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- Herausgeber: Packt Publishing
- Kategorie: Wissenschaft und neue Technologien
- Sprache: Englisch
Explore the differences between ICOs, cryptocurrencies, and tokens (offerings), enabling the reader to understand the ICO landscape, how millions were raised in minutes, and where the future of the tokenized economy is heading. Take a real-time journey, cutting through the myths, understanding token choices available to everyone.
Key Features
- Interviews with key figures in Tokenomics
- Unbiased evaluation and comparison of the different offerings
- Conceptual analysis of the market's reaction
- League table showing current exposure
- An account of the theoretical and current legal foundations of alt coins and tokens
- A complete introduction to the phases of an initial coin offering
Book Description
Tokenomics is the economy of this new world. This is a no-holds-barred, in-depth exploration of the way in which we can participate in the blockchain economy. The reader will learn the basics of bitcoin, blockchains, and tokenomics; what the very first ICO was; and how over a period of 5 years, various projects managed to raise the enormous sums of money they did. The book then provides insights from ICO experts and looks at what the future holds. By comparing the past, current, and future of this technology, the book will inform anyone, whatever motivates their interest.
The crypto shift of blockchains, ICOs, and tokens is much more than just buying bitcoins, creating tokens, or raising millions in a minute in an ICO. It is a new paradigm shift from centralized to decentralized, from closed to open, and from opaqueness to transparency. ICOs and the creation of tokens during the craze of 2017 needed a lot of preparation, an understanding of cryptocurrencies and of emerging legal frameworks, but this has spurred a new movement to tokenize the world.
The author gives an unbiased, authoritative picture of the current playing field, exploring the token opportunities and provides a unique insight into the developing world of this tokenized economy. This book will nourish hungry minds wanting to grow their knowledge in this fascinating area.
What you will learn
- The background of ICOs and how they came to be
- The difference between a coin and a token, a utility and a security, and all the other acronyms you're likely to ever encounter
- How these ICOs raised enormous sums of money
- Tokenomics: structuring the token with creativity
- Why it's important to play nicely with the regulators
- A sneak peak into the future of ICOs from leaders in the industry
Who this book is for
With the media hype about bitcoin, this book appeals to anyone, from those with a general interest in anything crypto, or those with some knowledge of the nuances between cryptocurrency, ICOs, IPOs and the Token economy.
Das E-Book können Sie in Legimi-Apps oder einer beliebigen App lesen, die das folgende Format unterstützen:
Seitenzahl: 575
Veröffentlichungsjahr: 2018
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Table of Contents
Tokenomics
Tokenomics
Copyright © 2018 Packt Publishing
All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, without the prior written permission of the publisher, except in the case of brief quotations embedded in critical articles or reviews.
Every effort has been made in the preparation of this book to ensure the accuracy of the information presented. However, the information contained in this book is sold without warranty, either express or implied. Neither the authors, nor Packt Publishing or its dealers and distributors, will be held liable for any damages caused or alleged to have been caused directly or indirectly by this book.
Packt Publishing has endeavored to provide trademark information about all of the companies and products mentioned in this book by the appropriate use of capitals. However, Packt Publishing cannot guarantee the accuracy of this information.
Acquisition Editors: Frank Pohlmann and Andrew Waldron
Project Editor: Radhika Atitkar
Content Development Editor: Joanne Lovell
Technical Editor: Nidhisha Shetty
Proofreader: Safis Editing
Indexer: Pratik Shirodkar
Graphics: Tom Scaria
Production Coordinator: Sandip Tadge
First published: October 2018
Production reference: 1041018
Published by Packt Publishing Ltd.
Livery Place
35 Livery Street
Birmingham B3 2PB, UK.
ISBN 978-1-78913-632-6
www.packtpub.com
To my dear wife Tara whose support has made this dream possible and to my children Ekun, Jayee, and Taline. If daddy can do it, so can you
– Sean Au
To Penny Power who has powered me through the last 30 years since we first met by accident on September 1st 1988, supporting and believing in all the risks we chose to take, thank you for creating the next generation of Power's (PowORS) in Hannah 1992, Ross 1994, and TJ Power 1997. To our three little ones I say, remember the six magic words "we become what we think about" and always be Open Random Supportive (ORS)®
– Thomas Power
Thomas and I
"Just share what you know," he said to me as we sat at the back of a meeting room whispering to each other like kids in a classroom. And it was on that morning, on the 5th of June 2015, in a meeting at Canary Wharf, London where he drew the Nike tick and wrote beneath "Just Share It"... and I've been doing that ever since.
I had heard of the name Thomas Power back in August 2014 in conjunction with words like "a social media guru" and "the guy who teaches high profile board members and individuals how to tweet." That sounded silly to me but then, I knew nothing about social media, and to tell the truth, I didn't really care.
My Twitter, Facebook, and LinkedIn accounts where all dormant, gathering cob webs in some dusty attic in cyberspace. I didn't rate them because I didn't understand them. Besides, as an introverted geek, why on Earth would I want to put myself "out there?" Little did I know that going to London for the first time and accidentally meeting Thomas Power would change my perspective and eventually change the way I would see the world.
