Tokenomics VS Economics – same or different? They are both science, but different in the field of specialisation. This article shares the similarities and differences between tokenomics and economics.
What is Economics?
You’re probably thinking “supply and demand”. Well, you’re not wrong. Economics is known for equilibriums, supply, and demand. But that is not all. Formally, it studies the production, distribution, and consumption of goods and services.
Economics considers: incentives, punishments, and behaviours. (Note: this is how I would explain economics to a 5 year old. Not how I would explain economics to an economist!)
Incentives (aka rewards) motivate us to do what we do. If life is a poker game, incentives are the chips you get if you win.
Punishment prevents us from doing bad things. If you are caught cheating in poker, you are banned from the casino. You might also have to pay a fine.
All these govern our behaviours. Based on the incentives and punishment, people behave differently. Then try to predict what’s going to happen next. In the poker game, behaviour is how players act when playing the game.
And What is Tokenomics?
Tokenomics is economics of tokens. They take the same form as economics: incentives, punishment, and behaviour.
Incentives motivate users to participate in the network. For instance, tokens can be used as rewards to users in the network.
Punishments prevent users from doing bad actions. For instance, to raise an issue for community voting, you have to place some tokens in the community fund (aka staking). This prevents users from raising random issues and wasting resources/time (aka bad actions).
Users behaviour changes based on incentives and punishments. Ultimately, we hope to create a network where everyone’s action is beneficial to the community.
Tokenomics VS Economics: Similarities
Both share properties: incentives, punishments, behaviours.
Economics looks at how central bank can use incentives like making it cheaper to borrow money (reduce interest rate) to affect certain behaviours like increasing consumption and spending by people in the country.
Tokenomics looks at the ideal behaviour of the token ecosystem and how to use incentives and punishments to encourage such behaviours. For example, the token ecosystem needs miners to stay on the network (behaviour) and they can encourage that behaviour by giving block rewards and allowing them to earn transaction fees (incentives) to stay on the network.
Tokenomics VS Economics: Differences
One important difference between economics and Economics of Tokenisation is that economics most often starts with predictive goals, and economics of tokenisation mainly starts with design goals. Economics analyses the outcome of a situation (e.g. if X happens, Y might happen). Economics of Tokenisation looks at the outcome desired (optimal objectives), and design mechanisms to achieve it (e.g. I want Y to happen. How can I affect X to achieve Y).
Edit 4/12/2018: Add more details to explain the similarities and differences.