Definition of a token
A token is a digital asset that represents a certain value, power or right in a network.
Tokens can be transferable, exchangeable from one individual to another without going through an intermediary, and in real time. It is not possible to duplicate them.
The tokens generally make it possible to govern the relations between the participants of this network.
Thanks to blockchain technology , and more particularly to that of Ethereum , it is possible to create tokens for all types of objectives.
For example, it is possible to issue tokens which provide certain rights such as voting rights, or property rights. The utility of each token is chosen and personalized by its creators, through a smart contract formed when the token was created.
There are three main categories of tokens, although some fall into all three (or none): utility tokens , security tokens and equity tokens .
Others believe that there are 4 categories of tokens:
- currency tokens: tokens
- utility tokens
- platform tokens
- security tokens
There are many ways to get tokens:
- Initial Coin Offering (ICO): these are fundraidings allowing blockchain start-ups to sell tokens linked to their project, in exchange for other valuable assets (Bitcoin, Ethereum, etc.) in order to finance their projects. The tokens sold generally make it possible to obtain a right to vote, to use a service (such as decentralized applications)
- By maintaining the network through validation of transactions, or other tasks performed such as for example the sharing of its storage space (Sia, Filecoin …)
- Free thanks to airdrops, or “rains”, free tokens offered to those who request them,
- By going to exchange platforms to buy these tokens.
Why use tokens?
Tokens are mechanisms allowing the transfer of value, but also and above all the digitization of the ownership of objects existing in the real world. It is possible to “tokenize” everything, such as company shares, marriage contract, etc. This mechanism will certainly allow, in the near future, to trading shares of the CAC40 on dozens of different exchange sites.
Tokens can be transferred, claimed, exchanged, sold … But for users to want to use them, the token must be attractive, in a way or another.
It is in this context that the discipline of tokenomics , the economy of tokens, was born.
Here is, in our opinion, the biggest advantage of these tokens.
On the internet, until 2008, it was not possible to transfer value or property. Indeed, when you send a file to a friend by internet, the file duplicates itself, you have a copy left on your computer.
It is this transfer of value or ownership that was solved by Satoshi Nakamoto , when transferring bitcoins, these are no longer present with us and are therefore not duplicated!
The term tokenomics actually designates everything related to economic ecosystem of the token. This ecosystem depends on a number of characteristics of the token concerned, among which are:
- Utility of the token,
- Quantity of tokens issued over time and frequency of issues,
- Bonus enjoyed by the first investors during initial calls for funds,
- Allocation of tokens,
- Possible destruction of certain tokens during their use
- Uniqueness of tokens.
Before talking about these different elements, it should be noted that a certain number of tokens exist only to represent a crypto-asset under development. These are intended to be destroyed when the crypto-asset in question is finally set up.
Their scope is therefore purely speculative, and their value depends, in the end, only on the feeling of the community about the crypto-asset in question. It is very rare that a material element justifies the value of these tokens. These tokens do not have an ecosystem to speak of, so there is no need to analyze them here.
We’re going to focus on the tokens that aren’t meant to become something else. Whether it is a tokens of type utility, equity or security, they all need a well-designed ecosystem to survive. This ecosystem, in general, must allow the tokens to be used for their own specific purpose, without the company that issued them suffering a deficit (therefore without the price of the tokens falling too much), and without the use of the token becomes uninteresting for the user (token too expensive).
In addition, it should be noted that tokenomics can be considered both on a large scale and up close. We will therefore speak of macro tokenomics, or micro tokenomics. To put it simply, macro tokenomics deals with characteristics that have a close connection with the outside world, such as partnerships; while micro tokenomics relate to purely internal characteristics of the network, such as the rights conferred by the token on users.
Without necessarily separating macro and micro tokenomics , we will see some of the important characteristics of an economic system of this kind. However, before delving into it, it should be noted that each of these characteristics must be analyzed in terms of its relationship to others, and not in isolation, to understand whether a system is well designed or not.
Utility of tokens
The very first characteristic having an influence on the price and the sustainability of the system, it is naturally the utility of tokens. Indeed, many tokens are only intended to serve as an alternative means of payment to access a service. Their price therefore depends on the value of the service rendered. As a general rule, tokens designed in this way have a stable price, since the service itself always has the same value. And that’s good: if the tokens get too expensive, there’s no point paying for the service with them, and the token ecosystem collapses.
Some other tokens, like KNC (Kyber Network Token) and KCS (KuCoin Shares) , see their price depend on the volume of the platform of exchange that issues them, because their use is to provide dividends to their owners. It’s a pattern that gives these tokens a much more volatile price. But since price stability is not necessary for the ecosystem to function, this is not a problem.
Amount of initial / issued tokens over time and frequency of issuance
This is probably the most important element of all: what is the existing quantity of tokens, and how is it increasing?
You should first know that in the case of crypto-assets whose total quantity increases regularly, if inflation is too high, tokens tend to be devalued very quickly. Many models are overly optimistic and rely on rapid adoption of the system. When these predictions turn out to be wrong, the amount of tokens increases but the number of users remains the same. The economic model is therefore uninteresting for those wishing to invest for the long term. And similarly, cryptoassets without a well-defined maximum number of tokens in circulation may have overly optimistic models.
It can also happen that the initial quantity of tokens is very large: when it exceeds hundreds of billions, the tokens are often of such a low value that they appear to be interesting for the buyers. Crypto-assets with outliers measured in hundreds of billions are therefore, on a fairly regular basis, designed in this way to deceive investors who do not understand the notion of capitalization.