At the back of that meeting room I hammered Thomas on why social media was a waste of time, questioned the benefits of being constantly present online and how it was a waste of time tweeting about your favorite TV show or what you just ate.
In the next 45 minutes, Thomas talked about being Open, Random, and Supportive, about being willing to serve and about staying hungry. Concepts that were beyond me but not strange to me. I then thought to myself, "maybe he knows something that I don't. Besides, what do I have to lose?"
Upon my return to New Zealand, I created a new Twitter account, dusted the cob webs off my Facebook and LinkedIn profiles, and tentatively tweeted my first tweet. I started using an application called Klout (now shutdown), which measured one's social influence. I had no intention of trying to be popular but what struck me was the tag line. "Be known for what you love." This got me thinking, what is it that I love?
I've been interested in bitcoins since 2014 as well as blockchain technologies and decided to pursue this full time shortly after. It was one of the biggest decisions of my life. I spent an entire year reading everything I could on the internet and probably only scratched the surface! What has transpired is a deeper understanding of how money works, how the world works, and doing things I never thought possible such as co-authoring a book.
The journey of living and not just existing, of creating a dream list and not a bucket list, and the attitude of whether I succeed or fail being able to tell my kids that at least your daddy gave it a go is not for the faint hearted. It puts to the test the very person that you are. It is an arduous journey. One fought with hard work and determination along with more than the occasional inspirational pick-me-up YouTube videos from the likes of Eric Thomas (@Ericthomasbtc), Gary Vaynerchuck (@garyvee), and Jay Shetty (@JayShettyIW).
I challenge those in similar situations to take a chance and explore this new world, but remember that your fundamentals and core values need to be right. Don't just be social for the sake of being social. Be open, random, and supportive. Help others and stay hungry.
Endorsements
Tokenomics is a great book! Sean and Thomas give a fascinating insight into the wonderfully exciting world of cryptocurrencies, tokens, and ICOs and how this technology is going to change the world. It takes the reader on a journey through time, from the first ICO right through to what could happen 5 years from now.
Dickie Armour
CCO,CorreInnovation.com
My mission as City A.M.'s Crypto Insider is to learn and share new knowledge in the fields of AI, Blockchain, Cryptocurrency, and Tokenization. Sean and Thomas's book Tokenomics is a must read for anyone wanting to get a valuable insight into the space and I can highly recommend it.
James Bowater
City AM's Crypto Insider
www.cityam.com/crypto-insider
Sean and Thomas demystify the concepts of blockchains, ICOs, and tokenomics and highlight how this technology will have a profound effect in the years to come. We have seen a new asset class created that can help address some of the challenges in our fast changing digital world from raising capital, helping to attract, engage, reward, and retain customers and helping to give control back to individuals!
Jonny Fry
CEO TeamBlockchain Ltd
www.teamblockchain.net
The momentum around cryptocurrency represents an opportunity for companies to engage communities and solve the "chicken and egg" problem of marketplaces in more innovative and impactful ways. Yet, Token Sales and Initial Coin Offerings (ICOs) are still clouded with uncertainty, even after you remove the bad actors. Tokenomics takes a much-needed look into the challenges that accompany the new world of tokens, blockchain, and the potential for token economies.
Vinny Lingham
Co-founder and CEO, Civic
An exciting and inspiring literary journey into the future of decentralization.
Jason Meyers
Founder of Auditchain.com
Blockchain and distributed ledger technologies have the potential to change the ways many industries work. This book does a great job of deconstructing cryptoeconomics, ICOs, and new models for businesses and individuals to thrive.
Nimo Naamani
Co-founder Horizon State
www.horizonstate.com
Sean and Thomas have done a great job of demystifying the concepts of blockchains, ICOs, and tokenomics in an easy to digest manner. Readers will come away realizing that this technology will have a profound effect on our future. A must read for anybody in business.
Mark Pascall
Director, BlockchainLabs.NZ and President of the Blockchain Association of New Zealand
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Contributors
About the authors
Sean Au is a blockchain researcher and trainer with a B.E. (Hons) in Electrical Engineering and a Masters in Engineering Management from the Canterbury University in NZ. His masters' thesis 19 years ago was titled "Information Intermediaries," but with the rise of decentralization, that old model has surely crumbled.
With over 15 years of experience in the field of IT, Sean started out as a programmer, and prior to entering the blockchain rabbit hole, he was an integration architect and consultant, joining cloud systems together.
Sean is a Certified Bitcoin Professional (CBP) and designed and delivered NZ's first blockchain training course in association with the Blockchain Association of New Zealand (BANZ). Sean is the immediate past president and current education chair of BANZ and a member of the NZ ISO/TC307 committee on blockchains and distributed ledger technologies.
Sean continues to contribute by building practical applications and sharing it with the local community as the co-organizer of the Wellington blockchain meetup and organizer of the Wellington smart contract meetup. Some of his projects include "Ubering Energy on the Blockchain" and placing his land title on the blockchain.
