeconomies are not subject to whims of central banks’ or governments’ monetary policy, nor the control of large financial institutions. Their structure also provides an immutable public record of transactions. This means that, as these microeconomies mature, the degree to which economic modelling can be based on empirical, real-world data, rather than assumptions, will be unlike anything we’ve ever seen before.

From theory to reality

All this does not mean, however, that governance, monetary supply and associated manipulation of prices are non-issues for cryptocurrencies — far from it. Anyone who has spent much time investing in cryptocurrencies — even those whose concepts seemed rock-solid — has likely been nastily burnt more than once.

Token supply in particular — both in number and release schedule — has been at the heart of a multitude of problems for crypto ventures over the last couple of years. These range from intentional manipulation, such as implementing absurdly low hard caps that create artificial scarcity and inflate token prices, to more innocent (yet no less damaging) practices such as releasing tokens arbitrarily; resulting in incredibly volatile prices and velocities. And this is to say nothing of how the numbers on the model are tied to concrete business realities like resource allocation and product development. Nor how the model — and business underlying it — adapts to new stages in a product lifestyle or market shocks. The harsh reality is that many, if not most crypto ventures are woefully unprepared to take the leap onto the big stage.

These are not intractable problems. They are the teething troubles of a field of economics that is little over five years old. But cryptocurrencies and blockchain are entering the rapid growth stage of the technology life cycle — it’s time for tokenomics to “grow up” and face the challenges head on. To do this, everyone involved — platform developers, investors and enterprise users — must be fluent in tokenomics.

Now that we’re armed with some theoretical tools, we can get stuck into dissecting tokenomics: starting with the different types of tokens and approaches to cryptoasset valuation. Then, we can take a deep-dive into the Christ Burniske’s ground-breaking INET model and its application to Karuschain. Keep an eye out for our next article to stay on top of this new, growing realm of token-based economies.

Don’t miss out on our latest news and join our newsletter.

Karuschain is a blockchain technology platform for the precious metals mining industry, giving mining companies a powerful tool to ensure data integrity, safeguard human rights, reduce risks and improve environmental regulations in their supply chain.

Follow Karuschain on our social networks!

Twitter Facebook LinkedIn Instagram Telegram Medium Youtube