Tokenomics is Not Economics
Tokens are the fuel of the Decentralised economy and Token Economics, or Tokenomics is at the core.
In January of 2018, ETH hit a then all-time high of over one thousand U.S. dollars and the platform became almost unusable. I know this because, in 2017 and early 2018, Blockchain Consultants LLC, a company I co-founded, along with John Crockett, was spinning up DLT architected organizations as fast as we could. We were implementing DLT workflows that functioned amazingly well. Transaction fees were inexpensive, and settlement was fast.
Then the disaster happened on November 28, 2017. The Canadian studio Axiom Zen released a blockchain game on Ethereum called CryptoKitties. Shortly after launch, there were concerns that CryptoKitties was crowding out other businesses that use the Ethereum platform. The game caused an increase in pending transactions on Ethereum, and at one point accounted for over 10% of network traffic on Ethereum.
A perfect storm ensued over the following months that almost decimated the ETH platform. The game’s popularity in December 2017 congested the Ethereum network, causing it to reach an all-time high in the number of transactions and slowing it down significantly. The game’s popularity also caused a massive inflow of speculators to the ETH platform who drove the price of ETH to a peak in January of 2018 of over one thousand US dollars. This affected transaction fees (the cost to record data on the chain) as fees went through the roof. The cost of a transaction went from 40 cents at the beginning of 2018 to well over 40 dollars in some cases toward the end of 2018.
ETH Developers began to have discussions about the viability and future of ETH. The platform just was not scalable. Yet on May 12, 2018, a CryptoKitty was sold for $140,000. Speculation and the greater fool theory had won out over sound logic.
The ETH platform became almost unusable. We learned first hand that Tokenomics is Not Economics.
Economics = You buy stock in ATT. When ATT increases sales the stock price goes up.
Tokenomics = You buy ETH. When the value of ETH goes up, the cost of a transaction goes up. With higher transaction fees, fewer organizations are willing to record transactions. The result is fewer transactions recorded. Even though the market cap increased, the useful value of the platform decreased.
Economics = Speculators begin to pump ATT stock and the price of your ATT stock goes up. So does the price to earnings ratio. ATT P/E currently hovers around 14.83 times earnings no company ever created is worth more than 6 times earnings in my estimation.
Tokenomics = Speculators begin to pump ETH prices and the price of your ETH goes up. So do transaction fees. The result is fewer transactions recorded. Even though the market cap is higher, the useful value of the platform goes down.
Tokenomics is Not Economics.
Today we are repeating the mistake. Today, ETH is once again over the one thousand dollar mark. Speculators see tremendous potential in digital currencies and they are driving the cost up. All the while reducing the fundamental value of the token they have bought.
Once again, for most normal people, the blockchain is pretty much unusable for average size transactions. Recently, sending an ERC20 token today could cost over US$60. To complete a simple UniSwap trade can run between $60 and $100 for each transaction. Unless you’re willing to pay $100-$200, you can forget about a complex smart contract interaction — it’s a financial nightmare.
This is not true with ETH priced around $200.00. At that price point, developers could begin to move forward with FinTech, MedTech, AgriTech, and many other industries that need Disintermediation to thrive in the coming decentralized economic environment.
Digital Currencies are ushering in a new paradigm and Consensus is at its core. If you haven’t spent time learning what Consensus is, it is time to do so.
Unfettered Global transactions are the promise and Disintermediation is the tool. The sooner we cumulatively begin to realize that we can not take traditional economic theory into the digital realm the better.
Change is coming and the future is decentralized.
I’m ready for it, are you?
Michael Noel CBP
#Blockchan #Tokenomics #DigitalCurrencies #Consensus #Disintermediation
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