What is Tokenomics?

Andre Szykier, BlockchainBTM’s CTO is an expert on cybersecurity, data compression, and database architecture. Szykier explains Tokenomics – a term often thrown around when discussing ICO’s, blockchain, and cryptocurrency.

Tokenomics is an invented term, like crypto, macro, global and others that preface the word “economics.” There is no formal definition and can only be derived from understanding both parts of the term.

Economics is the art and science of understanding how we impart value in the exchange of goods and services and how this value is measured and agreed upon; whether by the currencies used, the product and service prices in any transaction, and the reliability of parties that negotiate an exchange of value. These fundamental principles exist in different levels depending on what value results from a transaction.

Tokens (or “coins”) are no strangers to economics. They also represent value but not in the strict definition used in financial transactions. They have a property that flies in the face of existing FinTech models. This is the recognition that the plumbing on which they are based –blockchains – does not require “trust” among parties in their use. Given the increasing exchange of economic transactions through an untrusted platform such as the Internet, using blockchains provides a number of benefits that hamper existing financial systems that rely on archaic and multi-decade old practices such as the SWIFT banking network.

At an elementary level, Tokens are a means of raising funds with the hope that token holders can use them in exchange as part of a token-based enterprise. They also can act as a speculative instrument that allows a token acquirer to watch their holding value increase (or decrease).

Token Types
Again, the kind of token formats is wide-ranging and their definitions are somewhat confusing. Utility, security, stable, derivative, composite tokens represent how value is defined and manage once a token is issued. It is not the point here to discuss how they differ. How value of what the token represents and how its distributed to token users and holders is the key issue.

A technical definition: A token represents a programmable unit of value, using blockchain as the digital software plumbing to store transactions that have data and logic rules to enable contracts.

An economic definition: A token is just another term for a type of privately issued currency.

Token Properties
✓ Uses blockchains that exist on a decentralized network of
storage nodes without central management.
✓ Uses cryptography to mask what is stored and who can
access the underlying data.
✓ Inherits the property of blockchains that guarantee the
immutability of data once stored on a node.
✓ Allows token holders to be anonymous or invisible
  depending on purpose.

Token Ownership
“Owning a token bestows a right that results in product usage, a governance action, a given contribution, voting, or plain access to the product or market. In some cases, tokens will grant real ownership, even if most organizations are trying to avoid passing the Howey Test by skirting around the ownership aspect.” – William Mougayar Author, The Business Blockchain.

A token needs incentives through use to impart value to its owners. What incentives drive value to the entity, its investors, adopters and the public, depend on the business model. In general,token value must address the following:

✓ Recognized as having utility where it is used
✓ Resists inflationary Pressures from trading
✓ Is scalable in a blockchain method
✓ Imparts a simple understanding of its store of value
✓ Is fungible and exchangeable
✓ Is traded on an Exchange or financial institution

How tokens are distributed is an important decision to the issuer. The image below (Bitcoin Talk) is an example of token distribution for an Initial Coin Offering (ICO).

Tokens that use Ethereum
The major alternative to the BTC blockchain method is Ethereum. It allows developers to create different token types (ERC20) that conform to the network model. While it is a strong and extensible platform the current Ethereum Classic has limitations in terms of transaction recording delays, the size of blocks to store data, the ability to overlay additional protocols (Layer 3), and compatibility with various on chain and off chain storage for smart ledger contracts.

Ethereum has anticipated adding a number of upgrades that have caused new forks to the original blockchain. The current imminent upgrade is Constantinople, now delayed. It has accepted a number of submitted proposals from the community of developer and the Ethereum consortium.

Kryptinet Ethereum
The proposed Ethereum fork (Kryptinet) includes and goes beyond what Constantinople provides and allows a Layer 3 protocol that for the first time, provides E2E security among nodes in the main Ethereum blockchain network of nodes –  first of its kind. Kryptinet’s advantage works with public and private blockchains. It gives the ability for crypto exchanges to protect their wallet holders from theft and hacks. Kryptinet uses the secure E2E-P2P connectivity from the InterVault function that is a principal pillar of the UbiVault fabric.

Tokenomics addresses the movement from fungible fiat transactions run by financial institutions to an equivalent world of alternate currencies – i.e. tokens supported by a decentralized system based on blockchain methods. Bitcoin was the first instance. Ethereum and its offshoots the next stage. The future will lead to asset-backed cryptocurrencies used for the economic exchange of goods and services without centralized control by entities and government agencies. Adoption of tokens will still face regulatory compliance issues, auditability, legal approval, and market adoption. At this point, blockchains have passed beyond the Gartner hype stage and the irrational exuberance of cryptocurrency speculation has subsided. Improvements to the limitations of blockchains show a strong and clear path for their place in Tokenomics.

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