What is Tokenomics Explained | Tokenomics 101: Everything You Need To Know

Summary

This video from Whiteboard Programming delves into the concept of tokenomics, which combines 'token' and 'economics' to describe the quality and value of a token within its ecosystem. It differentiates tokens from cryptocurrencies, explaining types like utility and security tokens, and discusses factors like rights, durability, and supply that define tokenomics. The video also covers the unique applications of token economics, such as full cost accounting and incentive systems, and advises investors on evaluating token projects, emphasizing the importance of team, business model, and legality.

Takeaways

• 📘 Tokenomics is a combination of 'token' and 'economics', also known as cryptoeconomics, focusing on the quality of a token that influences its adoption and ecosystem development.
• 🏷 In real life, a token represents a fact, quality, or feeling, like a gym membership card or a driving license, and in the crypto world, it represents something within its ecosystem, such as value or voting rights.
• 🔑 Tokens are not limited to a single role and can have multiple functions within their native ecosystem, often representing assets or utilities distributed to investors during public sales.
• 💡 The primary difference between tokens and cryptocurrencies is that cryptocurrencies have their own blockchains, while tokens are built on existing blockchains and may not be intended to represent monetary value.
• 🌐 Layer 1 tokens power the main blockchain, whereas layer 2 tokens, like those of decentralized apps or ICOs, are built on top of the underlying blockchain, with the health of layer 2 being dependent on layer 1.
• 🔄 Tokens can be categorized as original protocols or forked chains, with examples like Bitcoin and Ethereum being original, and Zcash, Bitcoin Cash, and Litecoin being forked from Bitcoin.
• 🛡 Tokens are classified as utility or security based on the Howey test, with utility tokens providing access to a product or service and security tokens subject to federal securities regulations.
• 🔄 Fungible tokens, like Bitcoin or Ethereum, are interchangeable, while non-fungible tokens are unique and cannot be interchanged, such as ID cards or gym membership cards.
• 🚀 Tokenomics is evolving with innovations in token properties, including rights, durability, regulatory ease, purpose, supply, token flow, and temporal aspects.
• 🌟 Token economics differ from traditional economics by being decentralized, scalable with little capital, and offering secure transactions, with applications like full cost accounting and better alignment of producers and consumers.
• 💼 For investors, assessing a token project involves considering the team's credentials, business model robustness, PR and branding, legality, and understanding the technical aspects of the token structure.

Q & A

What is the term 'tokenomics' a combination of?

Tokenomics is a combination of the words 'token' and 'economics', and is also referred to as cryptoeconomics.

What is the primary focus of tokenomics?

The primary focus of tokenomics is the quality of a token that convinces a user or investor to adopt it and helps in building the ecosystem around the underlying project of that token.

What are some real-life examples of tokens mentioned in the script?

Examples of real-life tokens include gym membership cards, driving licenses, and hotel key cards, which represent subscriptions, qualifications, and payments, respectively.

How does a token in the cryptoverse differ from a real-life token?

In the cryptoverse, a token is a digital representation of something within its particular ecosystem, such as value, stake, or voting rights, whereas a real-life token is a physical representation of a fact, quality, or feeling.

What is the main difference between cryptocurrencies and crypto tokens?

Cryptocurrencies have their own blockchains, while crypto tokens are built on an existing blockchain. Additionally, cryptocurrencies are primarily monetary in nature, while tokens may not be intended to represent money or monetary value.

What is a Layer 1 token and how does it relate to Layer 2?

A Layer 1 token is the main blockchain token that powers the blockchain itself. A Layer 2 token, such as that of a decentralized app or ICO, is built on top of the Layer 1 blockchain. The well-being of Layer 2 applications is often dependent on the health of the Layer 1 blockchain.

What are the two types of protocols discussed in the script, and how do they differ?

The two types of protocols are original chain and forked chain. Original protocols, like Bitcoin and Ethereum, are not derived from any other protocol, while forked chains, such as Zcash, Bitcoin Cash, and Litecoin, have been derived from the main Bitcoin protocol.

How are utility tokens different from security tokens?

Utility tokens provide users with a product and/or service and do not necessarily represent an investment in a company. Security tokens, on the other hand, are subject to federal securities regulations and usually derive their value from an external tradable asset.