Early Investor Bonuses
One of the problems affecting tokens from ICOs is the proliferation of bonuses representing impressive amounts. If some private investors have the opportunity to buy tokens twice the price before the public, it is guaranteed that they will immediately plunge the price at the opening of trading, and make panic the public who will sell at a loss. This happens regularly, and has the consequence of leaving behind a large part of the public, condemned to keep crypto-assets having lost in a week more than half of their value.
It is therefore necessary to be very vigilant when investing in a token that it is not yet possible to buy or sell on an external market. Unless you are one of those with an advantage, you are likely to be disappointed.
Distribution of tokens
The distribution of tokens during their issuance can have quite significant negative effects on the development of a system. In particular, when the team arrogates a large percentage of the existing chips, or when it offers a large part of it to its “advisers” and other partners. Ideally, all of the tokens are offered to the public, but in some cases the team keeps astronomical amounts … which is, in a way, printing money. Owners are naturally tempted to sell everything they have as soon as possible, and are not necessarily encouraged to contribute to the project.
However, there is not really a defined maximum percentage, each project being completely different from the others. The sum has to be assessed, again, on a case-by-case basis.
Burning tokens after use
Some tokens, during their use, see a more or less negligible part being destroyed by the system. This reduces the amount of existing tokens, and at the same time, the influence of inflation which lowers prices over time. This mechanism is interesting because it increases the value of the tokens, but we must not forget that for this the network must be used. And if it remains abandoned, then the tokens are not destroyed. Again, a lot of cryptoassets are very bullish in their predictions and end up disappointing a lot of investors.
Uniqueness of tokens
After the development of the famous ERC-20 tokens , tokens of a different kind appeared, designed to be unique, and each to correspond to a different thing. That is, for example, some token ecosystems are centered around a video game. These games allow players to acquire tokens representing a virtual object, such as a gun that their character can use. The economic system of these tokens leaves a lot of room for speculation, since the value depends on the popularity of the associated game, in the case mentioned. For example, if Valve turned all of its Counter Strike weapon skins into Ethereum tokens, the tokens would be popular with the public.
In contrast, tokens issued by a Chinese company unknown to the western world, whose game has a total of about 20 regular players will not interest anyone.
Some of these tokens could be used, in a way, like works of art by a lot of the wealthy wanting to avoid taxes: by buying them and locking them in a safe somewhere, it is still possible to sell themlater by making an interesting capital gain, due to their rarity.
Note: It can happen that we speak of fungibility instead of uniqueness. The term fungibility is not entirely incorrect; however, it is best to avoid using it. Because confusion is easy with another notion, which is that of fungibility in the general sense. In other words, the protection of privacy during transactions, ensured in particular by crypto-assets such as Monero. Since Ethereum does not offer any function to protect user privacy, none of the existing tokens on the chain can be qualified as “fungible” in this sense. It is possible to track the movements of each token, whether they are unique or not.
All the characteristics that we have just seen will influence the economy of the token and in particular its price more than its use.
To know if a token will be used, excluding speculative aspects, ask yourself several questions:
Why keep our tokens?
Use a service, vote, acquire something (part of a company, building …)
Why would you exchange it for other tokens?
For an economy based on tokens to work, you have to encourage people to use them!
The token economy – some examples
ICOs are one of the first applications of the use of tokens. These cryptocurrency fundraisers allow anyone to raise funds from anywhere in the world.
Whereas today the startups must appeal to VC (Venture Capital), Angel Investors, banks … in this new economy, any start-up not having contact with any investors will be able to raise funds. It will be much more egalitarian, no need to have a seat in Silicon Valley to raise millions of euros!
This will create new uses. Here are some examples of saving projects with tokens:
- Golem : sell a part of the computing power of your machine in exchange for tokens.
- Purchase of building : a building is put up for sale. The entire building costs 200 tokens. You do not have enough tokens to buy the entire building and want to get some of it for 20 tokens. You will send your tokens to the address, your funds will remain blocked until the 200 tokens have arrived at the seller’s address. The building brings in 5 tokens per year. They will be redistributed to the various owners in proportion to the shares purchased. When a decision is made, one would imagine that the tokens would be used as votes. Thus a person with 30 tokens would have more votes than a person with X tokens in important building decisions ….
- Shares / investment in companies : same principle only for a building but with shares of a company.
- StreamR : you will be able to monetize the data you collect. Do you want to sell your car data to help institutes for pollution measurement or traffic regulation? StremR intends to implement this thanks to their token exchangeable directly between machines.
Tokenization can be a digital representation of certain goods. Thus, it will be possible to tokenize goods that were not previously such asworks of art, clothes…
These tokens will be traceable and will provide liquidity in markets reserved for certain people by making buying and selling easier.
Once all the characteristics of a token have been analyzed and put side by side, it becomes possible to determine whether an economic system is sustainable.
If it is not, then it is better not to invest, and to wait to see if any changes are made.
In some cases it is just convenient to wait for a price crash to buy a lot of tokens, while waiting for a rally. This is especially the case when the bonuses from the initial buyers are very large, but the other features may suit your expectations.
Let’s no longer speak from an investor’s point of view but of an economist (I’m getting carried away a little).
It’s a revolution, imagine direct peer-to-peer exchanges without trusted third parties. This helps decentralize the value and the ownership system.
Anyone can create and exchange value with anyone, instantly and without trusted third parties like banks or others.
Now that we know that it will be possible to buy part of a building for tokens. But also to buy company shares against other tokens. The next big innovation will be to successfully make all different types of tokens interact (exchange, sell, buy) easily. Solutions already exist and will be improved with 0x , KyberSwap , BarterDEX, Uniswap which are decentralized exchange platforms . It is this revolution which, in my opinion, will allow the explosion of decentralized exchanges.
And you, what do you think of the token economy? Is it possible, how would you see it?
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