In this article, we will walk you through the basics of the Token Economics of the RLC token. We can all agree that token economics is a hot topic, so before you get too excited… a disclaimer:

The iExec team can not comment on the price of the RLC token and the present article is not investment advice. The sole goal of this article is to educate on the specific mechanics at play behind the economics of the RLC token.

So, we won’t be discussing anything sexy such as trend reversal signals on the RLC price charts. Why? Well, apart from being a sensitive topic from a compliance standpoint (SEC is watching us…), it’s just not what Token Economics is really about. Token Economics or ‘Tokenomics’ differs from technical analysis in the method used to determine how valuable an asset is. Simply put, the valuation model in tokenomics is only based on the usage of a token in a given network. This means that the speculative aspect of a token price is not taken into account. Here, we are focused only on the utilitarian value of the token.

So far away from the FOMO side of the crypto world, economics is a science - something very rational, described as a “scientific study of the ownership, use, and exchange of scarce resources”. It is a research field of its own, with theorem and laws, that are extremely useful if you were to work in banking for example, with the sensitive task of deciding on interest rates or details of the next round of quantitative easing.

One of the appealing things about Blockchains is how they empower individuals or projects by allowing them to create and distribute their own currency, something that used to be the privilege of central banks and governments. With great power comes great responsibility, yet all of a sudden, we’ve seen cases of sorcerer’s apprentices, who are experimenting with wild monetary policies, each more audacious than the previous one: token minting, token burning, token staking, dual tokens and so on. This makes the task all the more difficult for anyone who is looking at buying a token as he faces a question that’s on everyone’s mind: “what is the fair price for this token?”. And whether you believe markets are rational or not, tokenomics is still widely used among funds to justify investment decisions.

The RLC token is no exception. It was designed, from the ground up, to enable the exchange of computing resources, which means that part of its role is to serve as a medium of exchange. Understanding where the utilitarian value of the RLC comes from is a priority for iExec. We’ve been actively working on this for over a year, in close collaboration with VCs and Blockchain analytics startups, including Nyctale (you can read more about this work on Nyctale’s article).

A basic token economics equation: Equation of Exchange

When it comes to monetary economics, one place to start is the equation of exchange. The equation of exchange describes the connection between the price of an asset and the consumption of goods in an ecosystem. It can be easily applied to any utility token powering a platform.

The relation is: M ⋅ V = P ⋅ Q.

Applied to the iExec network, it can be read as:

M - the total nominal amount of $ in circulation on average

- the total nominal amount of $ in circulation on average V - velocity of the RLC token — how fast it changes hands during a given period.

- velocity of the RLC token — how fast it changes hands during a given period. P - the price of a service on the platform in $

- the price of a service on the platform in Q - an index of expenditures, ie: how many transactions are processed by the network in the given period.

Although the equation of exchange is often criticized for being a tautology (similar to 1 + 2 = 2 + 1, check-out the great contribution of Julien PRAT at EthCC Paris 2019), if we make assumptions on some variables, it can lead to some valuable insights.

One such example is, if we make predictions about the P⋅Q number, such as “there will be 10M$ of spending flowing through the platform the first year, 20M$ the second year, etc…”. We can divide P⋅Q by the token velocity, which gives us M. And then, dividing M by the number of RLC tokens in circulation will give us the price of the token based on utilitarian considerations only. However, there are a few ways to improve the model (taking into account the “discount rate” being one of them²). Also, it is important to do sufficient analytics on the token in order to be as accurate as possible when deciding on the constants, such as token velocity or the number of tokens that are really circulating (ie: circulating supply minus token holders).

It is difficult to make 100% correct assumptions on all the characteristics of the network when it will have reached its ‘steady-state’. We will try to go as far as possible for each parameter that plays a role in the RLC tokenomics.

RLC Token Specifications

The first thing to notice about the RLC token is that its supply is limited. All the 87 millions RLC that will ever be minted, were done so on the day of the crowd sale. And there will never be any more RLC tokens. There is no “admin access” to the RLC ERC20 smart contract, meaning the total supply is written in stone, and can never change. This is different from the ETH token, which has a total supply that grows everyday as a result of the mining mechanism, which is itself subject to changes (forks, governance).

Another point worth mentioning is the high percentage of circulating supply: Apart from the contingency that is being locked indefinitely (less than 8%), all the other tokens are free to change hands. Even if you add to this the portion of tokens that the project holds, that’s still ~80% of “free to circulate” supply, in contrast with other projects who sometimes only sold a third of the total supply. Having most of the supply freely circulating makes the future a whole lot more predictable, which benefits the tokenomics model.

Total & Serviceable Market

iExec allows the monetization of three kinds of resources: Computing power (CPU, GPU), datasets and applications. Even though the market size of the two former kinds of resources is already huge and is expected to grow 10x in the coming years, it is still very fragmented and there is little data available on actual businesses that have successfully captured such value. So we decided to focus only on the computing power market in the below analysis.

