Written by Dr. Kyle Wong, CFA, President of Association of Blockchain Development
Tokenomics is simply the amalgamation of two words: Tokens and Economics. So, what is a token? According to Merriam-Webster Dictionary, it is “a piece resembling a coin issued as money by some person or body other than a de jure government.”In essence, it can be anything that represents legal money, or anything that is of value. Based on this definition, your Octopus Card is a token, your Starbucks card is a token and a share of a stock is a token -- since they all represent something of value. Their values are recognized by the central authority and is protected by legal means.
In the world of blockchain the word “token” is defined more narrowly. It represents a record on a blockchain. When you buy a Bitcoin, all really is happening is that your private key and the transaction is recorded on the blockchain. It is only that now, ownership do not require the endorsement of the government. It is instead validated by cryptography. No intermediate and central authority is required.
What about economics? Economics is a social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices about how to allocate resources. Fiat currency plays a central role in economics as it is 1) store of value 2) medium of exchange and 3) unit of account. It is far more efficient than barter system. However, I believe fiat currency is becoming increasingly obsolete. Tokenomics, in the basic form, is the replacement of fiat currencies by crypto-tokens in economic transactions. The advantages and implications are mind-boggling.
The Economic System build by Fiat Currency is obsolete
While we talk of global economy, fiat currency such as USD, Euro, and Yen are still local. Nowadays e-commerce giants like Amazon and Taobao operates all over the world. But the currency the customer pays is seldom the currency the producer receives. It means there are many currency exchange transactions hidden in a simple purchase, creating friction and costs.
Secondly, the major conduits in the fiat economy are banks. According to the statistics from World Bank, 1.7 billion adults in the world are unbanked1, i.e., they do not have bank accounts. One reason is that banks often require a minimum amount to open an account. For the poor, this requirement is often too high.
Thirdly, the services from banks are not keeping up with the pace of digital economics. In many parts of the world, bank transfer is still slow and expensive. Not to mention while e-commerce operates 7/24, the banks don’t.
Lastly, the current banking system is being abused and even weaponized. I have many friends whose bank accounts are closed without any reason provided by the banks. Bank accounts are often closed because the account holders engage in legitimate crypto transactions. The US is using its dominance in the SWIFT system to push forward its political agenda. Not to be outdone, China may well use its digital yuan to pursue national policy. I believe there is a need for an alternative to the fiat currency. There is a strong case for tokens which are secure, global, decentralized and innovative.
Tokenomics is the future
Tokens allow the transfer of wealth without any intermediaries. It not only reduces costs, but ensures that the payment system is transparent, robust and not to be used to pursue national interests. Tokens are transferred across the internet, making tokens truly a universal currency.
The incorporation of smart contracts into utility tokens align with the interests of the users and token owners, in a sense that the smart contracts can be programmed to distribute more tokens to the users. Therefore, the more you use the tokens, the more valuable the tokens are, which means the more wealth you create.
While critics attack Bitcoin as slow and inefficient, the problems are addressed as newer and more advanced blockchains are developed. For example, Ethereum 2.0 will remove proof of work in the validation protocol, significantly reducing operation cost. Even BTC has gone through many rounds of forking. Cryptocurrencies have come a long way since Bitcoin was launched in 2009.
Tokens allow innovative applications to be developed. One of them is DragonBite. DragonBite provides a versatile interface where users can consolidate all their digital assets, trade them for other assets and spend them at dedicated points of sales and merchants. Another application is the non-fungible tokens (NFT). All these applications utilize tokens to solve existing economic problems.
Tokenomics is replacing the old economics, and now is the time for everyone to start learning.
Reference: “The Unbanked.” The unbanked | Global Findex. Accessed April 12, 2021. https://globalfindex.worldbank.org/chapters/unbanked.