When it comes to the field of economics or finance, money is right there at the core of everything, it is the propeller of trade, business, and finance in general, and when you take into account the definition of economy, money is going to be there being the most prominent aspect of it. You use the money to buy products and services, and you use money as a notion of wealth for the betterment of society and the economy of a country generally.
Money happens to be the most elementary and central element for each and every person inhabiting this planet, but at the same time, it is being governed and controlled by centralized authorities such as governments and banks, doing whatever they please by increasing or decreasing the flux or flow of cash, printing money and making it available to either a select few or plethora of people based on their own diplomatic interests.
Decentralization and the idea of cryptocurrencies have changed this behavior well enough, and people are finally coming to an understanding that they don’t have to be a puppeteer of a centralized governing body such as a government or a bank to be able to take part in money-oriented games and entanglements because decentralization allows them to be the judge jury and executioner of their own financial life without any centralized control.
Tokenomics has enabled itself as an emerging field within the branch of finance and economics as its principles could be applied to the blockchain networks and lending them a monetary value so that people can use these tokens for the good of them and for making multiple trades in their everyday life.
The term Tokenomics is definitely new, and multiple additions have been made to the definition of what Tokenomics actually is, its significance, benefits and use cases, and how it is going to change the way we deal with money by making it more accessible and digital than it presently is. If you want to understand more about Tokenomics and just understand the whole idea of it comes from then, please take part in the following discussion, and you will be enlightened regarding this very topic.
Value of Cryptocurrencies
Every decision that you make in your life is followed by the act of receiving an incentive; no one is obliged to do anything for anyone until unless they are paid in some sense of fashion, either money or some other potential element worth some value to them thus at the core of every decision is an incentive.
You are more likely to listen to the advice of your doctor or your gym trainer more keenly as opposed to a friend because, at the end of the day, you are receiving the incentive of better overall health and a great body posture if you follow their advice. This is kind of an incentive for you and not entirely a monetary proposition but an incentive for good health and a chance to earn it.
The incentive is also a part of almost every business field or organization that is working to earn money because workers are being incentivized in the form of the salary they receive at the end of each month, and the bosses are being incentivized to continue running their organization for the hefty profit they earn every quarter.
Cryptocurrencies are also governed by the idea of incentive because there are tons of ways that you can make money with cryptocurrencies, such as engaging in active trading or staking your tokens for the very possibility of receiving some kind of reward or incentive for taking part in the activity. For one thing, the idea of Tokenomics did come into existence to propose an idea of incentives for cryptocurrencies and decentralization.
Cryptocurrencies are nothing but computer code sending and receiving value from one crypto wallet to another, and the concept of Tokenomics comes into play for the sake of engaging a better and more appropriate incentive into developing a new and expanding asset class. What drives the very foundation of Tokenomics? The answer that you have been looking for all along values, the tokens that you interact with on a day-to-day basis all have some kind of monetary value; you wouldn’t be engaging with cryptocurrencies or much less anything that is tied with the idea of blockchain technology and decentralization until unless you were not being incentivized in some sense of the word.
Although cryptocurrencies have enlightened the world of finance in many aspects, they lack tangibility, such as Fiat currency that you can hold in your own hands and have a physical existence.
Role of Incentive Theory in Token Economics
Now that you have come around to the prospect of incentives in the financial industry, banking, government sector as well as cryptocurrency, you might be thinking about what incentive has to do with token economics. The first thing that you need to understand here is the fact that the token economy indeed uses Incentives for the sake of enforcing and developing the behavior that is required within the blockchain ecosystem.
The incentive theory is not predominantly linked with other cryptocurrencies or the banking system because it is actually the human behavioral theory. It simply implies the fact that humans depend on their wish for reinforcing incentives. The incentives actually play a key role in determining the infrastructure of token economics for the sake of involving users and personnel so that they can participate in the trade of value that is taking place through digital means in a blockchain-oriented ecosystem.
All the miners that are validating the transactions, what guarantee does the blockchain have that they are actually not validating transactions based on their own personal interests and denying some of the transactions out of spite? What makes sure that those miners would work and they would behave in a required fashion for the sake of sustaining the security and transparency of the blockchain environment?
What promises it? The goal of incentives is the answer that you are looking for because every miner that is validating a dedicated transaction is actually doing so because they are going to get rewarded at the end for all the efforts they have put in towards the validation of a transaction. They will be rewarded with the same token that is the native token of the blockchain they are presently working on. They can convert that cryptocurrency into a dedicated Fiat currency of their own choosing and use it for whatever means they prefer to use it, and that right there is the meaning of incentives within the crypto world.
Working of Token Economics
To better understand the perspective working of token economy, it is essential to dive further into the concepts of what tokens are and how they work. Tokens are anything that serves that particular purpose while at the same time holding a specific value that is assigned to it on the basis of different characteristics that are assigned to them.
We use tokens on a daily basis in the form of Fiat currency that is sanctioned by our government in the regions that we live in; in fact, our library card works as a token because it has a systematic value assigned to it. You use that card for the sake of checking out books from the library and for other such purposes, so at the end of the day, anything that has practical value to it and can work towards a determined goal can be classified as a token.