So looking at the computing power market, we can outline three different adoption time-frames: One, in the very short term, that is to serve all the dapps running on a Blockchain that need to access off-chain computing. Here, iExec takes up a unique position as the off-chain services one-stop provider for Ethereum & Consortium Blockchains. Smart contracts are great for executing basic logic like ensuring access rights, keeping track of an inventory or triggering payments, but when it comes to heavy computation, we are nowhere near the time you’ll be able to run AI models on a Blockchain. And it makes no sense to do so. For these kinds of tasks, and many others like fetching a traditional API, you want to go off-chain. With DeFi paving the way to a lot more use cases powered by Blockchains, we expect a surge in off-chain demand in the coming months, that is represented in the upper left chart. You can read more about on-going standardization here:

In the mid-term, iExec addresses the needs of the cloud computing market, which is enormous. Out of the market, iExec positions itself on at least two specific aspects of the general cloud offering - Serverless and HPC. Their market share is respectively represented in the upper-right and lower-left charts. These markets are currently dominated by traditional players such as AWS (Amazon Lambda), GCP (Google Functions) and Alibaba. iExec aims to offer an alternative to centralized cloud providers by giving access to computation trust, exclusive hardware, at the best prices. One illustration is how iExec is taking the lead in the field of “Confidential Computing” by offering TEE ready workers together with a usable workflow.

Finally, on a longer-term approach, with the emergence of IoT and 5G technology, there will be an increasing demand for highly localized, low latency cloud resources which is often referred by the term “Edge Computing” (also “Fog Computing”). At the start of this year at MWC, iExec showcased autonomous vehicles making use of its cloud resources on Intel’s booth:

The demo was built in partnership with the SHIFT lab of Shanghai Tech University. Although it is still early to see considerable spending there, looking at the market share projections on the lower-right chart, it shows one of the highest annual growth rate (41%).

So summarizing these different markets in one chart, this leads us to estimate the serviceable market will reach 30 billion of $ by 2024 (being conservative here as we do not include data-sets and applications in the equation). iExec target is to capture 1% to 10% of this market, which will directly translate in RLC transactions flowing through the platform.

Stake

The staking mechanism has been introduced in the second version of the iExec platform, and it is explained at length in the PoCo series N°2 article. It is a requirement for any worker part of the public pool that wants to monetize its computing power. The stake is locked up as a type of ‘security deposit’ as an incentive as to prevent bad actors in the network. The stake contributes to reducing the circulating supply, yet it has been primarily designed to enhance the security of the platform.

attack surface when using 20% stake

Currently, the stake locked up during each contribution is equal to 30% of the computing cost (or worker’s reward for the task). That sets the minimum stake amount a worker should have. But if he wants to be able to cope with computation spikes, churn rate, payment lockups, there is a high level of chance that he decides to adopt a much higher stake. All in all, we estimate that this will represent around 5% of the total supply.

Holders

behavioral classification plotted by token amount

Thanks to the amazing work being done by Nyctale, combining data crunching and ML algorithms, we are able to label RLC token depending on how they are moved on the blockchain. That makes it possible to estimate the number of holders, that contribute to reduce the circulating supply. Looking at the chart, you can see that the share held by holders is currently averaging around ~90%, which is very high. In reality, it is slightly lower as tokens on exchanges’ wallets are not represented on the above chart (which explains why the total number of tokens appears to fluctuate). So if we consider that 50% of tokens on the exchanges are “on hold”, that would make the current total percentage of holders to ~75%. Still rather substantial.

behavioral classification plotted by wallet quantity

Velocity

The velocity of a currency is the frequency at which one unit of currency is used to purchase goods and services within a given time period. As the traders and holders are transitioning to real platform users, we expect velocity to be very low at the beginning, probably lower than the velocity of M1 money (that is currently around ~5). As a comparison, you can see M1, M2 and BTC velocity plotted on the below chart:

Keep in mind that when measuring the velocity on existing Blockchains like Bitcoin or Ethereum, it is often difficult to determine the nature of a token movement, which makes it hard to be absolutely sure that it actually contributes to the token velocity, given that it shouldn’t be accounted if not involved in the purchase of a good or a service.

Enterprise customers

In parallel to building the infrastructure on the Ethereum public mainnet, we identified the need to bring the iExec stack into the hands of corporate users, which led to the creation of iExec for Enterprise. There have been open discussions about how this relates to the publicly deployed version. These both serve the same goal: the growth of the iExec platform. As it is likely that enterprise customers and consortium won’t directly transact on mainnet, one condition we envision in order to gain access to the iExec Enterprise edition would be to stake RLC tokens. That would be fundamental to ensure that each new customer on-boarded would contribute to the RLC tokenomics.

Sidechain

The next iteration of the iExec platform: iExec V4, to be released around the end of the year, will include an initial implementation of a sidechain. Without going into the details of how this sidechain will function, here are the two key takeaways regarding its effect on the RLC tokenomics:

Any exchange of cloud resources happening on the sidechain will be settled in RLC. That is totally aligned with the current state on mainnet. Transaction validators of the sidechain will have to stake RLC.

Without fundamentally changing them, the sidechain will improve the current tokenomics. The sidechain, however, is only an initial implementation and these mechanisms may not be the final version.

The future of the RLC Token

As a final note, we want to make clear that getting the RLC tokenomics right means ensuring that the platform adoption will directly translate into the success of the RLC token. As the network matures and the RLC progressively changes hands from pure investors to more and more real end-users, we’ll make necessary adjustments to facilitate network growth in a way that can benefit all parties involved. We hope you now have a good understanding of the forces at play in ruling the value of a token. As more people get to know the basic concepts of tokenomics, we hope they can then make an informed decision that will in return benefit the whole crypto ecosystem. Happy crypto-picking!

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