What are the key properties of fungible tokens?

Fungible tokens have the property of interchangeability, meaning that units of a commodity can be exchanged with other units of the same commodity without any loss of value, such as Bitcoin or Ethereum.

What are some factors that investors should consider when assessing a token project?

Investors should consider the team's credentials, the robustness of the business model, PR and branding efforts, legality and compliance with regulations, and the technical aspects of the token structure.

How does tokenomics differ from traditional economics?

Tokenomics is fundamentally different as it is decentralized, requires little capital to scale, and offers significant security of transactions. It also leverages the internet and distributed ledger technology to model token economies that better reflect markets and serve as underlying logic for new technologies.

What are some applications of token economics mentioned in the script?

Applications of token economics include full cost accounting, better alignment of producer and consumer interests, triple entry accounting, and the creation of incentive systems that align individual incentives with the growth of the ecosystem.

Outlines

00:00

📘 Introduction to Tokenomics

The first paragraph introduces the concept of tokenomics, which is a blend of 'token' and 'economics', also known as cryptoeconomics. It is defined as the study of the quality of a token that influences its adoption by users or investors and contributes to the ecosystem of the underlying project. The paragraph explains that tokenomics is a broad subject that includes various components and primarily focuses on the differences between token economies and traditional economies, highlighting the decentralized nature, scalability with little capital, and security of transactions in token economies. It also provides a real-life analogy of tokens, such as gym membership cards or driving licenses, and explains the role of tokens in the crypto ecosystem, which can represent value, stake, voting rights, or other utilities. The paragraph concludes with a brief comparison between tokens and cryptocurrencies, emphasizing that cryptocurrencies have their own blockchains, while tokens are built on existing ones, and their purposes may differ significantly.

05:05

🔑 Types and Aspects of Tokens

This paragraph delves into the types of tokens and their classifications, starting with a comparison between Layer 1 and Layer 2 tokens, using the example of Ethereum and Omisego to illustrate the dependency of Layer 2 applications on the health of Layer 1 blockchains. It then discusses the distinction between original chain and forked chain protocols, with Bitcoin and Ethereum as examples of original protocols and Zcash, Bitcoin Cash, and Litecoin as forked chains. The paragraph also covers the difference between utility and security tokens, explaining that utility tokens provide access to a product or service and may appreciate in value due to supply constraints, while security tokens are subject to federal securities regulations. The discussion continues with fungible and non-fungible tokens, using ID cards and gym memberships as examples of non-fungible tokens. The paragraph concludes by acknowledging the evolving nature of tokenomics and the growing variety of tokens with refined properties, categorized based on rights, durability, regulatory aspects, purpose, supply, token flow, and temporal considerations.

10:08

🌐 Tokenomics in Modern Economy and Investment Considerations

The final paragraph explores the fundamental differences between tokenomics and traditional economics, noting the shift from centralized institutions to decentralized, internet-based informational networks enabled by blockchain technology. It outlines the applications of token economics, such as full cost accounting, better alignment of producers and consumers, triple entry accounting, and incentive systems that align individual incentives with ecosystem growth. The paragraph also addresses the importance of tokenomics in investment, highlighting factors investors should consider when assessing token projects, including the team's credentials, the robustness of the business model, project visibility, legal standing, and the technical aspects of the token structure. The conclusion emphasizes that tokenomics is a nascent field with significant potential to reshape the world economy, and as it evolves, organizations are developing more complex and specific use cases for tokens.

Keywords

💡Tokenomics

Tokenomics is a term that combines 'token' and 'economics,' often used interchangeably with 'cryptoeconomics.' It refers to the study of the economic aspects of tokens within a particular ecosystem, focusing on the quality of a token that influences its adoption and the development of the ecosystem it supports. In the video, tokenomics is central to understanding how tokens function and their impact on user and investor behavior.

💡Cryptoeconomics

Cryptoeconomics is a concept closely related to tokenomics, which involves applying economic principles to the design and management of cryptocurrency systems. It ensures that the system is secure and that participants are incentivized to act in the best interest of the network. The video mentions cryptoeconomics as an alternative term for tokenomics, emphasizing the importance of economic incentives in the crypto space.

