Tokenomics 101: A Beginner's Guide | 🪙 |
Learn how tokens are aligning incentives and driving collective action
GM. 🫶
This is Web3 Espresso ☕—the Web3 Newsletter for creators, marketers, and coffee drinkers looking to understand how Web3 technology is changing the world we live in.
If you missed last week’s publication on how to take control of personal you share online - read it here
Hello 😎,
Have you heard of the concept of the ownership economy?
As the Web3 movement gains momentum, the ownership economy is emerging as a promising new paradigm for creators and consumers alike.
Unlike the traditional Web2 model, where content creation and distribution are largely controlled by a few dominant players, the ownership economy is based on the principles of decentralisation and ownership. It is an ecosystem where creators and consumers can engage with each other directly, without intermediaries, and where the value generated by their interactions is distributed more fairly.
In the ownership economy, tokens play a crucial role in aligning incentives and providing value to stakeholders. It's a way to create a self-sustaining ecosystem where users, investors, and other stakeholders are incentivized to contribute to collective growth and success.
Understanding tokens is essential for anyone interested in participating in the Web3 ecosystem, as they are at the heart of many of the innovative new projects and platforms being developed.
This week, I take you on a journey where tokens and economics meet to create a new form of value—one that is transparent, inclusive, and aligned.
Read on.
What’s in store today:
🥡 The Weekly Roundup 5in5
🍿 An overview of Web3 by The Global Blockchain Council
🪙 Tokenomics 101: A Beginner's Guide
Exploring the Different Types of Tokens and Their Functions
What is Tokenomics?
Tokens to Increase Community Engagement
Tokens to Increase Network Effects
Navigating the Risks and Challenges of the Token Economy
Let’s go! 🥤
🥡 5 in 5 …
The Five Stories You Need to Know This Week
CaixaBank Centres Combine the Metaverse With Sustainability for World Earth Day 👉 see it here
Nike Unveils First .Swoosh NFT Digital Sneaker Drop 👉 see it here
How is Metaverse Presenting New Opportunities for Insurance Businesses? 👉 read it here
Société Générale introduces Euro stablecoin on Ethereum 👉 read it here
Smurf Happens: Beloved Blue Characters Enter Web3 👉 see it here
🍿 An overview of Web3 by GBBC
I love infographics; when done well, they quickly convey information in a format that is digestible and easy to understand.
The Global Blockchain Business Council has done a great job condensing the Web3 universe into three pages. It is an easy-to-understand representation of what Web3 is, its purpose, the technologies involved, and the different use cases being applied today.
I liked it so much that I thought you would too.
🪙 Tokenomics 101: A Beginner's Guide
These are exciting times, as we are staring at a technological crossroad of significant magnitude. Everywhere we look, we see how the power of the internet is being magnified through artificial intelligence and its ability to use millions of data points sourced online to answer questions in seconds.
In parallel, the tech crowd is raving about how cryptocurrencies and blockchain technology let us create value, reflect ownership, and exchange funds without the use of intermediaries.
This all sounds very exciting, but I do ask myself if all this is true:
How can you reflect ownership without the legal frameworks that govern property rights and enforce contracts?
As a creator, how do you ensure that your intellectual property is protected ?
As a digital consumer how can you trust that what you see online is true?
Blockchain technology is creating a world where ownership can be encoded in digital assets that are programmable, transparent, and self-executing. Effectively, this means that coders create a programme that outlines a set of rules that are executed automatically and for all to see. These are called “smart contracts.” How can a smart contract help solve the problems outlined above and reflect ownership?
Through tokens.
In simple terms, tokens are units of value that are transferred from one party to another over time in accordance with certain rules defined by their creators.
In the blockchain ecosystem, any asset that is digitally transferable between two people is called a token.
Why is this a significant improvement?
Blockchain acts like a cheaper rights management tool. By defining and enforcing ownership (aka tokens) by code rather than by legal institutions, it greatly reduces the cost of copyright protection as it excludes legal fees and frameworks. The proof of ownership is in the code, which is visible to all.
Understanding the power of tokens can be the difference between a successful project and one that falls short. By aligning incentives for all stakeholders, tokens have the potential to revolutionise how businesses grow and communities thrive in the Web3 space.
Exploring the Different Types of Tokens and Their Functions
Let’s start with the basic definitions:
Cryptocurrencies
Cryptocurrencies are digital currencies that use cryptography to secure and verify transactions. They are decentralised, meaning they are not controlled by any government or financial institution.
