Crypto Economics vs Token Economics

Dec 2, 2022

Welcome, premium subscribers! Thank you for subscribing. What will be shared today and the days ahead are alpha from our Economics Design's researchers.
Please keep these mails secret and do not share them with any one because these alphas are confidential. Enjoy your reading.

Introduction

What we’ve been noticing

To some, the difference between cryptoeconomics and tokenomics may not be clear yet. Some might even think that there's no difference between the two. But no, they are very different. Fostering a shared understanding of cryptoeconomics terminology and its relationship to blockchain technology is very beneficial. The aim of this post is therefore to create a clearer understanding of the common terms used, so that we can avoid confusion when talking about the protocol in real-world applications.

Key Topics this Article will Cover:

What are the differences between coins and tokens?
What are tokens and tokenomics?
What is cryptocurrency and cryptoeconomics?
What are the differences between tokenomics and cryptoeconomics?
Conclusion

What are the differences between coins and tokens?

One of the first things to consider is whether the asset is a “coin” or a “token.” It’s worth noting hat this kind of classification isn’t spotless because many people and publications use the terms coin and token interchangeably. However, by way of having a kind of crypto taxonomy, understanding the basic breakdown of what makes a coin, a coin and a token, a token, is essential.

A coin (aka layer 1 token) is a cryptocurrency that uses its own blockchain network. That blockchain network contains all the data of transactions that were made with the network’s native crypto coin. Examples are B 0.00%↑ for Bitcoin and/or E 0.00%↑ for Ethereum.

A token (aka layer 2 token), on the other hand, does not have its own blockchain. Instead, they use someone else’s existing blockchain. For example, most tokens rely on Ethereum’s network as a foundation. Tokens that use the Ethereum blockchain network are called ERC-20 tokens.

What are tokens and tokenomics?

A token is a cryptocurrency that doesn't have its own native blockchain. Developers build it on the blockchain of another cryptocurrency. While they often share deep compatibility with the cryptocurrencies on that network, they are a wholly different digital asset class.

Some examples of well-known tokens:

Tether USD ($USDT)
DAI Stablecoin ($DAI)
Binance USD ($BUSD)
BNB ($BNB)
Shiba Inu ($SHIB)

These tokens were developed on top of the Ethereum blockchain and are called ERC-20 tokens.

Economics of tokenization (aka tokenomics) designs and plans the distribution, price, and production of tokens for a tokenized ecosystem. It considers three design variables: market design, mechanism design, and token design.

Well-designed, well-developed tokenomics, with rules and incentives, determines the long-term success of crypto projects. Tokenomics is an integral part of a token-based system, and if poorly designed can lead to the ecosystem's collapse.

What is cryptocurrency and cryptoeconomics?

A cryptocurrency is an exchange mechanism, just like traditional currencies such as USD, but they are created to exchange digital information. It is a virtual currency secured by blockchain and cryptography. In a crypto ecosystem, tokens are more of a subset of cryptocurrency. So, every token is a cryptocurrency, but not every cryptocurrency is a token. Examples of cryptocurrencies are Bitcoin and Ethereum, which each have their own blockchain network.

Cryptocurrency economics (aka cryptoeconomics) is the economics of cryptography-based currencies and networks. Cryptocurrency economics focuses on creating economic incentives to direct the behaviour of buyers, sellers, service providers, and other parties in the network. It also attempts to measure and predict metrics such as user adoption, coin price, transaction volume, and services provided. Drawing on economics and game theory, it helps developers choose the most appropriate currency system parameters to generate the results they want.

What are the differences between tokenomics and cryptoeconomics?

When people talk about cryptoeconomics, they refer to the incentivized structures designed to promote and power the creation and transaction validation of a particular cryptocurrency. For example, Bitcoin's cryptoeconomics is intended to give Bitcoin miners a reason to mine new $BTC. These miners validate each Bitcoin transaction and then receive $BTC as a reward for their efforts.

Individuals, businesses, and $BTC users also have to pay a specific transaction fee to the miners to include their transactions in mining the next block. This means, in 2140, when all of $BTC will be mined, miners will still be incentivized to keep mining and validating transactions.

Tokenomics focuses particularly on the application layer of a token so the goal is to ensure that a crypto-token is used within the ecosystem as intended.

In other words, tokenomics does not focus much on supply and transaction validation, but rather on subsequent events. When we consider tokenomics, we have to consider what the token is used for and what behaviour the project and market maker is trying to evoke from it.

Conclusion

Tokenomics studies the economic institutions and policies of the distribution, production, and distribution of tokenized goods and services. Cryptoeconomics is the use of incentives and encryption to create systems, applications, and networks. It is the use of cryptography that takes into account economic motivations and economic theory.

Blockchain technology has become the driving force of innovation on the internet. Such developments have mobilised economic transactions that rely on tokens and do not require centralised intermediaries like banks or big enterprises. The nature of these commercial systems differs from traditional industrial economies in that they are decentralised, requiring very little capital to scale, and offering significant security of transactions.

Watch the video below to learn more about cryptocurrency economics and token economics on a technical level. Don’t forget to like and subscribe so you don’t miss important updates and latest videos.

Got a question for our author regarding this article? Contact her at:

Lisa JY Tan | Founder and Managing Director
E: Lisa.T@EconomicsDesign.com | W: EconomicsDesign.com