With the passing of each blockchain project, a new token is created. These tokens become the native coin supporting the project and an economy is created around it. This means users will need to invest in the token to gain some form of reward on the project or reaping the benefits from the investment made by buying the tokens. The second layer is decentralised apps which are built on top of various blockchain projects and also have their native tokens or utility tokens.
The token economy is borne out of the concept of tokenisation; which is an incentive-based mechanism to reward individuals or give them ownership in the form of tokens. I present here use case of tokenisation. In a high school, a class teacher can decide to institute a token economy around punctuality among students. The token reward can be given to students of the class for being punctual to class. The tokens will them have to have a value to incentivise members to want to earn it. In the class example, any time a student shows up before the class starts, they get a certain number of token rewards. The tokens earned can be used by students to get discounts at the school canteen or football games. It, therefore, means that one can create an economy around an activity by tokenising it to encourage others to invest their time and resources in order to gain the tokens which they can later use to reap the benefits. For those issuing the tokens, in this case, the high school teacher, it helps them get other benefits through the token economy instituted. In this example, it helps the class teacher will reap the benefits of student punctuality, higher student performance and possibility reduced absenteeism.
In recent years, the update of blockchain projects has popularised the concept of a token economy for most blockchain project projects. Instead of raising funding from institutional investors to build decentralised applications, blockchain projects have rather, decided to tokenise their apps as a way of attracting the community to invest their resources into building the infrastructure and marketing of the project. Token economies have different models which allow different interest groups to participate in the project. For most blockchain projects with a token economy, you would mostly find their models spelt out in their whitepapers and made public on their website. The whitepaper is a general guide to the project implementation and the future direction of the project as well as the token economy behind the project. Take it us the business plan for traditional businesses.
For every token economy, the uses of the token are what will encourage people to want to participate or hold the token. One way blockchain projects use tokenisation is to incentivise the community to build the resource infrastructure to support the project. One of such ways is to incentivise block producers or miners to join the blockchain network. Mining is a popular token model with Bitcoin. Individual developers are encouraged to set up their servers as nodes on the Bitcoin mainnet to compete to mine transactions on the network. For every successfully mined transaction, the miner (owner of the server) gets rewarded in Bitcoin for the job done. This way, the developers of Bitcoin don’t have to incur the cost of setting up different servers to host the different blockchain databases to validate transactions. In other blockchains, they have what is called delegated block producers. This is what is used on the Telos blockchain network where about 21 block producers are voters to produce blocks and confirm transactions on the Telos blockchain. Each block producer has to meet the strict code of conduct and maintain high standards on the network. There are also standby block producers who are paid to validate transactions in case any of the delegated block producers fail.
Apart from infrastructure support, tokens are also a store of value and individuals who believe in the blockchain buy their tokens with the hope of selling it in future when the value rises. They buy and trade on exchanges such as Binance, Huobi and Probit just to mention a few. For some projects, tokens offer discounts on trading fees for token holders (see Sesacash.com) the right to vote on the blockchain governance and generally contribute to the welfare of members.
Tokens have become an important avenue for blockchain projects to raise funding through an ICO or IEO for the development of the project. As a result, there are various use cases for the token of a blockchain project or DApp and companies create an economy around the token supporting the project. Where the token economy is great, holders of the token have a promising value for their coins and are likely to reap the benefits through higher sales.
The token economy seems to have become a red ocean and becoming difficult to operationalise. Every blockchain project has a token economy surrounding it creating a tonne of them currently in existence. To stand out, therefore, there needs to be a way to think of a token economy system that will entice people to invest in the project. To be successful with your blockchain token economy, you need a strong team and traction with your startup to convince people to buy your token. Also, the uses case for the token will also encourage more people to join or leave.