Blockchain
Blockchain technology, the underlying technology behind cryptocurrencies, is a distributed ledger that records all transactions on the network. The blockchain is immutable, meaning that once a transaction is recorded on the blockchain, it cannot be altered.
Tokens
Tokens are digital assets that are created and managed on a blockchain network. They differ from cryptocurrencies in that they typically have a specific use case or function within a particular platform or ecosystem.
Tokens can represent anything from digital assets to utility or ownership in a specific network. They can be used for a variety of purposes, including facilitating transactions, accessing specific features or services, or representing ownership in a project or company.
There are several different types of tokens, including security tokens, utility tokens, and governance tokens.
Security tokens represent ownership in a real-world asset or security, such as shares in a company or real estate, and are designed to comply with securities regulations. They often offer investors rights such as ownership, profit-sharing, or voting rights. Security tokens are subject to strict regulatory requirements. The token that the blockchain-based stock exchange tZERO issued is an illustration of a security token.
Utility tokens, on the other hand, provide access to a particular product or service within a platform or ecosystem. Utility tokens are not considered securities under US law.
An example of a utility token is the Basic Attention Token (BAT) that forms part of Brave browser, which rewards users for viewing ads and supports content creators. The BAT token creates a system of incentives that aligns the interests of users, advertisers, and content creators, while also creating value for the community through increased privacy and security.
Governance tokens allow users to participate in the decision-making process for a particular platform or ecosystem. Holders of governance tokens can vote on proposals or changes to the platform, which gives them a say in how the platform is run. Governance are usually issued by DAOs.
Also, tokens can be either:
A fungible token is not unique; they're identical and divisible and can work like currency.
A non-fungible token (NFT) is 100% unique and has only one owner.
What is Tokenomics?
What happens when you combine token + economics?
You get tokenomics.
This is a new term that reflects the study of how cryptocurrencies and blockchain technology work together to create a new kind of economic system that produces value through tokens.
It describes the factors that impact a token’s use and value, including but not limited to the token’s creation and distribution, supply and demand, and incentive mechanisms.
One of the main benefits of tokenomics is the ability to create a system of incentives that aligns the interests of all stakeholders, from investors and developers to users and customers.
Tokenomics is essential for designing token economies that incentivize users to act in certain ways and provide value to the network.
As more projects come to light, we are seeing how this alignment of incentives can promote sustainable growth and foster long-term engagement with any project or cause.
The Key Components of Tokenomics
There are several key components of tokenomics that are essential for creating a system of incentives that aligns the interests of all stakeholders. These components include token distribution, token supply, token utility, and token economics.
Token distribution 👉 how tokens are distributed within the network,
Token supply 👉 the total number of tokens in circulation,
Token utility 👉 how tokens are used within the network
Token economics 👉 the economic incentives that drive token usage and value.
Token Distribution
Token distribution refers to how tokens are distributed and who holds them. This can have a significant impact on the token's value. Token distribution can take many forms, including initial coin offerings (ICOs), airdrops, mining rewards, and more.
Token Supply
Token supply refers to the total number of tokens that will be issued and how they will be released into circulation over time. This can have a significant impact on the token's value.
Token supply can take many forms, including fixed supplies, variable supplies, and deflationary supplies. Fixed supplies mean that a set number of tokens will be issued and will never change (e.g Bitcoin) while variable supplies mean that the number of tokens issued will change over time (e.g Ethereum) and deflationary supply reduces the supply over time according to a predetermined deflation rate coded in the protocol.
Token Utility
Token utility refers to the usefulness of a token within a specific ecosystem. Tokens can serve different purposes, such as providing access to a platform or network, facilitating transactions, or granting holders voting rights. A well-designed token economy should align the incentives of all participants and encourage the adoption of the platform.
From a marketing perspective, token utility is crucial in driving user adoption and retention. A token must have a clear purpose and add value to its users, or else it risks becoming irrelevant or unused.
For instance, in the gaming industry, utility tokens are used a lot, they can be used to purchase in-game items, such as weapons or skins, or to access exclusive features. These tokens serve as an additional incentive for users to keep playing and engaging with the game.
Another example which I love the mission is Ecoterra. It is a sustainable initiative, which allows companies to connect with recyclers, offers a carbon-offsetting marketplace, and rewards users for recycling waste. Through its Recycle2Earn Application – users can earn $ECOTERRA, the native token, by depositing waste via Reversed Vending Machines (RVMs).