This book is the culmination of two minds from different ends of the spectrum with over 24 months of research. It was designed to capture a special moment in history and paint a picture of how the ICO craze came about. It is for the generations to come that want to hear and want to re-live the events that launched the token economy.
There are plenty of people who helped bring this book to fruition, and we are grateful to all of them. First of all, this book would not be possible without the great team at Packt who have done a fantastic job. Producer Andrew Waldron, project editor Radhika Atitkar, development editor Joanne Lovell, technical reviewer Reyan Lamrani and Rick O'Neill, founder of Look Touch & Feel, a digital marketing and automation agency for authoring chapter ten and his expert knowledge in the digital marketing space.A huge thanks to those that Thomas and I have met on this journey and inspired us in one way or another.
Thomas Power is an author of 7 books since 1998 and has made over 1000 speeches in 56 countries covering all aspects of technology, social media, community building, cloud, and SaaS Apps.
Now the world has shifted its attention to Blockchain, Bitcoin, Ethereum, ICOs, Tokenomics, Cryptonomics, Internet of Things, and Artificial Intelligence, and Thomas has shifted with the times, making presentations on these subjects to conferences and board members around the globe.
Thomas is ranked No 11 in the Crypto 100 most Influential People. Thomas is also ranked No 9 in The Blockchain Fintech 100 People.
Thomas has over 290,000 followers on Twitter and is ranked No. 1 in the world on LinkedIn with 680 written testimonials.
Thomas is a board member and Director of six companies, including 9Spokes PLC in New Zealand who supply Barclays, Royal Bank of Canada, and Bank of New Zealand with Cloud SaaS AI solutions for small businesses and Team Blockchain Ltd based in London.
As GDPR kicked in May 25th 2018, Thomas has woken up many executives to the power of Community Building on The Blockchain to avoid the penalty fines of 4% of global turnover.
The next big development is for us all to hold our identity on The Blockchain so we can go through Know Your Customer (KYC) and Anti-Money Laundering (AML) processes with Banks and Financial Services companies in one click like Amazon Pay. This will further allow us all to trade with tokens for products and services from Brands so we are incentivized and rewarded with every interaction… much like the opening show of Black Mirror part three.
And to all those who have been most helpful guiding me either on Twitter, WhatsApp, LinkedIn, Telegram, Signal, Slack, Skype, and Facebook, thank you all very much indeed as it's not possible to do this research and analysis without your insights and your connections.
– Thomas Power
About the reviewer
Reyan Lamrani is from a traditional finance background and is currently building an economic and financial framework adequate to the Blockchain ecosystem. Reyan primarily works on Token Model Design and Token Valuation for ICOs. He helps the start-ups going through an ICO to define a relevant Token ecosystem to attract rational buyers. He puts the value creation at the heart of its analysis. Reyan is the Founder of Token Capital Market, a consulting firm for the crypto market.
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Preface
Tokenomics is the economy of this new world. This is a no-holds-barred, in-depth exploration of the way in which we can participate in the blockchain economy. The reader will learn the basics of Bitcoin, blockchains and tokenomics, what the very first ICO was and how over a period of 5 years, various projects managed to raise the enormous sums of money they did. It then provides insights from ICO experts and looks at what the future holds. By comparing the past, current, and future of this technology, the book will inform anyone, whatever motivates their interest.
The crypto shift of blockchains, ICOs and tokens is much more than just buying bitcoins, creating tokens or raising millions in minute in an ICO. It is a new paradigm shift from centralized to decentralized, from closed to open and from opaqueness to transparency. ICOs and the creation of tokens during the craze of 2017 needed a lot of preparation, an understanding of cryptocurrencies, and of emerging legal frameworks but this has spurred a new movement to tokenize the world.
The author gives an unbiased, authoritative picture of the current playing field, exploring the token opportunities and provides a unique insight into the developing world of this tokenized economy. This book will nourish hungry minds wanting to grow their knowledge in this fascinating area.
Who this book is for
With the media hype about bitcoin, this book appeals to anyone, from those with a general interest in anything crypto to those with some knowledge of the nuances between cryptocurrency, ICOs, IPOs, and the oken economy.
What this book covers
Chapter 1, Once Upon a Token, provides an introduction to tokenomics looking at the meaning of a network of markets and compares the Internet of information versus the Internet of value and what tokenomics is. It looks at the first occurrence of the word tokenomics and discusses tokenization and the benefit it provides.
Chapter 2, A Bit of Coin Theory, lays the foundation, with a bit of coin theory looking at digital currencies before bitcoin and why they failed, and how bitcoin was born, along with some of the founding principles. After bitcoin, we look at the era of alternative coins known as "altcoins" and then take a deeper dive into what a blockchain actually is, including how you can find a Nelson Mandela tribute on the blockchain. We then introduce you to smart contacts and provide an overview of the peak of the ICO craze in 2017.
