Understanding the token economics of any token matter to all participants, because it governs and incentivises interactions

We’ve come a long way from private equity funding to venture capital funding, crowdfunding, kickstarters and most recently, to Token Generating Events (TGE), a funding mechanism often associated with initial Coin Offerings (ICOs). 2017 was a bullish year for ICOs – according to Crunchbase, there was seven ICOs which raised US$28 million in Q1 2017. This number rose to over 100 ICOs in Q4, raising close to US$3 billion, around 100x growth. By the year-end, some US$4.9 billion was raised via ICOs in 2017, as startups and investors rode a wave of confidence derived from Bitcoin’s historic price run to US$20,000, as well as rising public interest in cryptocurrencies.

Cryptocurrencies, principally led by Bitcoin and Ethereum, are essentially part of an abstract economy. Their values are inherently pegged to market conditions – they are affected by economic forces like supply and demand. Understanding the token economics of any token matter to all participants, because it governs and incentivises interactions.

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What is a token and its role in an ecosystem?

Put simply, a token is a unit of value that an organisation creates to self-govern its business model, and empower its users to interact with its products, while facilitating the distribution and sharing of rewards and benefits to all of its stakeholders. The utility role of the token is a primary consideration in the success of models that intend to exploit their potential.

To achieve good tokenomics, a token should provide an advantage to users, entice early adopters and encourage expansion. A well-designed token network carefully manages the distribution of tokens and incentives across all groups of network participants (buyers, sellers, borrowers, lenders and other financial institutions)

The generation and utility of tokens also contribute to the network effects which drive the ecosystems they facilitate. Since online economies utilise their own unique tokens, economic growth means that participating businesses will see the value of their tokens increase as the network grows, enabling them to scale their operations and profits.

Driven by practical use cases

A token’s valuation can easily be driven beyond belief by pure speculation, but if the project doesn’t identify with practical use cases and isn’t designed to handle mass adoption, it is unlikely to be a sustainable one. A platform achieves its value when the tokens in circulation are in demand due to their utility, rather than demand by traders and speculators. To this end, the creation of ecosystems provides the ideal platform for such tokens to be effectively utilised to the benefit of all participants.

Take the e-commerce ecosystem for example. A single unified payment token could potentially allow all participants, including merchants and consumers, to pay each other for goods and services efficiently and cheaply. It could also facilitate the fast transfer of funds between the merchant and consumer, for both cross-borders and domestic online purchases, as well as eliminate pain points such as high exchange rates.

A thriving e-commerce ecosystem does not simply include incentives for buyers and sellers, but considers the incentives for other participants as well: how to change borrowers into buyers, how to help sellers sell more by borrowing more, and many other elements.

Viewed in this respect, a native token created is no longer a medium of exchange in this ecosystem, but a store of value that aligns the incentives of all participants.

Developing a robust ecosystem

Cryptocurrencies and blockchain technology will undoubtedly continue to play a significant role in creating value for society. Hence, it is imperative that organisations intending to conduct ICOs, recognise the critical role they play in creating ecosystems which are able to thrive through the circulation of utility tokens. Participation in these ecosystems will then not only become mainstream practice but also potentially rewarding.

Also read: Before you ICO, learn from challenges and experiences faced by those who have gone that route

In conclusion, as a vehicle for fundraising, ICOs have had their fair share of detractors. They have been questioned around the lack of regulatory governance, and sometimes moot valuations. Yet, the successful fundraising campaigns of Ethereum, Telegram and Filecoin have demonstrated how well-organised ICOs – predicated on robust prototypes and proof-of-concepts – can instill and drive investor confidence. As the market continues to mature, there remains a growing need to educate investors on the utility of tokens.

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