Tokenomics of a utility token

[dnpotter]

I've been trying to describe tokenomics of a utility token to a non-techie crypto-noob friend.  The description is targeted at a specific project but it might be helpful for others too.  I'm trying to get to the underlying concepts while deliberately keeping it as simple as I can and avoiding describing the technology.  Here's what I've got so far - if anyone has any ideas for improvement I'd love to hear them.


Description of a utility token economy:

• The economy is an open market with three actors: users, token holders and miners.
• Users buy tokens on the open market so they can use services on the network.*
• Token holders are owners of a portion of tokens within an economy.
• Token holders provide liquidity on the open market - they provide a pool from which users can buy tokens to use the network.
• Miners run the network in return for fees from all transactions that users make on the network**.  These fees are paid in tokens which the miners may sell on the open market.

As in any economy the interactions between actors and the effect on the price is hugely complex.  Some points worth noting in very high level terms:

• As the platform matures more users join the economy, raising demand for tokens.  This has the effect of pushing up the price of the token since the total number of tokens is fixed.  Token holders can benefit from this price gain.
• The supply of tokens depends on how many token holders and miners are willing to sell at the given price, given the demand and market fundamentals etc.

* actually, application providers may buy tokens in bulk then supply them to users as part of a traditional paid service.  In this case the tokens (and the token price) will likely be invisible to the users as developers build application layers on top of the platform.  Note, application providers who buy tokens in bulk while the price of tokens is low will have a competitive advantage over others.

** Note: in the early years of platform development, when there are few users and few transactions, miners are encouraged to help run the network in exchange for minted coins.  The number of minted coins available to miners reduces algorithmically over time based on the economic model coded into the underlying blockchain software.  The reduction is designed to reflect the increasing number of transactions over time as more users join the economy.

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[elda34b]

If the token is not a PoW-based, then I think the term "miners" might sound a bit confusing. AFAIK, most utility tokens are running on top of other's blockchain platform right now, most notably eth.

I'd probably use "full node" or "node" just for clarity because some of them might use PoS or something similar.

[odolvlobo]

• The economy is an open market with three actors: users, token holders and miners.

You forgot the most important actor: the service that uses the tokens. The value of the tokens depends on the value of that service.

[dnpotter]

Thanks guys.

If the token is not a PoW-based, then I think the term "miners" might sound a bit confusing. AFAIK, most utility tokens are running on top of other's blockchain platform right now, most notably eth.

I'd probably use "full node" or "node" just for clarity because some of them might use PoS or something similar.

Quite right.  Miners isn't the right term.  'Node' is good for technical people but doesn't mean much for non-techies - mind you, neither does 'miners'.  Struggling to think of a good term: perhaps 'network providers'?

You forgot the most important actor: the service that uses the tokens. The value of the tokens depends on the value of that service.

The 'users' are meant to be those actors - they are the ones using the service provided by network.  Are you thinking of something else?

[odolvlobo]

You forgot the most important actor: the service that uses the tokens. The value of the tokens depends on the value of that service.

The 'users' are meant to be those actors - they are the ones using the service provided by network.  Are you thinking of something else?

Yes, and someone must provide that service.

[Naida_BR]

I've been trying to describe tokenomics of a utility token to a non-techie crypto-noob friend.  The description is targeted at a specific project but it might be helpful for others too.  I'm trying to get to the underlying concepts while deliberately keeping it as simple as I can and avoiding describing the technology.  Here's what I've got so far - if anyone has any ideas for improvement I'd love to hear them.


Description of a utility token economy:

• The economy is an open market with three actors: users, token holders and miners.
• Users buy tokens on the open market so they can use services on the network.*
• Token holders are owners of a portion of tokens within an economy.
• Token holders provide liquidity on the open market - they provide a pool from which users can buy tokens to use the network.
• Miners run the network in return for fees from all transactions that users make on the network**.  These fees are paid in tokens which the miners may sell on the open market.

As in any economy the interactions between actors and the effect on the price is hugely complex.  Some points worth noting in very high level terms:

• As the platform matures more users join the economy, raising demand for tokens.  This has the effect of pushing up the price of the token since the total number of tokens is fixed.  Token holders can benefit from this price gain.
• The supply of tokens depends on how many token holders and miners are willing to sell at the given price, given the demand and market fundamentals etc.