Chapter 3, The Potential of ICOs, looks at the potential of ICOs, including what an ICO is and the associated and somewhat confusing terminologies involved. We do a comparison between the dot-com bubble and the dot-coin bubble, then we consider the challenges ICOs face, and we finally take a quick look at the new era of ICO innovation that will result from this massive global crypto experiment.
Chapter 4, Token Varieties, takes you on a journey back in time to the very first ICOs on the bitcoin blockchain, then ICOs on custom blockchains, before delving into a number of ICOs on the ever-popular Ethereum blockchain. We also highlight non-blockchain technologies.
Chapter 5, The Need for a Token, asks the question on everyone's lips: do we really need a token? We go through various thought experiments and compare how existing companies versus new companies incorporated tokens into their business model. We present some critical consideration points, to guide you if you are looking to start your own token creation journey.
Chapter 6, Playing by the Rules, introduces you to the concept of security tokens and looks at what they are in the context of ICOs. We then explain the Howey Test and outline the global stances of regulators around the world. We also present several case studies, where the US regulators closed down ICOs for unscrupulous behavior. We also discuss the evolution of white papers.
Chapter 7, The Token Sales Mechanics, explores the often very creative token sales mechanics of several high profile ICOs, looking at the token supply, distribution, presales strategy, and bonuses provided. It considers ICOs that had a hard cap, a soft cap, and even those with no caps and explains the concept of a reverse Dutch auction. Finally, we look at some token mechanic considerations as a guideline.
Chapter 8, White Paper, Website, and Team, looks at the critical components of an ICO, namely the white paper, the website, and the team. White papers have certainly evolved from being technical and mathematical in nature, to being marketing brochures and investment statements. The chapter elaborates on why a well-designed website is very important, along with a great team to boot because quite often, it is not the idea but the people behind the idea that is the difference between success and failure.
Chapter 9, Social Media and Influencers, presents social media and influencers from a different light, exploring the deeper meaning of being social, before explaining what social media is. It then looks at how ICOs use social media, and covers some of the major influencers in the crypto landscape on Twitter and YouTube.
Chapter 10, Marketing and the Launch, covers the marketing and launch of an ICO by describing the state of ICO marketing, examining the messaging and tools used, and, of course, discussing the all-important community aspect. It also explains various marketing strategies, such as bounty campaigns, airdrops, and announcements, which all build up to the launch date.
Chapter 11, Voices of the ICO World, provides a unique insight into several ICO founders: their projects, their tokens, how their ICO went, and general thoughts on the future of ICOs, tokens, and the token economy.
Chapter 12, The Future, looks at the future, highlighting that bitcoin is the only true cryptocurrency without a leader. It takes a closer look at a world full of tokens and what happens when saturation hits. It also covers the rise and importance of privacy coins, quantum blockchains, governments, and societies.
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Conventions used
There are a number of text conventions used throughout this book.
Bold: Indicates a new term, an important word, or words that you see on the screen, for example, in menus or dialog boxes, also appear in the text like this. For example: "To the technical purest amongst us, in an ICO, the coins that investors receive are actually digital tokens, which is why sometimes they are called an Initial Token Offering."
Note
Warnings or important notes appear like this.
Tip
Tips and tricks appear like this.
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Chapter 1. Once Upon a Token
Tip
The future is decentralized and the future is tokenized.
Out of all the technological advancements that humans have achieved throughout history, the creation of a simple token on a simple digital distributed ledger has the potential to redefine the very meaning of value. This is because the underlying technology, which will be discussed throughout this book, will open up new markets, and these new markets will enable everyone to connect, participate, and exchange value in ways we never thought possible.
We are already seeing snippets of this, such as being able to send value around the world in seconds at a fraction of the normal cost; crypto and token markets trading 24/7 instead of having to close at the end of each business day and all weekend, and, of course, accessing permissionless markets with just a computer and an internet connection.
In this chapter, we start off the journey by introducing some high-level concepts. We will talk about the exciting technology in more detail in subsequent chapters. This first chapter looks at the idea of a network of markets, explains what tokenomics is and paints a picture of a tokenized economy.
These concepts should become clearer as you progress through the book and hopefully, by the end, you can join the network of dots and make your own connections.
We may be surrounded by fancy words, such as "tokenomics" or "blockchain technologies", but beneath it all we are humans trying to connect. We must connect in order to communicate, produce, create, and exchange, all within a market.
A network of markets
Markets have existed for as long as humans have engaged in trade and markets have emerged as a natural process of social coordination. The evolution of markets is constant, through a series of technological discoveries that help these markets to become more efficient.
Money has helped to facilitate trade and make markets much more efficient than bartering. In fact, it was around 5,000 BC that scripts first appeared and then around 2,500 BC when the first coinage appeared. With the onset of the agricultural revolution, and the rise of cities and kingdoms, an economy of favor and obligation didn't work. Therefore, money was invented as a much-needed solution.
Money allows participants within a community to compare quickly and easily the value of different commodities, and to easily exchange one thing for another. Cowry shells were a very popular representation of money used for thousands of years in Africa, South Asia, East Asia, and Oceania (Sapiens: A Brief History of Humankind, Yuval Noah Harari). Fast-forward a few thousand years and computers have made updating stock prices much more efficient than using chalk and blackboards, but how have networks and markets developed?
