The Foundations of Tokenomics
Why it matters for entrepreneurs?
Tokenomics is a broad concept with various interpretations based on individual expertise and perspectives. In this article, we will focus on the economic, marketing, and managerial aspects of tokenomics from an entrepreneurial standpoint. To begin, tokenomics merges fundamental economic primitives with blockchain primitives.
Microeconomics, behavioral economics, and economic sociology:
- What is the utility function of each stakeholder, or in simpler terms, their decision-making motivations?
- Factors influencing decision-making: token price volatility, actual yield, expected yield, and competitor conditions like Curve or PancakeSwap.
- Understandably, the motives of a large liquidity provider differ from those of a small speculator.
Macroeconomics:
- Analyze the equilibrium of supply and demand, considering monetary factors like inflation.
Corporate finance:
- Project the P&L for the project, investor returns on the token, and potential treasury drawdowns.
Economic design, systems dynamics, and game theory:
- Determine how users will interact within the complex system.
- Understand how the system behaves when elements of the economic structure change.
The Difference between Tokenomics and Cryptoeconomics
In the realm of digital finance, it is essential to understand the distinction between tokenomics and cryptoeconomics. Although there is no universal standard, one key differentiator is the presence or absence of a native token. When tasked by the TON Foundation to develop an economy around its native token, the focus is on tokenomics.
In contrast, if we construct an online store that accepts payments in TON but lacks its token, we refer to it as cryptoeconomics. From an economic, marketing, and management perspective, this approach closely resembles traditional economic calculations in Web2. This raises the question: How do economic calculations differ in Web2?
The essence of Web2 economic calculations lies in establishing unit economics—a measure of how long users engage with a service and how much they spend monthly (LTV). This figure is then compared to the cost of acquiring a user (CAC).
In contrast, if we construct an online store that accepts payments in TON but lacks its token, we refer to it as cryptoeconomics. From an economic, marketing, and management perspective, this approach closely resembles traditional economic calculations in Web2. This raises the question: How do economic calculations differ in Web2?
The essence of Web2 economic calculations lies in establishing unit economics—a measure of how long users engage with a service and how much they spend monthly (LTV). This figure is then compared to the cost of acquiring a user (CAC).
Why Web3 Space IS different?
In Web3, significant changes are taking place. Here are some key points:
Decentralized Influence:
Exploit Potential:
Market Volatility:
Decentralized Influence:
- Each user's actions directly impact the system.
- Rewarding users with non-valuable tokens can lead to selling and price drops.
- Stakers may react by selling, initiating a downward spiral.
- Users might not engage if reward tokens lack value.
- Influencing user behavior is crucial, but direct control is not possible.
- Mechanisms must be designed to align user actions with the founder's goals while considering varying user motivations.
Exploit Potential:
- Users seeking "unfair" advantages are drawn to projects with higher TVLs.
- Robust security measures are necessary to mitigate potential exploits.
Market Volatility:
- Web3 and tokenomics are emerging and evolving rapidly.
- Token prices can be highly volatile, with rapid shifts in popularity and value.
To sum it up
Tokenomics is a multifaceted discipline that blends traditional economic principles with the unique characteristics of blockchain technology. Successful tokenomic design requires a deep understanding of micro and macroeconomics, behavioral incentives, and game theory. It's crucial to consider the motivations of various stakeholders, anticipate how they might interact with the system, and design mechanisms that align their interests with the project's overall goals.
Unlike Web2, where user acquisition and retention are paramount, Web3 demands a more nuanced approach. Decentralization means directly controlling user behavior isn't feasible. Instead, tokenomics focuses on crafting incentives that guide users towards actions beneficial to the system's health and growth.
The world of Web3 and tokenomics is still in its nascent stages, marked by volatility and potential exploits. As the space matures, robust tokenomic models will be essential for creating sustainable and valuable blockchain-based projects. Those who master the art of tokenomics will be well-positioned to shape the future of this exciting and transformative technology.
Unlike Web2, where user acquisition and retention are paramount, Web3 demands a more nuanced approach. Decentralization means directly controlling user behavior isn't feasible. Instead, tokenomics focuses on crafting incentives that guide users towards actions beneficial to the system's health and growth.
The world of Web3 and tokenomics is still in its nascent stages, marked by volatility and potential exploits. As the space matures, robust tokenomic models will be essential for creating sustainable and valuable blockchain-based projects. Those who master the art of tokenomics will be well-positioned to shape the future of this exciting and transformative technology.
References
- Giants founder Alexey Karanyuk lecture: Tokenomics for Startups: Everything a Founder Needs to Know