Token Economics
Token economics refers to the economic incentives and mechanisms behind a token's issuance, distribution, and circulation. A well-designed token economy should take into account various factors, such as supply and demand dynamics, inflation, scarcity, and distribution models. Token economics can influence the token's price, liquidity, and overall value proposition.
From a marketing perspective, token economics can be used to create a sense of scarcity and exclusivity, which can drive demand and adoption. Scarcity can be achieved by limiting the token supply or by introducing time-limited events or programmes. Token economics can also be used to incentivize early adopters, community members, or strategic partners, by offering them exclusive benefits or discounts.
Tokens to Increase Community Engagement
Tokenomics can also be used to increase community engagement by providing users with incentives to participate in a project. By creating a reward system for active participation, projects can increase user engagement and build a strong community around their platform.
You see this frequently in DAOs. Tokenizing a DAO allows, for instance, that anyone in the world can purchase tokens and thereby contribute to initial funding for the DAO. Also, tokens can be paid to early adopters and active users, which will help attract users.
An excellent example of this is the Brave browser, which uses a token-based reward system to incentivise users to view ads on its platform. Users are rewarded with Basic Attention Tokens (BAT) for viewing ads, which they can then use to support content creators or exchange for other cryptocurrencies. The BAT token creates a system of incentives that aligns the interests of users, advertisers, and content creators, while also creating value for the community through increased privacy and security. This system has incentivise users to participate actively in the Brave browser ecosystem and has helped the project to grow rapidly.
Tokens to Increase Network Effects
Tokens can also increase network effects by creating a strong incentive for users to invite others to join a project. This incentivization can result in rapid user adoption and, ultimately, a more valuable network.
An example of the network effect in Web2, was Dropbox, the cloud storage and file synchronization service that allows users to store and share files online. When it launched, Dropbox implemented a series of hacks that allowed the solution to grow rapidly. This included free storage for referrals, free storage for social media sign ups and free storage contests. This spread like fire. Its referral programme became legendary and brought 2 million invitations sent out in a month.
In the Web3 space, the social media platform Steemit is using similar incentive based tactics. It uses a token-based reward system to incentivise users to create and curate content on its platform. Steemit users are rewarded with Steem tokens for creating and curating content, and they can also earn tokens by inviting new users to join the platform.
Navigating the Risks and Challenges of the Token Economy
While tokens offer many benefits, there are also several risks and challenges associated with their use.
Technical barriers to entry
Although many users have heard of blockchain, DeFi, NFTs, iGaming, and the Metaverse, setting up an account and dealing with private and public keys, seed passphrases, and other technical lingo is too complicated for beginners.
Buying and selling tokens is complicated
To ensure mass adoption, buying (and selling) tokens should be as easy as buying any other product or service online. Currently this is not the case. Users have to go to a cryptocurrency exchange to buy cryptocurrency with euros, convert the cryptocurrency to the token that is used on the platform, and then send it to the correct wallet address. This process needs to be simplified.
Market volatility
There is a high degree of market volatility, with token prices often fluctuating wildly in response to news or market conditions. This volatility is a clear deterrent to adoption as the value associated with the token is unstable and difficult to predict.
Unclear customer protection
Any Web3 application should prioritise customer protection, including cyber security and customer data protection. The token infrastructure should adhere to the highest levels of security, confidentiality, and availability to prevent fraud and the loss of tokens.
To mitigate these risks, users and investors can take steps to stay informed and protect themselves. This may involve conducting extensive research before investing in a particular token, using secure wallets and exchanges to store and trade tokens, and staying up-to-date on regulatory developments.
Concluding thoughts
I believe that the ownership economy represents a major shift in the way we create and consume content. Tokens are a central concept in the ownership economy and tokenomics is a powerful tool for aligning incentives and providing value in the Web3 space.
As web3 continues to develop, alongside other decentralised applications such as decentralised autonomous organisations (DAOs), the importance of creating a tokenised system to align the interests of investors, users, and developers will only become more important going forward.
When used effectively, tokens have the power to shift the balance to the user and unleash the true power of a community led ecosystems.
Exciting times ahead.
Do you own any tokens? Let me know!
That’s all for this week… 🫶
Please note that I do not recommend or endorse the companies and organisations mentioned in this newsletter. This content is purely informative and not a recommendation. Always be mindful of where you connect your wallet. Always do your own research. 💛