Before Satoshi launched Bitcoin, the Peer-to-Peer system lacked incentives to coordinate participants. Satoshi’s Proof of Work (POW) consensus mechanism revolutionizes the peer-to-peer system, introducing a new way to coordinate the cryptography economy.
But what crypto-economics is and how it differs from token economics remains ambiguous to many blockchain enthusiasts. Hence, this article explains the concept of crypto-economics and tokenomics and their differences. Before then, let us understand what a token is.
What is a token?
A token is often referred to as a single digital asset that runs on another cryptocurrency’s blockchain, like most DeFi tokens.
Therefore, it is a currency for decentralized exchange and selling of tokenized assets like video games.
In general, tokens are non-mineable digital units of value that exist as registries in blockchain, according to Binance Academy.
Additionally, a token is a currency for a specific blockchain ecosystem or a means to encode a unique asset or data.
Companies issue tokens as native digital currency using existing third-party blockchains, which are used to create and execute decentralized apps and smart contracts and facilitate transactions.
However, tokens are not cryptocurrencies like BTC or Ether but are transferable assets developed and issued over a blockchain.
Tokens are mostly classified as utility and security tokens. The former refers to tokens that serve as a medium of exchange or access to a certain value within an ecosystem.
In contrast, the latter refers to financial assets – similar to shares. Also, tokens are classified into fungible and non-fungible tokens.
For example, a dollar bill and tokenized in-game assets are fungible and non-fungible, respectively. Finally, every token is a cryptocurrency, but not all cryptocurrencies are tokens because tokens are a subset of cryptocurrency.
Cryptocurrency is a reward token to participate in the consensus mechanisms of a blockchain and used to be a payment method.
which can also serve as a virtual accounting system. Cryptocurrency turns in a standard currency to make and receive payments on a blockchain.
Unlike tokens, most cryptocurrencies have dedicated blockchains. Additionally, like USD, cryptocurrency is a means of exchange utilizing blockchain and cryptography.
What is crypto-economics?
Cryptography is utilized to secure data and encrypt information for safe and secure transfer across different platforms and systems. When cryptography merges with economics, we have crypto-economics – protocols that distribute, produce, and trade services in a digital ecosystem.
For instance, Hashgraph technologies and blockchain operate through a digital ecosystem.
Therefore, crypto-economics deals with the design and characterization of protocols.
Crypto economics functions as an economic mechanism to create decentralized P2P protocols.
By definition, crypto-economics is the study of economic interaction in adversarial environments.
A centralized party does not control decentralized P2P systems because of cryptography and economics that thrive against adversarial challenges to disrupt them.
Therefore, the security of P2P communication is through cryptography, while the economics incentivizes all contributors in the secure network to continue developing the network.
Breaking it further, crypto-economics focuses on the messages of an entire platform – like people coming together to form a consensus to verify information using consensus protocols.
Message (transaction) validity is the hallmark of crypto economies – how messages align, are validated, and are agreed upon before being recorded as part of history.
Crypto economics is needed in Blockchain ecosystems. Thus, it uses incentives and penalties to monitor services, goods, and efforts in the new digital economies.
Crypto-economics focuses on mechanism design, security engineering, market design, and token engineering.
The major reason for the crypto-economics mechanism is to ensure a network is attack-free and can tolerate faults; the cost of mistakes is insignificant in well-designed crypto-economics. It is also the basis for unfamiliar individuals to reach a consensus over a blockchain system.
What is token economics?
Token economics, also known as tokenomics, refers to plans, designs, distribution, price, and token production in a tokenized ecosystem. Tokenomics put market design, mechanism design, and token design as the three design variables.
The design and distribution of token economics determine the long-term feasibility of the token and its underlying projects.
Therefore, poorly designed tokenomics will mar the outcome of a project.
Tokenomics utilizes smart contracts to validate transactions and incentivize people in a network.
Therefore, tokenomics is about coordinating people, forming collaboration, and allowing transactions to occur.
Thus, when people come together, a message is formed and validated by crypto-economics (consensus mechanisms).
Likewise, tokens validate transactions by people coming together to agree and transact using smart contracts.
In a nutshell, tokenomics is a community that creates, analyzes, determines the function, utilizes, and distributes tokens.
Therefore, tokenomics highlights how tokens are supplied and also how it serves as progress indicators for traders.
Difference between crypto-economics and token economics
Tokenization is part of crypto-economics; this makes token economics similar to crypto-economics.
However, remarkable differences exist. Cryptoeconomics refers to the incentivized structures formulated to promote and champion a particular cryptocurrency’s creation and transaction validation.
For instance, bitcoin’s crypto economics incentivizes Bitcoin miners to mine new BTC.
The miners, in turn, validate each Bitcoin transaction.
Bitcoin traders and business owners pay transaction fees to miners to include their transaction when mining the next block. Now, you may ask what will happen after all BTC has been mined by 2140; miners will be incentivized to keep validating transactions.
On the other hand, tokenomics focuses on a token’s application layer so that the token can be used as originally planned.
Thus, tokenomics does not concentrate on transaction validation or token supply but processes and events after launches, like the token utilities and the behavior of the market and company after the token launch.
So, tokenomics focus on the economic institutions and policies of distribution, production, and distribution of tokenized assets.
It may be confusing to understand crypto economics and token economics; their major difference is that crypto economics focuses on transaction validation while Token Economics focuses on coordination of people using tokens and smart contracts.
Bitsapiens offers Tokenomics consulting services to design and launch your tokens, including developing your smart contract. If you don’t have the technical resources, we have a web3 development Studio to create what you need.
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