Naval Ravikant, the CEO and founder of AngelList, a website for startups, angel investors, and job-seekers, wrote a very insightful 36-tweet tweetstorm in June 2017 about a network of markets. Here is a summary of Naval's key points:
Blockchains will replace networks with markets. Humans are the networked species. The first to network across genetic boundaries and thus seize the world. Networks allow humans to co-operate and to allocate the fruits of our co-operation. It is this overlapping network that helps to create and organize society. Physical, digital, and mental roads connected us all together. Money is a network, religion is a network, a corporation is a network, roads are networks, electricity is a network, and all these networks must be organized according to rules. They require rulers to enforce these rules against cheaters. (https://twitter.com/naval/status/877467629308395521).
Ravikant further explained the different types of networks, such as social networks, the search network, the telecommunications network, and networks run by the elite, such as the university network, the medical network, and the banking network. The most exciting network mentioned was the blockchain network:
"Blockchains are a new invention that allows meritorious participants in an open network to govern without a ruler and without money. They are a merit-based, tamper-proof, open voting system where the meritorious are those who work to advance the network. As society gives you money for giving society what it wants, blockchains give you coins for giving the network what it wants".
The tweetstorm contained some very deep concepts (you may want to refer back to this when you reach the end of this book) that can be encapsulated by the very first tweet:
Blockchains will replace networks with markets.
Without having to understand what a blockchain is, but accepting that it is some technology that can enable the transfer of value without involving an intermediary, this statement conveys the idea that there is a technology that has come along and, for the very first time, allowed the creation of a network of markets, which is profoundly more powerful than the network of information.
These networks are essentially Open, Random, and Supportive (ORS)®, which is a concept expanded on in Chapter 9, Social Media and Influencers. Open and random mean permissionless because anyone can join the network at any time. Supportive means that these networks are neutral, censorship-resistant, and democratized.
This network of networks will also have to be interconnected because, as we've seen time and time again, the world will never agree on a single ledger or a single platform, as long as each provider wants to own the network.
Consider this: the largest taxi company in the world (Uber) owns no cars, the largest media company (Facebook) creates no content, the largest accommodation provider (Airbnb) owns no hotels, the largest e-commerce companies (such as Alibaba) own no inventory, and a $130 billion USD currency (bitcoin) has no CEO, no bank branches, and no customer support. What do they all have in common? They all have a network, be it of cars, rooms, suppliers, or trust (https://techcrunch.com/2015/03/03/in-theage-of-disintermediation-the-battle-is-all-for-thecustomer-interface/).
The Internet of information
The internet has allowed access to vast amounts of information and the ability to communicate with anyone in the world from a device in the palm of our hands. It has been a mammoth effort from contributors around the world putting all this information online. Need to know how to cook your better half's favorite dish? The chances are that the recipe will be online and there will probably be a video showing you step-by-step the process of cooking it too. In fact, it was reported that "how to" video searches have surged 70%, with over 100 million hours watched in 2015. (https://searchengineland.com/youtube-how-to-searches-up-70-yoy-with-over-100m-hours-of-how-to-videos-watched-in-2015-220773).
Near instant access to any kind of information was a scene from science fiction movies only several decades ago, but this has now become a reality. The ability to access this information and knowledge, and to communicate, has transformed multiple industries, such as media, telecommunications, and health, and the list goes on. What this information didn't change, though, was how value was transferred because intermediaries were still required.
Take the action of purchasing a pair of shoes online. The payment from the consumer to the producer was not a straight line between two parties but often a zigzag, with multiple intermediaries involved. This was necessary because there was no other way.
Another example is the political system, where when we vote for a representative, we are transferring the rights of our political value to the representative, so that he or she can represent our views for a certain period of time. We have always used intermediation as a tool to scale our society and this was required because there was no better technology to do anything differently.
We have since discovered, or perhaps, more appropriately, we knew all along, that this intermediation is not perfect. Look at financial institutions as an example: it could be argued that banks are the reason that more than half of the world's population has been excluded from basic financial services.
Then comes the predicament where these intermediaries or representatives, once they get big enough and the value they accumulate is large enough, have more incentives to service their own interest than those that they represent.
This leads us to the question: why is the internet that we know and love, that has changed so many aspects of human society, not managed to enable us to transfer value? The reason is relatively simple: information can be almost infinitely replicated without cost. The same music file can be downloaded millions of times, or a digital image can be replicated, shared, and used many times over, all for almost zero cost. This problem didn't have an answer in the decentralized world, until the invention of bitcoin.
Bitcoin, a digital asset, was really a blockchain technology that presented itself as bitcoin. Many people then incorrectly thought that bitcoin was the first application of the blockchain technology. More on this in Chapter 2, A Bit of Coin Theory. This is analogous to the development of other technologies, where there was some product that embodied the technology, but as the technology matured, there were different designs aimed at different use cases.
