What is Tokenomics? Introduction to ICOs, blockchain and tokenomics 2021

Hello fellas! How are you all doing? Today, we’re going to be talking about tokenomics. Blockchain is one of the most popular gained buzzwords in technology right now, alongside AI and Big Data. However, Blockchain is a relatively new invention.

The Bitcoin ledger started in 2009, and Ethereum started in 2015. However, it’s rapidly expanding and evolving. It’s impossible to check the technology news and not see new startups in Blockchain coming out all the time, in all kinds of different areas. 

So we have everything from insurance to agriculture to AI, anything. Moreover, even though Ethereum, which enables the creation of ICOs, is a relatively new technology, startups have raised billions of dollars using it so far. So this is just to demonstrate how vital Blockchain is right now in the world of technology. 

Also, This article will purely give your all more insights about ICOs only! After that, I will make another detailed blog post for you all to know more about IDOs. As we know, IDO’s already outstood ICOs in terms of technology for the past two years. So keep calm! And have quick info on ICOs & Tokenomics! 

What’s an ICO?

So what’s an ICO? I’m assuming that most people know what an ICO is, but for those that aren’t, ICO stands for initial coin offering. So this means that you are creating a token or virtual currency, and you want to get funded, and you don’t do this through the traditional way, but instead, you ask for Ethereum or Bitcoin in exchange for your token, right? 

So you give your users a token, and then you can exchange Ethereum or Bitcoin, and then you can convert this to fiat, like a standard currency such as USD or dollars, and then you can use this to fund your venture. So this is a compelling concept.

You wonder is that possible for bitcoin to replace US dollars in the upcoming future? read this What If Cryptocurrency Replaces USD In Future If It Ever Collapses 2021?

First of all, from a regulatory and technological perspective, it democratized funding in startups even more. That’s one. 

Secondly, there’s an exciting idea, which not everyone has captured, behind ICOs. By issuing a token, a startup business effectively creates a kind of artificial economy, which means that you can reward users with tokens based on arbitrary incentives. 

So to give you an example, there’s Filecoin ( FIL ), where tokens represent megabytes of hard drive space, or you have environmental tech startups that reward users with tokens for producing clean energy, or you can have health apps where they record users for participating in healthy activities.

Types of Tokens

So there are different types of tokens. There are two main types: security tokens and utility tokens. Security tokens, for those companies in the States and possibly for many other companies, are a no-no because security tokens effectively represent assets such as dividends.

They’re basically like equities or bonds, etc., which means that in the States, they are treated the same way as dividends, and this means they need to be regulated. However, there are some countries where regulation right now is a grey area, and it’s not recommended to try and create a security token unless you know what you’re doing. On that note, Do check out this one Total 5 Types Of Cryptocurrencies Explained , for you to understand more about security tokens and utility tokens.

You have the right legal team to support you through this process of understanding how to be compliant with the regulations. But, on the other hand, utility tokens offer goods and services to users that basically want to interact with businesses. 

So maybe a company is selling goods, and instead of just accepting US dollars, they receive tokens. Or maybe if you hold these tokens, you get some premium service, or perhaps you get a special discount, etc. So utility tokens are not going to provide you with dividends or equity or anything of that sort. But, still, they’re effectively a medium of exchange for this closed economy represented by the business. 

Tokenomics! ( or we say Cryptonomics )

So, since we are talking about the creation of these virtual economies, essentially, the question that arises is how we can govern these economies?

So this is when tokenomics comes into play. Also, there’s another word called cryptoeconomics. In contrast, crypto-economics mainly refers to the incentives for the blockchain network participants, for example, miners. 

In comparison, tokenomics relates particularly, in most cases, to the economy of these closed worlds. And many questions need to be answered in this setting. For example, In the real economy, the central bank cares about setting the interest rates. When a company decides to run an IPO or initial public offering, they need to think about how many shares to issue, etc.

Similar questions arise in this content. For example, how many tokens should I issue if I’m a blockchain startup? How can I set up the right inventive structures so the token will appreciate? Why is this important? Because if someone buys a token during the ICO stage, it’s very likely they see this as an investment, and they want some assurance that this will increase in value in the future. 

How can I control some factors of the economy, such as inflation or volatility? I mean, volatility can be beneficial, but too much volatility can make the system collapse. It’s the same with inflation. Finally, user incentives. These user incentives are also tied to the business model. How can I create the right incentives for my users to use the token and add some value to their lives?

Common fallacies about Tokenomics

Some common fallacies take place. For example, a very common fallacy is using tokens as a replacement for fiat. So, for example, let’s say you come up with an idea to create some kind of online retailer for online shopping. 