💡Token

A token, in the context of the video, is a digital asset that represents a particular utility or value within a blockchain ecosystem. Tokens are not limited to monetary value and can represent a variety of roles, such as access rights, voting power, or a stake in a project. The script uses examples like gym membership cards and hotel key cards to illustrate how tokens serve as tangible representations of certain rights or assets.

💡Blockchain

Blockchain is the underlying technology that enables the creation and management of tokens. It is a decentralized ledger that records transactions across multiple computers in a secure and transparent manner. The video discusses how tokens are built on existing blockchains, highlighting the importance of blockchain in facilitating tokenomics.

💡Decentralization

Decentralization refers to the distribution of power and authority away from a central point. In the context of tokenomics, it is one of the key characteristics that differentiate it from traditional economies. The video emphasizes how tokenomics operates in decentralized systems, allowing for more open and accessible economic models.

💡Layer 1 vs Layer 2

The terms 'Layer 1' and 'Layer 2' are used to differentiate between the main blockchain (Layer 1) and applications or additional protocols built on top of it (Layer 2). The video explains this concept using the example of Ethereum as a Layer 1 blockchain and OmiseGo as a Layer 2 application, illustrating how the health of Layer 2 is dependent on Layer 1.

💡Forked Chain

A forked chain is a blockchain that has been created by modifying the original protocol of another blockchain. The video mentions that protocols like Bitcoin and Ethereum are original, while Zcash, Bitcoin Cash, and Litecoin are examples of forked chains, derived from the Bitcoin protocol.

💡Utility Token

A utility token is a type of token that provides users with access to a product or service within its ecosystem. The video explains that utility tokens are not securities and are designed to facilitate the use of the network, with properties such as the right to use the network and voting rights.

💡Security Token

Security tokens are tokens that pass the Howey test and are considered investments in a company. They derive their value from an external tradable asset and are subject to federal securities regulations. The video contrasts utility tokens with security tokens, highlighting the regulatory implications of the latter.

💡Fungible vs Non-Fungible

Fungible tokens are interchangeable units of a commodity, like Bitcoin or Ethereum, where each unit has the same value as another. Non-fungible tokens, on the other hand, are unique and cannot be interchanged, such as ID cards or gym membership cards. The video uses these terms to discuss the different types of tokens and their properties.

💡Investment Analysis

Investment analysis in the context of tokenomics involves evaluating the viability of a token project. The video suggests several factors for investors to consider, such as the team behind the project, the business model, legal standing, and the token's structure, to assess the potential for investment.

Highlights

Tokenomics is the study of the quality of a token that influences its adoption and ecosystem development.

Tokenomics encompasses a broad subject, including decentralized characteristics and transaction security.

A token represents value, stake, voting rights, or other roles within its ecosystem.

Tokens are not limited to a single role and can serve multiple functions within their native ecosystem.

Tokens are often given to investors during a public sale, representing an asset or utility of a company.

Cryptocurrencies differ from tokens in that they have their own blockchains, while tokens are built on existing ones.

Layer 1 tokens power the main blockchain, while Layer 2 tokens are for decentralized apps built on top.

The success of Layer 2 applications can positively impact the Layer 1 network's value.

Original protocols like Bitcoin and Ethereum are distinct from forked chains like Zcash and Litecoin.

Utility tokens provide access to a product or service, while security tokens are subject to federal securities regulations.

Fungible tokens are interchangeable, unlike non-fungible tokens which are unique and cannot be interchanged.

Tokenomics is evolving with innovations, leading to tokens with more refined properties.

Tokenomics can offer full cost accounting, reflecting both economic and social costs.

Token-based economies can better align producers and consumers, bypassing large enterprises.

Triple entry accounting with blockchain can reduce the administrative costs of auditing complex organizations.

Tokenomics can create incentive systems that align individual incentives with ecosystem growth goals.

Investors should consider factors like team credentials, business model, legality, and token structure when assessing token projects.

Tokenomics is an emerging field that challenges and has the potential to reshape the foundations of the current world economy.

