Abstract

Supply and Demand in Tokenomics

Distribution is undoubtedly the backbone of growth in a crypto ecosystem. Without distribution, any currency, with no exception to digital currency, is effectively deemed worthless. This stems from the fact that cryptocurrencies only exist, function and sustain in an economy that, in its distinctive nature, is determined by a balance of supply and demand. As any crypto project developer may have known, if you have less supply than demand calls for, you lose out on potential revenue. Conversely, in the event you have more supply than demand suggests, you find yourself grappling with sunk costs and extra overhead. Therefore, to achieve the desired equilibrium state for a token to thrive over time, leveraging the demand from your users and their behavior is key.

Enter “tokenomics” - the art of identifying what value exchange is being cultivated in a crypto project, who the actors and beneficiaries are, and eventually influencing their behavior through strategic incentives. As people are offered opportunities to make free choices with regard to incentives, tokenomic design, therefore, is compelled to take user behavior seriously. That is to say, tokens have somehow well created a means of architecture that determines how users behave in a network, enabling relevant prediction and potential generation of new behaviors beyond current ones.

Leveraging Tokens & New Skeuomorphic VS. Emergent Consumer Behaviors

In one of his October blog posts, Mason Nystrom – Senior Research Analyst at Messari – introduces the concept of Skeumorphic consumer behavior and its counterpart – Emergent consumer behavior. The goal is to shed light on how crypto can concurrently transform formats and perceptions of consumption through the lenses of these mediums.

To explain shortly, skeuomorphic behavior, just as skeuomorphic illustrations, has its fair share in existing behaviors – meaning there will be one-layered alterations in either format or perception of consumption; comprehensive change of both does not fall within its remit. Let’s say instead of compulsory F2F meetings, we conducted virtual meetings since the pandemic was threatening our health, which ended up saving cost while upholding necessary efficacy, so we continue doing so. Or instead of US Dollars which is governed by centralized entities, Ethereum launches MakerDAO – a decentralized global reserve bank, resulting in a new type of currency – stablecoins.

On the other hand, emergent behavior results from the dramatic shifts of both format and perception of consumption, oftentimes stemming from new technology. Case in point: without the invention of blockchains, tokens and NFTs as well as the new perspective they bring about – “it is valuable to own digital assets” – the world would never know if digital ownership was possible, let alone it being so massive and prosperous as it is now.

Behaviors

As per Mason’s elaboration, behavior is most likely to be observed in these 03 contexts: Communication and Social, Physical Infrastructure and Token Distribution.

1. Communication and Social witness a format shift to W2W messaging (wallet to wallet) as a skeuomorphic manifestation.

What: Together with W2W messaging, there is also the on-going development of Web3 Social – open social graphs that are beneficial over Web2 social graphs in many ways including self-sovereign data ownership, security threat diminishment, freedom of choice as to community cultures and policies as well as the right to either monetize or not monetize their data. Emergent behavior is about to take a leap towards using NFTs as content. Some Web3 projects that are implementing social graphs are Lens Protocol, CyberConnect, DeSo, 5Degrees, etc.

2. Physical Infrastructure undergoes an expeditious overhaul where private companies can build and design their own physical infrastructure. This model was proven successful by Nova Labs (Helium) in the past few years, with consumers playing a prominent role in securing the PoC (Proof-of-Coverage) chain. The business model attracts demands by rewarding users who are willing to invest a small sum of money in buying the required devices, carrying out the work in exchange for HNT.

Risk or Opportunity: Some might say the network will not sustain in the long run as the rewards offered are simply used as a promotional device to bring in new users. But that’s not true since Helium does solve a non-crypto problem. It is significantly cheaper to connect all devices to Helium’s network than buy a cellular data plan for each device. Although hot spot owners profit when HNT value rises, their primary means of earning more is to add more hot spots, not by day trading. Therefore, to an extent, this model could become a popular sustainable setup for other companies seeking to expand their services through the power of community.

3. Token Distribution in several projects has adopted token incentives as a drive for user contributions, which is observed throughout different stages of project development. This shows preliminary skeuomorphic actions. However, there is a newly emerged positive trend that has spawned quite a few innovative approaches to how tokens can be distributed to their rightful community before being launched, which are expressions of emergent behavior:

Case Study 1: Uniswap’s Retroactive Airdrops were really effective in engaging their initial users base at a low to no cost, which birthed a number of other airdrops following their path. This then sets off a chain of influence on users, who are now seeking fresh potential networks to be a part of and looking forward to the day they receive their airdrops. 

Case Study 2: Another example is implementing auctions as it seems to be a more effective way to prevent price manipulations from whales and speculators; at the same time, it creates a better UX for less experienced and retail participants. As different protocols have different unique goals, several customized types of auction have been implemented such as:

(3.1) Liquidity Bootstrapping Pools (LBPs) - which sets the price to decrease proportionately over time, but the price pumps again if the token sees high demand;

(3.2) Degenesis which sets a foremost price range to be decided over a period of days when everyone pays the same price so that there is no guessing for price volatility;

(3.3) streaming auction Locke Protocol which allows investors to move in and out with price changes.

Others

Besides the mentioned influenced behaviors, there are also others catching fire as we speak:

Protocol-owned liquidity to end meaningless yield farming, strengthen protocols and DAOs, which rewards the community in the native tokens for their participation.

Lockups to stabilize price and attract long-term investors as rewards can be boosted up to 20%.

Stablecoins created by layer-1 protocols to become a medium of common transactions.

Although it is hard to accurately predict the future of every new social behaviors, we believe companies and protocols can make use of these two models to keep an eye on the imminent consumption trajectory and carve out appropriate token design that enhances their token’s ability to work as intended.