What is "tokenomics" and why is it important for investors to consider?
"Tokenomics" is a much misunderstood concept, that I feel is the most important factor in considering the value of a blockchain token or coin. The word is used as a pun on "economics" (if that wasn't obvious), and has as much to do with the ability of the token to unlock some product or service, as it has to do with "market cap" and "circulating supply".
In other words, market cap and supply are only the beginning of any well researched effort. You must understand the utility of the token itself, before making any reasonable attempt at giving it a value.
There are two questions that often get confused as being the same, but they are radically different:
- What value does the project bring to the world?
- What value does the token bring to the world?
I cannot stress this enough. Failure to see this distinction makes you a disadvantaged investor in the space. This is why we see inflated prices across the board on projects, that have worthless tokenomics. For the same reason we see various projects flying under the radar, which happen to have superior tokenomics.
Utility as a currency (Not what I am explaining in depth today)
Utility as a currency, in this context, means:
How well does the crypto currency serve as a currency?
This is NOT what I will cover in any meaningful depth, because the majority of the crypto space is full of these types of discussions. But for a sense of completeness I will just name a few factors that you should research into more:
- Scalability
- Decentralization
- Privacy
- Anonymity (not the same as privacy)
- Distribution
- Usability (Yes John Oliver, whether something has ease of use is a very big concern for a currency)
- Adoption by Merchants
- I'm sure you can think of more tokenomic factors as it pertains to being a currency
Tokenomics as it refers to uses other than a currency (The "Dark Matter" of the Industry)
This is probably the most interesting topic on token economics right now, simply because we are just starting to discover its importance and implications. I refer to it as the dark matter of the crypto space, merely because it is very invisible in an industry with so much noise and distraction, all the while being the giant elephant in the room.
Poor analogies aside, what am I rambling on about here? I am talking about the utility of tokenizing the physical world.
Why is this important? It's not, unless you believe (as i do) that it will become the most used way of buying, selling, and renting physical assets and services.
What is tokenization?
Tokenization is the act of taking a physical object having monetary value, and representing the ownership of that thing in the form of tradable tokens. So for example, if you wanted to sell your house in the future, you could imagine tokenizing the ownership of the house into say 1000 shares, and selling that 1000 shares on the open market on your favorite exchange. Need a mortgage on your home? Just tokenize it and keep 51% of the tokens, giving you the "rights to live in it". At the time of sale of the home, you can sell the 51% ownership to a third party giving them "living rights" and decision making. This could imply fiduciary duties on the person in charge of improving the home. It could imply that your home now acts as a corporation, giving voting rights to token holders. The possibilities are quite large in number.
That is just one of many examples, as we shall see.
EOS's Tokenomics and the virtualization of the internet:
Thought the internet was virtual enough to make your head spin? It seems as though we are just getting started. Eos has some pretty unique features as it pertains to it's tokenomics. To start with, just consider this tidbit:
If you own 1% of the supply of Eos, you own 1% of the bandwidth, storage, and processing power of the block producing nodes.
This is radically different than what we see with Bitcoin, and the rest of the space. With Bitcoin, owning 1% of the supply only makes you well off financially. It doesn't guarantee you any rights over the network other than the ability to crash the price. The voting rights and network utility of bitcoin reside in the "hashing power" that you own, which has a totally different set of economic factors.
Ethereum has a different model, where owning 1% of Ethereum's supply gives you 1% of the gas of the network. It would be quite absurd for anyone to spend that much money on gas alone, however, as that would be prohibitively expensive to say the least.
So, how is EOS's tokenomics set up?
As we mentioned in passing, owning 1% of the EOS supply gives you 1% of the bandwidth, storage, and processing power underlying the network. What does this imply?
Have you ever wanted to own your own server, instead of renting your web hosting services from Amazon, Alibaba, and Google? It would definitely be cheaper at scale to do so. With Eos, you have the ability to go beyond simply owning server space. You own a percentage of all of the available computing power on the network. This has many implications.
There is a difference between investing in a percentage of a server and investing in a percentage of a network. The difference is that the money you invest in a single server or an array of servers is a fixed cost, and you know what you are getting. This also has the disadvantage of being a depreciating asset. If you are not using your computing power that you purchase you are losing a lot of money. The rate at which the computing power on a micro chip doubles is every 18 months. So you are losing half of your investment every 18 months. This is not great as an investment unless you have customers that will be using it.
With EOS on the other hand, you are investing in a percentage of a network of servers, that is constantly evolving over time. As the computing power doubles every 18 months, so does the amount of computing power you theoretically will own, as a holder of the token. As the network grows over time, so does your ability to store and compute files on the cloud. This is pretty advantageous if you are a developer. You can make a one time investment for life, and just know in the back of your mind that, as the eos block producers grow so will your ability to make large scale applications without ever needing to break the bank.
The best part about this economic model is that, all transactions and storage on eos are free in the sense that you do not have to spend your eos as gas when making computations. This means that you don't have your wallet dripping money like a leaky faucet.
Even more, owning 1% of the network does not imply that you will be paying to upgrade your equipment. This cost gets passed onto the network as a whole and is paid for as a silent tax in the form of an inflation rate. Inflation rates can vary from 1% to 5%, as it will be up to the community to decide.
We are not done yet. Owning 1% of the Eos supply gives you 1% of the decision making power of the network. This has a ton of political implications that I will not discuss here. But it definitely gets one to think about all the possibilities, good or bad.
Will EOS fulfill its promise?
There is no reason why we should believe that EOS cannot fulfill this goal. The block.one team has reportedly obtained over a billion dollars from its crowd sale alone (that is a lot of runway). Multiple high profile VC's such as Mike Novagratz (Galaxy Digital), Eric Schmidt (Tomorrow Ventures and ex-CEO of Google), and others, are putting hundreds of millions of dollars into the project. Dan Larimer has experience of expanding blockchain scalability by orders of magnitude (he has done it before with Steem and Bitshares). Finally, the team has met all of their roadmap deadlines up till now.
Currently, in a recent Telegram chat with Dan Larimer, he suggested that EOS Dawn 3.0 will be released by the April 6th Tokyo Meetup https://www.eventbrite.com/e/eosio-hong-kong-meet-up-tickets-42667012182?aff=es2 . EOS Dawn 3.0 is the final major version being released before the main-net release in June 2018. Dan Larimer suggests that it will be feature complete, meaning that all of the major features will have been added for production and testing. As it stands, EOS will be tested from April 6th onward until June, and their seems to be a special announcement on April 6th along side the Dawn 3.0 release.
EOS For Investors Series:
- https://steemit.com/eos/@hassananon/eos-for-investors-parallel-processing-on-the-eos-blockchain
- https://steemit.com/eos/@hassananon/eos-for-investors-what-about-scalability
- https://steemit.com/eos/@hassananon/eos-for-investors-eos-s-tokenomics-revealing-the-dark-matter-of-the-crypto-universe
Great article! I love how you highlighted how disrupting this platform can be. My support for EOS stems from how its tokens can compete with the current money-debt system as currency adding another dimension to the many ideas you mentioned.
It is sad that you do not have 1,000+ up votes already. Is the idea too early? I found that even investment professionals do not understand how the Federal Reserve Dollar is created into existence......nor do they make changes when they are presented with the information.
My previous articles have suffered the same fate, unfortunately. Thanks for the read though.
Wow great article @hassananon really interesting! I really hope EOS can fulfil its goal! By the way, I post similar content on my blog, we should follow each other!
Thank you! It's nice to know that someone enjoyed reading it.
Coins mentioned in post:
;)