The last article, I deconstructed the difference between Crypto Economics and Tokenomics.
Tokenomics, on a high level, involves incentives of the token ecosystem at present and properties of the token ecosystem in the future. It looks at the 3 design goals in a token ecosystem. Design goals means an outcome or objective is defined, and mechanisms are designed to achieve that outcome.
The 3 design goals/pillars are:
Incentives of the System Today
Remember we talked about incentives of the system? This part is shown in market design pillar.
Environment to Incentivise
Economics is also about the environment. So of course, tokenomics would be about the environment. Sometimes, we call them “markets”. If we think about GBP, the market (environment) would be the UK economy and how the economy functions. So we need to design a market that is suitable for your token.
Properties of the System in the Future
The next part of tokenomics is properties of the future. That’s the remaining 2 pillars: mechanism design and token design.
Rules of Incentives
As the creator of the token, you want to define certain parts of the future properties to ensure your system is integral. Going back to GBP again, how can we be sure that in 20 years’ time, GBP will still be valuable? The central bank of UK comes in and adjusts the supply of money, affecting things like interest rate, inflation rate and behaviours of people. This ensures that GBP has certain properties (aka not hyper-inflate like Venezuela that no one uses the money) in the future. This can be done in the mechanism design aspect. We call them the incentive structure, which is built into the protocol system.
Lastly, the incentives themselves. For example, a rare £5 note could fetch hundreds of pounds. These old £5 notes are worth the same as the new polymer £5 note. Then why is it that the old rare £5 notes are sold at a higher price? Basic economics: low supply, high demand. There are only 4 specially engraved Harry Kane £5 notes available. So naturally, it becomes very valuable. Similarly, in the crypto space, there are different forms of incentives for you and me in the market. Simple example: Bitcoin’s block reward is 25 BTC. That is an incentive to keep you in the network.
Now we have shared some very basic overview of the pillars to Tokenomics.
Edit 4/12/2018: Added more details and definitions. Removed “Customer Analysis” as a pillar.