Take, for example, automobile technology, where the goal was to get from point A to point B quicker than on foot or horseback. This technology then developed to getting from point A to point B with a heavy load (a truck), or with a group of people (bus), or even with renewable energy (electric cars). This design-driven approach is focused on one specific use case, rather than a generic design that fits every use case.
Blockchain is similar because there are thousands of token projects searching to find the right use case to focus on and be successful at. The challenge, though, is to look beyond bitcoin because the modus operandi is that we only see what we already know. Many thought PCs were just powerful typewriters and the internet just a place where computer nerds hung out. In fact, Keynesian economist Paul Krugman, who was awarded the Nobel Prize in Economic Sciences in 2008, wrote an article in 1998 on the topic:
"The growth of the internet will slow drastically, as the flaw in 'Metcalfe's law'—which states that the number of potential connections in a network is proportional to the square of the number of participants—becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the internet's impact on the economy has been no greater than the fax machine's. (http://web.archive.org/web/19980610100009/www.redherring.com/mag/issue55/economics.html)."
We all know now that the internet's impact on the economy is much greater than the fax machine, but it was Krugman's most recent article, in July 2018 in The New York Times, that had many critics up in arms:
"In other words, cryptocurrency enthusiasts are effectively celebrating the use of cutting-edge technology to set the monetary system back 300 years. Why would you want to do that? What problem does it solve? I have yet to see a clear answer to that question" (https://www.nytimes.com/2018/07/31/opinion/transaction-costs-and-tethers-why-im-a-crypto-skeptic.html).
It is almost impossible to see the full potential of any technology from the beginning. Bitcoin may be that powerful typewriter but we must wait for its true potential to reveal itself in the next decade or so. This is because bitcoin is the first network of networks for the transfer of value without requiring an intermediary.
The Internet of value
The Internet of value allows important things in an economy or market to be transferred, instead of just information. The difference between information and value is the scarcity: if you give information to someone you still own it, but if you transfer value to someone, you do not own it anymore. Examples include stocks, intellectual property, art, music, votes, identity, and, of course, money. The Internet of value provides the ability to move value as easily as we move information.
Being able to send the same $1,000 to more than one recipient is not a good idea and this is known as the "double spend problem," which is explained in Chapter 2, A Bit of Coin Theory. The problem has previously been managed through intermediaries, such as banks, governments, and numerous other third parties, to establish trust in our economy. They provide the service of identifying people, verifying, clearing, and settling the transaction, and keeping records, so that you cannot spend the same $1,000 twice.
The result, over time, is an increase in cost, a reduction in value, and the exclusion of a large number of people from the global economy. These intermediaries also capture our all-important data. With this new technology called "blockchains", or more accurately "distributed ledger technology", there is a decentralized network where trust is native to the medium. Value can be created, transferred, or exchanged and participants trust the network and the mathematics (believe it or not, the world we live in is governed by the laws of mathematics).
In this Internet of value world, value is represented by none other than a token and the value it represents is governed by the various laws of economics, where the simplest is supply and demand. This has given rise to the concept of tokenomics.
What is tokenomics?
The word "tokenomics" is a portmanteau, or combination, of the words "token" and "economics" and it is a relatively new term that rose to popularity in the middle of 2017. As with anything new, the meaning has yet to be standardized, with many industry leaders attempting to provide their own definition. This is similar to attempting to define blockchains or the internet in the early days, as there are a range of ideas that are encapsulated within the idea of tokenomics.
Tokenomics, however, encompasses the concept of the study, design, and implementation of an economic system to incentivize specific behaviors in a community, using tokens to create a self-sustaining ad hoc mini economy. It includes game theory, mechanism design, and monetary economics.
If we think back to the loyalty points we get from our local supermarket or an airline, when we collect or redeem them some of us analyze the economics. For example, I need to purchase another $50 worth of groceries in order to receive a $15 gift voucher because it only gets paid out after 200 points have been collected, and I'm on 195 points ($10 of spending for one point). Another example is asking how many flights do I need this year to achieve gold status and how many flights do I need to maintain gold status? Anyone who has gone through these scenarios could argue that they were analyzing the tokenomics of the loyalty points system.
Tokenomics was selected as the title of this book because with all the ICOs in the last few years, and this new tokenized economy that is emerging, token supply, inflation rate, and even the various incentive schemes can all be encapsulated into this word.
Micro and macro
In economics there are two major fields: microeconomics and macroeconomics. Microeconomics focuses on individuals or companies, which could mean studying the supply and demand for a specific product or the production that an individual or business can produce. Macroeconomics focuses on the aggregate issues that affect the overall economy, such as the gross domestic product of an economy or the effects of imports or exports.
Tokenomics is similar. Microtokenomics can be considered as features that drive the functions of individual participants within a blockchain economy. Examples include mining rewards and how they change over time, and the mechanics needed to adjust the token supply, demand, and velocity, such as vesting periods, the mining difficulty, and the inflation rate.