* actually, application providers may buy tokens in bulk then supply them to users as part of a traditional paid service.  In this case the tokens (and the token price) will likely be invisible to the users as developers build application layers on top of the platform.  Note, application providers who buy tokens in bulk while the price of tokens is low will have a competitive advantage over others.

** Note: in the early years of platform development, when there are few users and few transactions, miners are encouraged to help run the network in exchange for minted coins.  The number of minted coins available to miners reduces algorithmically over time based on the economic model coded into the underlying blockchain software.  The reduction is designed to reflect the increasing number of transactions over time as more users join the economy.

I think that it is hard for a newbie in the crypto space to understand those terms.
They don't have in their mind the concept and the environment where tokens are created thus even the simplest terms are hard to understand.
In my opinion, you have cover all the major topics. Maybe a good idea is to describe them with examples of how the tokenization happens.= in order to support your theory.

[dnpotter]

Yes, and someone must provide that service.

Ah, I see.  In my model the miners are providing the service.  I've stripped off any layer 2 service that uses tokens as their payment method as I think it complicates things unnecessarily.

[dnpotter]

I think that it is hard for a newbie in the crypto space to understand those terms.
They don't have in their mind the concept and the environment where tokens are created thus even the simplest terms are hard to understand.
In my opinion, you have cover all the major topics. Maybe a good idea is to describe them with examples of how the tokenization happens.= in order to support your theory.

Good idea.  I'll try to come up with an example.

[bitsurfer2014]

I think it might be best if you could include other aspects of the token economy which could make it more comprehensive like the capacity of the team, its legality (legal compliance), an example of tokens use case and its metrics, etc.

[odolvlobo]

Yes, and someone must provide that service.

Ah, I see.  In my model the miners are providing the service.  I've stripped off any layer 2 service that uses tokens as their payment method as I think it complicates things unnecessarily.

I guess that is the source of my confusion. If not for payment, then what are utility tokens used for?

[FanEagle]

I think the important fact that a utility token as important as it is used should be emphasized as well. I mean you can totally build a token that has a utility but as long as people do not use it then whats the point of it?

So, yeah utility is an important fact for it but is it actually utilized is much more important. There are coins with some utility and they are not used that much which makes them not important and their price either stagnant or even go down because people don't use it.

I actually have one of those coins that has a utility but since nobody really cares about that utility and not using it the price keeps going down all the time. Sometimes a whale buys a bit and increases the price but that's it, so an emphasize on utility token being actually utilized is very important.

[dnpotter]

I guess that is the source of my confusion. If not for payment, then what are utility tokens used for?

Digital signatures are a simple example (e.g. opensig.net): The user buys tokens in order to write the hash of a file to the blockchain.  In this case it is the blockchain itself that provides the service and the miners receive the rewards.

There are many decentralised applications too.  You're right though, if the developers of these apps are trying to make a profit then they could charge something on top of the transaction fee or sell tokens to the user at a premium.  I'll think about this more.

[SquallLeonhart]

I think this should be the simplest form of explanation I have ever seen for anyone or any newbie to fully understand the technology of token, and this is the main reason why projects are all producing their own token, but I am someone that have very big problem with that, I hate seeing many companies creating tokens in the name of creating an open market for users to buy token for their network.

The question is, how useful is the product they are providing that users will be attracted to their network? Most of these projects produce a project with a product that is not attractive and have no much users, imagine having a project, that cannot even get the interest of more than 1000 people in a population of over a billion users, how do they expect the network to grow for it to add any value to their coin.

The reason why you see a lot of volumes on some useless project right now is because many people are actually in there for investment, so with that investment mentality, they just pick interest in the token without actually having any use for it. Try and make a research if possible, get a token with large network, and ask all the communities why they are holding the token, I can bet my life with it that they do so because of investment purpose and not because they are interested in the utility token part of it. Only few projects do people really join the market for utility purpose like bitcoin, Ethereum and few.

[Ulven]

Here we can talk about the problem of projects, So you can not get as many users as possible. I think the number of users currently does not exceed ten million users, Much also speaks of the importance of digital currency in the future
In social websites. Strangely, every newcomer to the market is exposed to the monument.