You just sell products and, instead of accepting just fiat currencies such as USD or Euros, you say, “You know what? I’m going to issue my own tokens, “and the question there is,” Okay, so does your token offer any value, or is it just another layer of complexity added on top of your business without any real value?” Another mistake I’ve seen is what many startups have done in the past.

They still run ICOs with a limited number of tokens, and then these tokens are burned gradually. The theory behind this is that when you are burning tokens, they will appreciate eventually because you are limiting the supply of the tokens. 

This is not a very good idea because it doesn’t help the long-term viability of the project. And then there are some other, more, let’s say, technical matters that need to be taken care of, such as the right auction mechanism for an IPO, so GNOSIS, and you can see the link here, from Vitalik Buterin’s blog, this is a very interesting use case.

They used the reverse Dutch auction mechanism, which backfired a bit, leading to 90% of their tokens not being sold. So after the ICO, they had to develop a new solution for managing the economy, effectively holding the tokens and then redistributing them, etc… Still, the important thing here is not what these people did, but what GNOSIS did.

The purpose of this example is to demonstrate to you how things such as the auction mechanisms need to be very carefully chosen, and sometimes they can backfire. Then, quite often, because all these things are new, there’s nothing out there for 90% of tokenomics. We’re just trying to do things by stealing tools from traditional economics. So sometimes, things backfire, and then solutions have to be found on the fly. 

Some more Considerations about ICOs 

So there are some other considerations around ICOs. One is whether you should go for a hard cap or a soft cap. Another issue is the actual number of tokens that should be issued, which I think research is currently providing, and it seems to agree that it’s not a very important question. 

The actual number of questions, as long as it’s a large number, it’s not going to make much of a difference. Then another question is how much the percentage is as to how tokens from the ICO should be distributed. Some are going to founders, some percentage going to bounty programs, etc., or even how to structure an ICO in the sense that do you want an ICO that’s all going to happen at one stage, or are you going to have a pre-sell, then multiple stages of the public offering? 

Then finally, another question is whether you should make the token compliant with the Ethereum Blockchain or whether you want to create something new from scratch. But, again, this is just scratching the surface. Many, many more questions need to be answered in this context. And also, there are some legal issues. I already mentioned that some of the complications are legal issues and security tokens. 

Agent-based Modelling

So I’m a big fan, personally, of agent-based modelling, and this is something I have also promoted on my blog. I do believe that because tokenomics is a new field and it isn’t easy to study. 

We’re facing many unknowns and many non-linear and complex interactions between entities such as the users of the system or speculators in the market etc. So I do believe that agent-based modelling can be an excellent tool that can help us study tokenomics. 

Since we are not driven so much by theory at this stage of tokenomics research, why not just use an agent-based model that lets us explicitly code all the assumptions behind our system or closed economy and see how it unfolds? So I’m a big fan of this technique. 

Conclusion on Tokenomics & ICOs

• Blockchain is one of the most popular buzzwords in technology right now, alongside AI and Big Data.
• Moreover, even though Ethereum, which enables the creation of ICOs, is a relatively new technology, startups have raised billions of dollars using it so far.
• As we know, IDO’s already outstood ICOs in terms of technology for the past two years.
• And have quick info on ICOs & Tokenomics!
• These user incentives are also tied to the business model.
• How can I create the right incentives for my users to use the token and add some value to their lives? Common fallacies about TokenomicsSome common fallacies take place.
• A very common fallacy is using tokens as a replacement for fiat.
• They used the reverse Dutch auction mechanism, which backfired a bit, leading to 90% of their tokens not being sold.
• So after the ICO, they had to develop a new solution for managing the economy, effectively holding the tokens and then redistributing them, etc… Still, the important thing here is not what these people did, but what GNOSIS did.
• The purpose of this example is to demonstrate to you how things such as the auction mechanisms need to be very carefully chosen, and sometimes they can backfire.
• Then, quite often, because all these things are new, there’s nothing out there for 90% of tokenomics.
• We’re just trying to do things by stealing tools from traditional economics.
• Sometimes things backfire, and then solutions have to be found on the fly.
• Some more Considerations about ICOs So there are some other considerations around ICOs.
• Then another question is how much the percentage is as to how tokens from the ICO should be distributed.
• Or even how to structure an ICO in the sense that do you want an ICO that’s all going to happen at one stage, or are you going to have a pre-sell, then multiple stages of the public offering?
• Then finally, another question is whether you should make the token compliant with the Ethereum Blockchain or whether you want to create something new from scratch.
• And also, there are some legal issues.
• I already mentioned that some of the complications are legal issues and security tokens.
• Agent-based modelling I’m a big fan, personally, of agent-based modelling, and this is something I have also promoted on my blog.
• I do believe that because tokenomics is a new field and it isn’t easy to study.
• So I do believe that agent-based modelling can be an excellent tool that can help us study tokenomics.