Macrotokenomics consists features that relate to the interaction with the wider blockchain economy and they tend to include governance (such as who decides what the next new feature is), the participant interaction within the ecosystem, and also the external factors of the token growth and volatility (such as the utility of the token and the liquidity on exchanges). It is the interaction of all these variables that produces what is known as a 'token economy.'
First occurrence of the word
One of the earliest occurrences of the word was in a tweet with the hashtag #TOKEnomics, in March 2012, from DJ Hustlenomics, an American rapper:
Figure 1: One of the earliest uses of the word "tokenomics" by an American rapper. (https://twitter.com/DjHustlenomics/status/185205191480582144)
'Hustlenomics' was the second studio album by American rapper Jasiel Amon Robinson, who is better known for his stage name 'Yung Joc.' Needless to say, this was probably nothing to do with blockchains or the new decentralized economy.
The next occurrence was from someone on Twitter with the handle @thewayoftheid. Again, we can probably safely assume that Jamie is not talking about blockchains to @Mami_LongLegz:
Figure 2: Another use of the word "tokenomics" on Twitter in December 2013. (https://twitter.com/thewayoftheid/status/416599434097463296)
Almost a year later, in August 2014, there was a more relevant tweet from Dave Feuling, or @GoodForOneDrink, who tweeted Enjoying Tokenomics at the good ol Hammond Hotel. Feuling explained where he heard the word from:
"A local bar (no longer in business) held Tokenomics on Wednesday nights for a certain length of time. It was called this bc (sic) every drink you bought awarded you a drink token that was good for one free drink of equal or lesser value. It was basically a special happy hour" (https://twitter.com/seandotau/status/1024041929158221824).
This tweet may not be directly referencing blockchains or ICOs, but we are getting closer because there is a token involved that can be redeemed for a drink at the Hammond hotel in Wisconsin, USA:
Figure 3: The earliest mention of the word "tokenomics" that has reference to an actual token (https://twitter.com/GoodForOneDrink/status/497159085721391104)
Fast forward to March 2015 and the word "tokenomics" was mentioned again in a tweet by @mmoblogosphere, who was actually referencing @casualnoob blog post titled Tokenomics. @casualnoob is a female blogger with the pseudonym "Da Cheng", who is a mage (a magician) character in the computer game World of Warcraft (WoW).
Figure 4: A blog post on tokenomics, analyzing the WoW token
The tokenomics blog was in reference to a WoW token released by Blizzard Entertainment and "Da Cheng" analyzed the economics of the token. Essentially, Blizzard created two in-game tokens. One token could be bought from Blizzard for an initial price of $20 per token and another could be sold to Blizzard to add 30 days of game time to your account. The final tokenomics recommendation from "Da Cheng" was:
"Recommendation: buy Gold WoW tokens on day 1. Buy all you can afford. There will never again be such a concentrated glut of sellers. The price will never drop to 40 000g again. Don't buy $teel WoW tokens before week 5, once the upward price momentum of gold tokens is obvious."
The final occurrence before the floodgates opened wasn't until June 2017 (https://twitter.com/search?l=&q=%22tokenomics%22%20since%3A2014-07-03%20until%3A2017-07-04&src=typd&lang=en) by William Mougayar, a thought leader in tokenomics, who wrote an article titled 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). Mougayar provided a detailed analysis, where he defined a "token" as just another term for a type of privately issued currency.
Figure 5: The tweet that opened the floodgates on the word "tokenomics." (https://twitter.com/wmougayar/status/873912937676779522)
The token economy
Tip
Token economy: A system or marketplace where decisions are made driven by economic incentives of digital tokens.
Burrhus Frederic Skinner, or more commonly known as B.F. Skinner, was an American psychologist, behaviorist, and social philosopher who used the term "token economy" in 1972 in a video titled Token Economy: Behaviorism Applied" (https://www.youtube.com/watch?v=fyFzPgIy-0g). Skinner used this concept in the context of using physical tokens in a program of therapy for the treatment of criminals and the mentally ill. As a side note, the writer of the famous American animated sitcom The Simpsons, Jon Vitti, named the "Principal Skinner" character after B.F. Skinner (The Simpsons season 2 DVD commentary for the episode "Principal Charming" [DVD]. 20th Century Fox).
One of the major teaching techniques was using a token economy with the students. A token economy was very simply a structured learning situation, where tokens, or little plastic chips, were used so that students could earn tokens in a wide variety of ways. This always involved learning more appropriate behavior.
The meaning of a token economy or tokenized economy in 2018 contains the same concepts, but it is applied in a different context. Little plastic chips have now been digitized into tokens and instead of students earning tokens, anyone can earn them and the structured learning environment has now changed into a new digital world, where anyone can participate.
The underlying infrastructure that has allowed this new token economy to flourish is blockchains, which are the equivalent of an ad-hoc miniature economy. In this economy, you have a group of people, or entities, who are all interacting with each other, making decisions, co-operating, and even competing with each other. The driver is an underlying software that enforces the rules created by the original author(s) and it governs how the interactions will unfold.
What is interesting is that all these miniature economies are powered by their own specially created token. Why do these token projects do this? The answer is: because they can. The marginal cost of creating a new token on a platform designed for creating tokens is almost nothing; however, gaining adoption is a totally different challenge.
