Token Economics: A rising knack for decentralized investments

Figure 1: History of the Web
Figure 1: History of the Web. Notes: This figure illustrates the various stages of evolution that the Web has undergone in the context of the blockchain technology (Voshmgir, 2019).
Table 1: Tokenomics parameters, sample findings and research findings.
Notes: This table illustrates all the tokenomics parameters, along with a comparison of the sample findings and the research findings (findings from the literature), as analyzed by Wandmache (2019).
Figure 2: Token Utility and Value
Figure 2: Token Utility and Value. Notes: This figure illustrates the utility and value obtained from tokens based on the role, purpose and feature of the token (Mougayar, 2017).
Figure 3: Token Economics Framework
Figure 3: Token Economics Framework. Notes: This figure illustrates the complete framework for understanding Token Economics (Tan, 2019). NFI stands for Non-Financial Incentives and FI for Financial Incentives. In Mechanism Design and Token Design, the words to the left of the line are factors that enable user participation and the words to the right are the factors which are highly automated (governed by the code written). It is important to note that the relevance of these variables depends on the use-case, function and business model of the token. Another thing to note is that this framework only considers the endogenous variables and not external variables like the popularity of blockchain, the legislation surrounding it, and so on.
Figure 4: Correlation Network plot of all ten cryptoassets
Figure 4: Correlation Network plot of all ten cryptoassets. Notes: This figure shows the correlation network between all ten cryptoassets as mentioned above. Positive correlation is denoted by a green line and negative correlation is denoted by a red line. The thickness of the line indicates the strength of the correlation between the two cryptoassets in the nodes. The thicker the line, the higher the correlation. This image was plotted using the qgraph⁶ package in R programming.
  • [1] Since the record of each and every transaction on the peer-to-peer network is unique and each token is thoroughly verified, the value from it can be spent only once. If a copy of each transaction file could be created, then the same value could be spent multiple times.
  • [2] The chicken and egg problem refers to the fact that for a currency token to be used by many users, it requires a high value and high liquidity. However, high value and liquidity can only be achieved if the currency token is used by many users. Therefore, it takes a long time for a currency token to appreciate in value. Note: The chicken and egg problem won’t apply to cryptocurrencies which are backed by the government since governments can create demand by forcing everyone to use the currency token.
  • [3] Refer to Krueger (2018) for the complete list of laws that the economic models of any new token should follow.
  • [4] The data for the close prices of the cryptoassets was obtained from CoinMarketCap (2021) and the returns were calculated as the % change in the close prices of the cryptoassets.
  • [5] The choice of this time period is because Uniswap launched its UNI governance token only on 18th September 2020 (Decrypt, 2021) and therefore, the common time period for all the cryptoassets was from 18th September 2020 to 8th July 2021.
  • [6] Refer to CRAN (2021) for the complete documentation of the qgraph package.
References101 Blockchains. (2021, May 31). Tokenomics: The Beginner’s Guide. https://101blockchains.com/tokenomics/.Binance Research. (2019, March 20). Are Cryptoassets Highly Correlated? https://research.binance.com/en/analysis/correlations-q1-2019.Bitcoin.com. (2019, January 6). Report: Most Major Crypto Assets Show Close Price Correlation. https://news.bitcoin.com/report-most-major-crypto-assets-show-close-price-correlation/.Chicago Booth Review. (2018, February 7). The Bitcoin market isn’t irrational. https://review.chicagobooth.edu/finance/2018/article/bitcoin-market-isn-t-irrational.CoinMarketCap. (2021). Global Cryptocurrency Charts. https://coinmarketcap.com/charts/.CoinMarketCap. (2021, July 8). Today’s Cryptocurrency Prices by Market Cap. https://coinmarketcap.com/.CRAN. (2021, January 28). Package ‘qgraph’. https://cran.r-project.org/web/packages/qgraph/qgraph.pdf.Decrypt. (2021, June 17). Uniswap: Beginner’s Guide To the Leading DEX (2021). https://decrypt.co/resources/what-is-uniswap.E-Crypto News. (2021). How Many Cryptocurrencies Are There In 2021? https://e-cryptonews.com/how-many-cryptocurrencies-are-there-in-2021/.Forbes Advisor. (2021, June 25). Top 10 Cryptocurrencies In June 2021. https://www.forbes.com/advisor/investing/top-10-cryptocurrencies/.Fort, B. L. (2018, August 1). Economics 101: Demand. https://medium.com/impact-economics/economics-101-demand-301f79e90e51.International Banker. (2020, April 8). Token Economics: An Emerging Field. https://internationalbanker.com/brokerage/token-economics-an-emerging-field/.Krueger, F. (2018, February 12). How to think about Tokenomics. https://medium.com/workcoin/how-to-think-about-tokenomics-b3da509444e5.Mougayar, W. (2017, June 10). Tokenomics — A Business Guide to Token Usage, Utility and Value. https://medium.com/@wmougayar/tokenomics-a-business-guide-to-token-usage-utility-and-value-b19242053416.Nasdaq. (2021, October 5). Everyone is early to Bitcoin. https://www.nasdaq.com/articles/everyone-is-early-to-bitcoin-2021-10-05.Rijmenam, M. v. (2018, April 10). Token Economics: Why and How Tokens Fuel the Decentralised Economy. https://www.linkedin.com/pulse/token-economics-why-how-tokens-fuel-decentralised-mark-van-rijmenam.Tan, L. (2019). Token Economics Framework. SSRN Electronic Journal, 1–17.Voshmgir, S. (2019). Chapter 1: What is the Token Economy? In S. Voshmgir, What is the Token Economy? O’ Reilly Media, Inc.Wandmache, R. (2019). Tokenomics. In S. Goutte, K. Guesmi, & S. Saadi, Cryptofinance and Mechanisms of Exchange: The Making of Virtual Currency (pp. 113–124). Springer Nature Switzerland AG.

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