An introduction to tokenomics: tokenizing the global financial system

The cryptocurrency industry continues to adapt more and more functions of the traditional and familiar financial system. Issue of shares, lending, payments, cross-border transfers and even loyalty programs today can be implemented using cryptocurrencies and internal tokens of blockchain projects. This ecosystem, which is often called tokenomics, has a number of undeniable advantages over the traditional economic model. What is tokenomics and how tokenization will change people’s lives in the coming decades – we will consider in this article.

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What is a token?

A token is a digital financial instrument, a coin that is issued to perform specific tasks. For example, in the traditional world, money solves the problem of making payments and transferring value, and shares are a tool that confirms ownership of a share in a company. You can buy goods with money, pay for services, or transfer them to another person. You will not be able to pay for products in the store with promotions, for this you will have to sell them first, and then return to the store with the money.

In the world of cryptocurrencies, cryptocurrencies themselves are considered money: bitcoin, ethereum, litecoin, monero and others. You can easily buy other digital assets, goods or services for them. However, cryptocurrencies have other opportunities for use: for example, during the ICO boom in 2017, hundreds of projects appeared on the market that issued their own internal tokens to perform a specific function:

  • Share ownership token (security token) – allows its holders to participate in the life of the project and vote for updating and introducing new functions and services. In some cases, security tokens also allow, by analogy with shares, to receive a part of the project’s profit or own a share of it. 
  • Fuel token (utility token) – used as a means of payment for company services. Utility token can be used to pay commissions, subscriptions or other goods and services of the project.
  • A unique token (NFT or Non-fungible token) is used as proof of ownership of a certain digital item, the rights to which are recorded in the blockchain. This can be in-game items, photographs, music, or information about the ownership of real assets.
  • A synthetic token is an analogue of a real physical asset or an asset from a traditional financial system in a tokenized form. The cost of a synthetic token is tied to the real value of the asset.

Most often, tokens are issued based on the Ethereum blockchain and have an internal ERC-20 network standard. To create unique tokens, the ERC-721 network standard is mainly used. Thus, today you can create a project to solve any problem and issue local currency, stocks or other values using tokenization. If you want investors to become interested in your token or if you yourself plan to become an investor, it is important to be able to evaluate the economic model of the token – tokenomics.

Token economic model – tokenomics

When investing in a token or issuing it in order to attract investment, it is necessary to adhere to certain economic principles. They will help you to interest investors or assess the potential of the project in which you plan to invest.

Token function

When launching a token on the market, the founder of the project must have a clear understanding of what function the coin will carry and what benefits it will bring to its holders. If a token has real application and can give certain advantages to its owners, then such an asset will be popular with platform clients and investors. For example, the BNB token of the Binance exchange allows you to pay a trading commission with a 50% discount and is very popular with traders, since it significantly reduces the costs of opening trading operations. It is beneficial to hold such tokens, which positively affects their demand in the market and contributes to an increase in value. If the token does not carry any practical benefit and was issued only for the purpose of attracting money, in the future it will be exclusively depreciated.

The number of tokens issued and their value should correspond to the amount of attracted investments, since this directly affects the market capitalization. In addition, it is important to consider whether the number of tokens issued will circulate properly in the project’s ecosystem. If most of the assets are simply dead weight on users’ wallets (not to be confused with long-term investments), then such tokens will quickly become illiquid and depreciate.

To assess the adequacy of the value of a token, pay attention to the function that this asset performs. If the project sells 1 token for $ 5, and with its help you can pay a 50-cent commission, then the cost of the token is clearly overstated, and in the future it will depreciate at least 10 times. Much more reasonable would be the option when the project attracts $ 10 million in investments, determines the intrinsic value of the token at 50 cents and issues, for example, 100 million tokens at 10 cents each. Thus, the founders lay the potential for growth in the value of the token in the future and provoke an increased demand for it, because in order to pay the commission within the project, the user will need 5 tokens.

Token liquidity

If the issued token complies with the above two principles, then there is a high probability that there will be increased demand for it in the market. Simply put, the token will be liquid. However, it is possible to add value to a token in other ways, for example, by gradually burning a part of tokens withdrawn from circulation. This method creates a scarcity that leads to higher demand and an increase in the value of the token. Another way is listing on the largest cryptocurrency exchanges. The more exchanges list a token, the more often your token will participate in trading and the more liquid it will be. In addition, listing on the largest trading platforms makes the token even more attractive for investors, because not every coin is able to get to platforms such as Binance or Coinbase. And finally, the third and easiest way to increase the liquidity of the token is the constant development of the project and the creation of new functions, goods and services for which you can pay with the token.

If you plan to purchase or issue tokens for investment, pay attention to 4 main factors that indicate the prospects for the project and the token itself:

  • real use in the ecosystem of the project or industry;
  • deflationary model, which includes a token shortage over time;
  • potential for development and scaling;
  • liquidity that can only be provided by listing on the largest exchanges.

If the project and its token meet these parameters, then issuing such a token or investing in it can be very profitable and promising.

Tokenization of assets

In addition to the issuance of tokens for individual projects, there is also the tokenization of existing assets. For example, the Currency.com exchange offers its clients leveraged trading and buying stocks, indices, commodities, currencies and other traditional assets in tokenized form. You can purchase Apple shares in the form of an ERC-20 token issued on the basis of the Ethereum network and withdraw it to your cryptocurrency wallet.

The DeFi Synthetix platform allows users to issue so-called Synth’s or synthetic assets, the value of which is tied to the real asset. For example, you can issue a synthetic (pseudo) dollar in tokenized form or any other asset and use it in the decentralized finance ecosystem.

Result

Tokens issued on the basis of the blockchain of any cryptocurrency are not the same cryptocurrencies, but they are capable of performing many other useful functions. For example, it is difficult to compare the value and benefits of the stablecoin USDT (token of the ERC-20 standard) and the Bitcoin Cash cryptocurrency. The Tether token is a synthetic dollar and allows you to quickly hedge the price risks of any cryptocurrency, while Bitcoin Cash has no real use. There are a lot of tokens like Tether on the market today, and there is no doubt that in the future the entire global financial system will go into a tokenized state.

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