Economics is the study of human behavior involving scarce resources — and the effects those behaviors have on those resources, explains Roderick McKin
Economics is the study of human behavior involving scarce resources — and the effects those behaviors have on those resources, explains Roderick McKinley.
Tokenomics in crypto is a related but different field. Tokens are a way for projects to raise funds and build communities, and designing the way they work can be much more complex than traditional equity raises — and potentially much more problematic.
“In tokenomics, the token or digital asset is the scarce resource. But we can now design features for these programmable digital assets, influencing how people behave and interact with each other, often creating new possibilities for exchange altogether,” McKinley says. He explains the distribution of tokens and the outcomes of that distribution are key matters for investors and for how the business ends up operating.
McKinley has worked on a range of different projects, including ParallelChain, GBC AI, Avarta, Fluid, ShopX, Terona and Kasta. But what is it that a tokenomics expert provides to projects?
“I typically deliver a range of services to projects. These include a design of the token’s supply alongside other economic features that make the token useful, so it attracts demand, helping clients to understand how to use the technology in ways that fit their business and, finally, how to make a compelling fundraising case,” he says.
There are two parts to every token’s value equation: supply and demand. Yet an internet search for “tokenomics” is likely to take you to colorful fan charts that only deal with the supply side of that equation: describing how a project plans to release its supply of tokens to stakeholders, over time. Making sense of how tokenomics is applied on the demand side is harder because each case is different and potentially unique.
A few examples
- Ethereum’s ETH token was designed to be the only way that users could pay miners for the computational resources supplied to run the blockchain — aka gas fees. As long as there is demand for computation to be performed on the Ethereum blockchain, a finite supply of ETH has value.
- Synthetix’s SNX token was designed to make up the collateral that backed the issuance of synthetic digital asset derivatives (tokens that follow the price movements of other known financial assets). Stakers receive SNX token rewards while the project is in the early stages, as well as all of the trading fees collected. Synthetix also popularized “yield farming” by giving users SNX rewards to provide liquidity on Curve and Uniswap. As long as there is demand for the synthetic assets that Synthetix builds, a finite supply of SNX has value.
- Helium’s HNT token is used as a reward payment paid to users who provide wireless coverage capacity to support Helium’s decentralized wireless connectivity platform, and the token is burned for every dollar fee paid by users who connect to this network. As long as there is demand to connect to this decentralized wireless network, a finite supply of HNT has value.
None of these examples describes a fully automated process. In every case, humans are making free choices in response to incentives, and that is why the consideration of human behavior is fundamental to tokenomic design.
Human behavior
But real-world facts often diverge in surprising ways from classic economic theory. For example, numerous experiments and papers point to the fact that people will not always work harder for more pay. So, how can incentives reliably work to alter people’s behavior?
“When designing tokenomics for a project that then goes live, it’s like conducting mini experiments into people’s behavior. We can learn from what people actually do instead of what theory tells us they will do,” he explains.
“We’re not into manipulation. People join these communities on a voluntary basis, and they can choose to opt in or out of the project. If the project has collectivized governance, they may be choosing these rules for themselves.”
“This is very different to what we get with something like China’s social credit system,” he adds. “This is dystopian, as there is no choice — everyone must take part whether they want to or not.”
Instead, McKinley compares behavioral change directed by tokenomics as little nudges, like putting the cookie jar out of sight when you want to eat fewer calories. “Influencing behavior does not have to be malicious,” he says. All these incentives and interactions are built from freely programmable and endlessly configurable code. That poses a dilemma of choice when the possibilities are so open-ended.
Tokenomics is one of the most important aspects of Crypto
If you don’t understand tokenomics, you’re not gonna make it.
Here’s everything you need to know about Tokenomics🧵
cointelegraph.com