What is tokenomics? Why does it matter? How do we separate good tokenomics from bad?

In a time when cryptocurrency and blockchain are exploding into every facet of life, the fact that these are underrepresented questions should give us pause. Blockchain is transforming how we source food, how we do commerce and manage finances, and even how national governments are run. And within such industries and institutions, blockchains often have many touchpoints and play numerous roles — whether sharing information, securing its validity, or executing decisions. Why? Well, many say that data is the currency of the future. In reality, that understates its significance. …but we’re getting ahead of ourselves. For now, it’s sufficient to say that any individual, business or institution that can benefit from an immutable database will be transformed by blockchain. Which is to say, in the modern world, pretty much everyone.

Growing pains

The numbers appear to bear this out. As of October 2019, there were 2957 publicly trading cryptocurrencies. This in turn vastly underestimates how widely blockchain’s use is growing, given the prevalence of entirely private blockchain systems — 53% of businesses in 2019 viewed blockchain as one of their top 5 strategic priorities; an increase of 10% from just the previous year.

Despite this boom, it’s been anything but smooth sailing. While constructing the Karuschain tokenomics model, our economic advisor Luciano Pesci analysed databases containing whitepapers from around 3000 crypto projects. Far from containing inspiration or some hints at best practices, less than 1% contained anything even approaching a formal tokenomics model. Instead, most listed little more than an accounting summary — release X tokens to Y people on Z date. How the token was to gain value — what its purpose was, what utility it would serve, or resource it would provision, and the business roadmap to make this a reality… well, that remained a bit of a mystery. Looked at in this stark light, it may not surprise those with entrepreneurial experience that less than half of these ventures have survived.

The divergence of private blockchains

Of course, things in the world of private blockchains are a little different. An impressive 81% of businesses plan to replace current systems of record with blockchain (up from 69% in 2018), with a further 77% stating it was critical to maintaining a competitive edge. Such figures indicate that blockchain is maturing, and business executives are happy to throw their resources behind developing platforms. In these cases, there is little doubt that there are concrete models, teams and roadmaps transforming ideas into reality. But many of the pioneers who have been driving the technology forward — innovatively, if haphazardly — by developing or investing in crypto projects are being left behind. The aforementioned private ventures offer no direct way to invest in the blockchain infrastructure and thus have no incentive to share their models and methods. Unfortunately, this means that those who put in the early hard yards get no piece of the pie — nor even an improved recipe.

Order and chaos

This brings to mind a comparison — while not a perfect one… so bear with me — to the era of Wildcat Banking. Just as crypto and blockchain ventures have eclectically proliferated in an unregulated environment, much the same happened with the wildcat banks of early 1800s United States. In both cases, rapid decentralised expansion and innovation coexist with scams, disorder and wild economic fluctuation.

Banking was brought to order in the mid-1800s through heavy recentralisation; it was viewed as the only regulatory solution for stability. The wildcat banks were progressively driven out of existence. While the world of crypto isn’t exactly the Wild West, it’s created many similar concerns for regulators, who are approaching crypto after this period of chaotic expansion. So, the question we face today is, how do we keep the best of both worlds? How do we retain the essence of dynamism and democratisation without letting it become a runaway train — and risk a regulatory response of blasting the train off its rails?

Doing It Right

Karuschain’s vision, and answer to that question, is deceptively simple: by doing it right. You assemble a talented team, who can build great tech, which fulfils a need in the market. With the proven success and demand for private blockchain in enterprise right now (83% of executives see compelling use cases for blockchain), there is a clear opportunity to on-board serious industry clients (in our case, the mining industry). So what does this do to help legitimise decentralised cryptoassets — and how does it democratise rather than centralise value?

While the utility that Karuschain is providing (initially, regulatory compliance and transparency to the mining supply chain… more on this later) is created via Hyperledger family private blockchain, our token — KRS — is hosted on Ethereum. This means that anyone can invest, and so the privately created utility value is publicly shared; put differently, value is democratised. Moreover, it means that the system is auditable, and tracking token performance allows you to watch the business grow in real-time.

So, in the collaborative, transparent and democratised spirit of blockchain, we’d like to share our model with you. We’ll discuss the relatively unchartered waters of tokenomics, and how it arose from the failures of trying to apply conventional valuation methods to cryptoassets. We’ll explore what these new models look like, and why we chose the one — INET — that we did. We’ll delve into how INET combines a discounted-cash-flow-esque investment valuation approach with the quantitative theory of money — reflecting the fact that every cryptonetwork is a micro-economy in its own right. How subjective assumptions can be tied to objective research; how a token accrues intrinsic value and how this differs from speculation; how we translate future value to the present… We’ll take on some controversial questions like hard caps and token velocity, and the solutions that we came to. Finally, we’ll take a journey into the future, and start thinking about the–literally–cosmic true potential of Karuschain and blockchain technology at large.

By the end, we hope you’ll be able to:

Buy into the Karuschain vision — not because of promises or hype, but because you can evaluate the validity of our model and judge it based on logical merit.

Analyse and evaluate each crypto investment you approach from this point forward, hold them to these standards, and start a conversation about crypto-investment principles.

If you intend to start your own crypto project, use this as inspiration for your own tokenomics. Tell us what works for you, and what doesn’t. Each crypto venture has its own requirements, but collective growth is forged in the constant tension between difference and repetition.

And if by the end, once you understand our model, you still have some serious questions, queries, or flat-out disagreements… good! Then we’re on the right track. Ray Dalio — who grew Bridgewater Associates out of his garage into one of the world’s most successful and innovative financial management firms — attributes much of his success to one underlying principle: Radical Truth and Radical Transparency. If you’re going to break new ground, you’re going to make mistakes. Well, the crypto projects of the last few years have made plenty of those… but the trick is to learn from them. To do that, you need to lay everything on the table — your ideas, your logic, your method — and subject it to an intellectual gauntlet. It is in that dynamic, iterative space that true innovation and lasting success emerges. We invite you to join us as we embark on that mission.

So, starting with part two, we’ll come full circle to our opening question: what, really, is tokenomics?

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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.

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