Transcripts

welcome to whiteboard programming where we simplify  programming with easy to understand whiteboard videos  

and today i'll be sharing with you what is  tokenomics so let's get started first off  

what is tokenomics well tokenomics consists of  two words token and economics and is also called  

as cryptoeconomics it is defined as the quality of  a token which will convince a user or an investor  

to adopt it and helps in building the ecosystem  around the underlying project of that token but  

you must be wondering now hey what do you mean  by quality well to put it simply anything which  

impacts the token's value is a part of tokenomics  and you can say that tokenomics is a pretty broad  

subject and includes a variety of components  and the primary one to consider is that how the  

nature of such commercial differs from traditional  industrial economies as its characteristics are  

decentralized, require very little capital to scale  and offer significant security of transactions  

but hey what is a token well in real life a token  is a thing which serves as a visible or tangible  

representation of a fact, quality, or feeling to  be more clear you can even say that you're having  

empty pocket right now and you will still stumble  across real life tokens for example your gym  

membership card is a token that represents the  fact that you have subscribed to a gym  

your driving license is a token which represents  the fact that you have taken training required  

to drive in your country your hotel key card  shows that you have paid the hotel for your room  

similarly in cryptoverse a token  is a representation of something  

in its particular ecosystem it could be value,  stake, voting right, or anything and just note that  

a token is not limited to one specific role and  can fulfill a lot of roles in its native ecosystem  

and furthermore broadly you can say that a token  represents an asset or utility that a company has  

and they will usually give it away to  their investors during a public sale  

next let's have a quick comparison  between tokens versus cryptocurrencies  

well the biggest difference between the two is  that cryptocurrencies have their own blockchains  

whereas crypto tokens are built on an existing  blockchain also do note that cryptocurrencies  

are built keeping in mind the monetary benefit  whereas many tokens are created without the intent  

to represent money or monetary value at all moving  further it's time to discuss the types of token we  

can use to best suit our possible requirements for  this we need to understand several categories into  

which we can differentiate the tokens and as it's  pretty vast topic I'll only be mentioning a few  

important ones in this video number one layer 1 vs layer 2 here layer one is the underlying  

or the main blockchain that is the token which  powers this blockchain is the layer one token  

and layer two is the decentralized app or  ICO built on top of the underlying blockchain  

confused? let's take an example to better  understand it Omisego is a project that is  

built on top of ethereum blockchain in this case  ethereum is layer 1 and is powered by the ether  

the layer 1 token and Omisego is layer 2 and  is powered by omg that is the layer 2 token  

here you'll notice that the well-being of layer 2  application is completely dependent on the overall  

the well-being of layer 1. if there are some  issues with the layer 1 blockchain that is  

for example a hack or a bug it's going to  affect the overall well-being of layer 2 as well  

while there are many projects that are  working on making layer 1 and layer 2 as  

independent as possible but if you yourself  think on a more practical level it would be a  

lie to suggest that these two have no connection  whatsoever now if a layer 2 application is doing  

well then it reflects positively on layer 1 as  well as such many layer 1 projects try their  

best to attract as many developers as possible  to their platform so as a conclusion we can say  

that higher the quality of layer 2 application  better will be the value of layer 1 network

number 2 original chain vs forked chain  this second category is mostly about layer 1

protocols which is to differentiate  whether the protocol is original or  

has it been forked off some  other protocol for example  

bitcoin and ethereum are examples of original  protocols while zcash, bitcoin cash, and litecoin  

are all examples of forked chain since they have  been forked from the main bitcoin protocol  

i'll recommend you to watch my video on blockchain  forking to better understand this concept the link for  

the same is given in the description below next  number three utility vs security token because most  

of the ICOs are investment opportunities in the  company itself most tokens qualify as securities  

however if the token doesn't qualify as a Howey test then it is classified as a utility token  

these tokens simply provide users with a product  and/or a service and you can more of think of  

them like a gateway token to state broadly  utility tokens have the following properties  

number one they give holders a right to use the  network number two they give the holders the  

right to take advantage of the network by voting  number three since there is an upper cap on the  

maximum token availability the value of the tokens  may go up because of the supply demand equation  

on the other hand a crypto token that passes the  Howey test is deemed to be a security token these  

