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

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

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