The very model of token economics is based on the prospect of tokens that represent cryptocurrencies. A token might serve a plethora of functions being on the same network other than the assumed one, which is to be a store of value. Take a look at the Ether blockchain, which has its own particular token which not only serves as a store of value but also promises other functions.
You can use the Ether network for the sake of conducting and establishing smart contract derivatives, which can help you execute various business as well as conventional deals with other users present on the blockchain without having to hire an intermediary to do your bidding. There is a wide range of decentralized services that you can avail yourself from the Ether blockchain network, and it has truly stretched the horizon of the blockchain network serving as not only a store of value but also providing tons of other services that no other cryptocurrency network or blockchain entity out there is facilitating their users with.
You can calculate the importance or significance of a token based on what kind of services the blockchain as a whole is providing; Ether, at the end of the day, is more valuable than any other altcoin out there because of the vastness of services that it provides.
Use of Tokens in Tokenomics
After gravely discussing the origin, significance as well as escalation of token economics within the decentralized world, it has become paramount that the use cases of token economics should also be discussed to better understand the work ethics of these tokens and this discipline that is going to shape the world of finance for good. Following are some of the best use cases that are accustomed to token economics, its working, and the understanding of this whole initiation in its entirety;
Distribution of Tokens
For any crypto project to be successful not only in its execution of ideas but also in delivering value, it is important that it has a proper distribution channel for its tokens in real-time. The project in question should be able to transfer or distribute its tokens to the end users in a consistent fashion, and if it fails to do so, then the project would exist without its token having any kind of monetary or otherwise resource full value to the end user.
It is as if the project is inconsequential. To begin with, thanks to the prospects of token economics, the distribution of the tokens has been added as a potential element that needs to be entertained at all costs. Blockchain networks allow the distribution of incentives among miners and end users who are in charge of validating transactions on their network. An ICO is also used by many blockchain projects out there to initiate the distribution of tokens. Specific behaviors trigger the distribution approach for these tokens, and unless that specific behavior or action is not fulfilled or committed, the distribution will not occur.
Price Stability
The world of economics deals at length with the price stability for not only products and services, commodities, and elements that users can buy with money but everything that it encompasses as a whole. Economics also deals with the idea of supply and demand, how the cycle works in its entirety and what users should be expecting. Merge that element with tokens, and you have got yourself token economics.
Cryptocurrencies are better known for their consistent volatility and price drops, and it leads to fluctuations not only in their price and value but also in the overall interest an investor has towards them. Furthermore, speculators could also jump in at a later date to investigate the consequences of sudden price drops and volatility within that particular blockchain network, and that is not something that any cryptocurrency or owner of that particular blockchain wants to deal with.
To deal with such a challenge of supply and demand, price volatility, and the actions of the speculators, the blockchain projects could use the elements of token economics by having a proper repository of those tokens so that whenever there is a demand for those particular tokens and the supply is struggling that repository can help replenish the supply and ensure consistent availability of the tokens to those who need it.
This would lead to the overall stability, which would come towards the price of the asset in question, thus dealing with the volatility factor or any other such fluctuation that is stopping a particular crypto project from giving out its best, growth in demand could also be sustained with the help of token economics which is not something crypto projects are able to do on their own.
Scope of the Business
The very next agenda that you should be considering is the scope of the business that could be increased by leaps and bounds with the help of decentralization and specifically applying the prospects of token economics. There exist many opportunities out there which allow people and crypto users for the sake of leveraging their tokens in real-time, and in return, they earn rewards and other incentives, which creates a loyal user base for that particular blockchain entity.
Many financial companies out there have developed this system in the form of decentralized marketplaces where users are able to leverage their tokens for the sake of trading in multiple products and services that get offered within the realm of those specific marketplaces.
You must be aware of the working of the stock market and just how well versed it is in the prospect of giving out profits to the end users in the form of dividends and whatnot. The same concept of giving out incentives has been deployed in the decentralization and blockchain marketplaces out there.
Many companies have developed this system there to give out rewards to the users for the sake of participating either in the validation of transactions or staking away their cryptocurrencies for the sake of earning rewards and allowing companies and businesses to lend those tokens to crypto borrowers out there on their behalf. Not only will it ensure the overall loyalty of the users to that particular blockchain program, but it will also make sure that the network is robust at all times and have ample supply as well as circulation of tokens to begin with.
Most of the tokens out there in the decentralized world are going to act as securities, while most of them work as utility tokens which means they have a specific use case assigned to them, and when that particular use case is over, they don’t have much of use left.
Other tokens act in dual nature, a hybrid if you will, and they can work both as utility as well as governance tokens. It means that people who hold these tokens and have them in abundance can actually use them to cast their votes deciding various matters of the blockchains, such as what type of tokens would be made available and in what percentages, what percentage of incentives would be divided among the miners and so on so.
Many companies out there are already using this approach where they have particular tokens given out to the users that they can use in a governance model for the sake of taking votes and making decisions that they deem fit and when a specific percentage of voters incline towards a possibility it becomes part of the network and is implemented as a separate update through proper channels. So token economics can be the way through which these elements take place, it is going to take a lot of time and patience, but at the end of the day, it is going to be more than worth it.
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