Part 1 – Introduction to tokenomics
Part 2 – Token utility
Part 3 – Economic design
Part 4 – Token Design
Part 5 – Testing & Adaptation
Welcome to the Block Consult tokenomics series, where our aim is to demystify the world of tokenomics and show you how to design a thriving tokenomics ecosystem. This 5-part series will be published once a week and cover everything from the basics of tokenomics to the nuances of token design.
To have a strong base to build upon, our first article we’ll be breaking down what tokenomics refers to, the various token types as well as their use cases.
Let’s start with the basics, what does tokenomics refer to?
Simply put, tokenomics refers to the creation of a token economy, this can be on one or multiple blockchains. Tokenomics encompasses everything from how the token is created, distributed, and traded to more complex features such as token issuance, inflation, staking, governance, and other incentive mechanisms. At the core, tokenomics aims to determine the value proposition of a given token as well as how different stakeholders will interact with it. Don’t worry if you are not familiar with some of the terms just mentioned, we will cover them all in due time. First it is important to understand that there are different types of tokens each with their own use case.
Types Of Tokens
The main tokens you will come across are:
Utility Token:
Provides the token holder with access to a specific application or service within a blockchain network. Utility tokens can also be used as rewards for participating within an application or ecosystem.
Security Token:
Represents actual ownership in a project, protocol, or investment fund. It is important to note that that security tokens are subject to federal securities laws. Launching a security token takes considerably more consideration and planning.
Governance Token:
Gives the token holder the right to be part of the decision-making –process of a project, protocol or blockchain. In Web3, projects often start centralised and become more decentralised as time passes, the governance power is distributed with governance tokens to the project participants. The level of decision making power and which decisions can be voted on change from token to token.
Non-fungible Token:
A unique digital asset which represents the ownership of a specific item or content. The main feature is that they are one of a kind and are therefore not interchangeable, in contrast to cryptocurrencies for example. Therefore, each NFT has its own unique value based on their traits and what they represent.
Token Use Cases
Now that we have examined the type of tokens let’s look at what they can be used for. There are a multitude of different use cases, to keep this blog nice and compact we have picked out the most common.
Digital Assets:
Popularised by cryptocurrencies such as Bitcoin or Ethereum, this is the most well-known use case. However, tokens can be used to represent any digital asset, for example real estate, stocks, or commodities. The benefit of tokens is that they can be traded in a secure and transparent way. Furthermore, it breaks down the barrier of entries as one just needs access to an internet connection. This is the basis of decentralised Finance, also referred to as DeFi.
Access Rights:
Tokens can give the holder access to a certain tool or resources. This is especially popular in the NFT sector where holding a certain NFT will can give you access to a multitude of things, for example:
- Exclusive content
- Members only community
- Games
- Analytics tools
- Rights to purchase future NFT collections for free or at a discount
A lot of traditional brands have leveraged this by launching their own NFT collection and giving holder exclusive access and rewards.
Fundraising:
Tokens have been used by blockchain start-ups as a means to raise capital. Instead of buying equity, investors receive a percentage of the token supply which they can then trade on the open market. This is done via a Simple Agreement of Future Tokens (SAFT), this is a term sheet stipulating the investment details. The token is usually a utility token essential for the project’s ecosystem, providing an investment opportunity for token holders. Raising capital through a token launch can be a more accessible and efficient way compared to traditional fundraising methods.
Note: NFTs have also been used to fundraise capital. An example is the world-famous music band Kings of Leon who released their album as an NFT. The NFT gives fands special perks such as concert tickets and exclusive merchandise.
Governance:
As previously mentioned, tokens can be used for governance purposes and voting. In this use case token holders can vote on important governance decisions therefore including stakeholders in the decision-making process. There are a variety of token voting models ranging from very simple to extremely complex. Using governance tokens are a common practice in Decentralized Autonomous Organizations (DAOs) as well as many decentralized protocols. Find out more about what DAOs are and what benefit they can bring here.
Loyalty and rewards:
Tokens can be used to reward customers or incentivize users to act in a desired way. For example, in Decentralised Finance tokens are regularly used to reward users who interact with a given protocol or provide liquidity for a token pair, ensuring a smoother trading experience. However, also traditional brands have leveraged the power of tokens to upgrade their customer loyalty program. Customers can earn NFTs by making purchases or engaging with the brand. These NFTs can subsequently represent various rewards or perks, such as exclusive discounts, access to special events or other type of experiences.
Read more about NFT loyalty programs here.
Supply Chain Management:
Tokens are an excellent tool to track the movement of goods and services within a supply chain. Through the characteristics of blockchain every step in the supply chain is recorded and can be tracked. This not only increases transparency and efficiency but also reduces the risk of fraud creating a more sustainable supply chain. You can read more about supply chain management using blockchain here.
This marks the end of our first article in our tokenomics series. In the next issue we will take a closer look at the importance of token utility and the different types of incentive mechanisms.