This leads to the concept of a minimum viable economy, where if traction or critical mass is achieved, the economy can self-sustain and self-govern. Otherwise, it collapses and new ones form very quickly, and it's the low barrier to entry that allows this to occur.
The token is interwoven throughout the business model, providing a way to reward and incentivize the network participants, customers, and stakeholders. This focuses innovation at the token level, as the blockchain infrastructure is already provided, along with other requirements, such as consensus algorithms and the creation of a network.
There are key questions to consider around the tokens with a token economy. For example, is the token tied exclusively to a product usage or a network? The current answer is almost always yes. Other key questions include: does the token provide the owner with special privileges or ownership? Is the token required to run a smart contract or is it used to pay for usage? The answers to these questions are all varied and unfortunately, they depend on the design and context.
The most important question, though, is whether having a token is an absolute necessity in solving the problem. In other words: if digital tokens and the blockchain technology had not been invented, could the problem still be solved?
A unique aspect of the token economy is around the distribution because the key is to get the tokens into the hands of as many users as possible, so they can be used. This is because in this miniature economy, your products or services can only be used or traded with that token, which means that if you provide a valued service or product, that token eventually comes back to you. This circulation between stakeholders is very important. The most successful token projects will be the ones that can solve this challenge or even gamify it.
Marc Andreessen, co-founder of Netscape and venture capitalist firm Andreessen Horowitz, famously stated, Software is eating the world. In his 2011 article, he outlined that the world's largest bookseller, Amazon, is a software company; the largest video service by subscriber, Netflix, is a software company; and music companies like iTunes, Spotify, and Pandora are also all software companies. The list keeps going, with the likes of Skype in telecommunications and Pixar for animated movie production and Andreessen added, Software is also eating much of the value chain of industries that are widely viewed as primarily existing in the physical world (https://a16z.com/2016/08/20/why-software-is-eating-the-world/).
Nearing a decade on, the manifestation of the physical world is slowly being recreated in the virtual world and the missing piece of the puzzle has been discovered: the ability to transfer value in this virtual world with trust. This is how and why the token economy will continue to grow and develop. The tokenized economy starts with the digitization of the physical world and ends with the realization of the virtual world.
What does the current tokenized economy look like?
A token economy may be hard to conceive because it is not really tangible, like physical assets or your local bazaar, but there are digital tokens being created every day for all sorts of uses. The following image shows only the top 10 out of the thousands available and these thousands will grow further in the coming years. The reason for the growth is because of the new network of markets that is being created.
Figure 6: A list of the top-10 tokens, out of thousands in a token economy, from CoinMarketCap.com
What is tokenization?
Tokenization is the process of converting the rights of real-world assets into a digital token, stored on a blockchain or decentralized ledger. The simplest analogy is democratizing ownership of real-world assets, where the value stored in some physical asset, such as real estate, is represented as a token. For example, if you had an apartment valued at $1,000,000, one million USD tokens could be created to represent the value of the apartment at $1 per token.
The one million token supply is totally arbitrary. The one million tokens could then be freely bought or sold on an exchange and if you bought 500,000 tokens, you would effective own 50% of the apartment, and the various rights and benefits associated.
This concept is not new, as anyone can create tokens and record the token history using a regular database, managed by a trusted third party, but the novelty now is that it can be done in a decentralized fashion and nobody can "erase" your ownership of these tokens. This is the key tenet of this blockchain technology.
Real-world assets, such as artwork, stocks, and gold, are just the first step because the same thing can be done with digital assets and intangible assets, such as carbon credits, patents, and copyrights. These tokens and their exchange are what creates this token economy. What's more, every brand, every artist, and every community can tokenize its economy with the ability to incentivize early adopters or reward loyal follows within this economy. This is the equivalent of being able to communicate value on a new level. Think of it as loyalty points on steroids.
The tokenization of everything
We've seen the ability to tokenize anything, from the physical and tangible to the intangible. The next logical question is why?
First of all, when assets are tokenized, they unlock liquidity. The value you have in your property is regarded as illiquid because there is no easy or quick way to access the capital stored there. Tokens representing the value of your property can be traded much more easily and hence they are more liquid.
The technology the tokens live on allows greater access to everyone. It may not be to the extent that all you need is a computer and internet connection, but it will be much more democratized than what we have at present.
This increased participation results in greater ease of trade, by bringing in more liquidity and efficiency to a market.
Tokenization enables new economic models, such as fractional ownership (investors can own a certain percentage of a certain asset), therefore users can purchase a smaller, more affordable portion, rather than an expensive whole portion.
Through fractional ownership, more diversification of risk can be obtained. If a valuable piece of artwork was destroyed in a fire, an investor would lose only the proportion of that which was invested.
Tokenization reduces administrative expenses and with smart contracts and an immutable audit trail, auditing and compliance become a lot easier and quicker for regulatory bodies.
It would be presumptuous to assume that tokenizing assets is without its challenges.