usually derive their value from an external  tradable asset and because of these tokens are  

deemed as a security they're subjected to federal  securities and regulations and lastly do note that  

if the ICO doesn't follow the regulations  then they could be subjected to penalties  

number four fungible vs non-fungible  to state tokens may be fungible that is  

they can have interchangeability of units of a  commodity with other units of the same commodity  

like bitcoin or ethereum or non-fungible which  on the other hand are unique and thus cannot  

be interchanged ID cards or Gym membership  cards are examples of non-fungible tokens  

further you must understand that  tokenomics is evolving with innovation  

in tokens and thus there is a growing number  of tokens with more refined properties  

these tokens apart from the classification we just  discussed can be based on the following factors  

number one rights where tokens may give the holder  property rights or give the holder access rights  

number two durability wherein tokens can  remain stable in the face of censorship  

or attacks number three regulatory wherein tokens are easy to classify and regulate  

number four purpose wherein tokens are created  to serve as a proof of behavior or value creation  

or to represent existing asset or access right  number five supply wherein we offer a fixed supply  

of token or sometimes unlimited number six token  flow wherein tokens can be generated linearly  

and destroyed after use or remain in circulation  last but not the least temporal wherein tokens may  

or may not have an expiration date next let's  discuss about what makes tokenomics different  

having briefly understood what tokenomics is let's  now explore why it is fundamentally different from  

the economics we generally operate in in the  modern economy economic forces that govern our  

lives have over time become increasingly channeled  by a few centralized bureaucratic institutions  

with the access of internet and distributed ledger the  sources of various kinds including financial  

capital, supply chain, information etc are now  flowing through these informational networks  

and quite similarly development in blockchain  provides secure and reliable way to model token  

economies to reflect better markets and serve as  underlying logic in the face of new technologies  

some of the applications of token economics are as  follows number one it offers full cost accounting  

wherein tokens can be coded to reflect both  economic and social cost while accounting for  

example one can code into price of diamond that  are sourced ethically versus the ones that are not  

number two there's better alignment of producer  and consumer with token based economies one can  

bypass big enterprises that may not align with  consumers value this can be done by replacing  

organizations with token-based blockchain  networks wherein producers and consumers  

can find each other for their specific needs and  bypass a bigger platform this primarily replaces  

the big businesses with community-based  solutions and due to such a solution  

as the network scales the profits don't get sucked  by big centralized management but are instead  

distributed throughout the network's token holders  number three they offer triple entry accounting  

those who don't know about this it is a method of  proposed enhancement of double entry bookkeeping  

by simply cryptographically sealing all  entries dealing with an outside party with  

a third entity in the system this third entity  is the blockchain where these entries are posted  

as both receipts and transactions this if used  well easily replaces the administrative cost  

of auditing complex organizations number four  incentive systems with tokenomics built on  

blockchain protocols tokenization will become  a reward for an increasing area of transactions  

that is every source of value can be tokenized  to build microeconomics that aligns individuals  

incentive with the goal of growth of the ecosystem  further let's talk about investment and tokenomics  

now with a great number of projects funding  themselves using ICOs it has become important  

for investors to develop tools to analyze the  viability of their investment opportunities  

and as an investor here are the factors that you  may consider in assessing a token project as well  

first the team you must check the credentials and  reliability of the team that is behind the project  

next business model how robust is the business  model they are offering as the complexity of  

token scales from simple payment mechanisms  to the greater ones next PR and branding  

how well the project is being mobilized to the  community because in the end community matters  

next legality now legality around tokens still  remain in the dark in many jurisdictions and  

thus projects need a good legal team to make sure  that the project stands good on the legal grounds  

next token structure this is very important  and you must understand the technical aspect  

of the nature of the token which  is being developed or distributed  

lastly to conclude we can say that tokenomics as  a field is still in it's infancy and considering  

that it changes a lot of foundation cornerstones  of the current world economy there's a lot to be  

explored along with a wider option of tokens many  organizations are developing more complex and  

specific use cases every day with that I hope  this video was helpful to you and serve value  

if you love my content feel free to smash that  like button and if you haven't already subscribed  

to the channel please do as it keeps me motivated  and helps me create more content like this for you