Token economics: Building an ecosystem for digital assets

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  Quantumrun Foresight
• December 19, 2022

Insight summary

Token economics or tokenization is an ecosystem that puts value on digital currencies/assets, allowing them to be traded and paid in equivalent fiat (cash) amounts. Token economics has led to many tokenization programs that enable companies to better engage their consumers through cryptocurrencies. The long-term implications of this development could include global regulations on tokenization and brand loyalty programs integrating tokens.

Token economics context

Legal and economic frameworks are essential to establishing a token's value. Thus, token economics focuses on how blockchain systems can be designed to be advantageous for all stakeholders, including token users and those who verify transactions. Tokens are any digital asset representing value, including loyalty points, vouchers, and in-game items. In most cases, modern tokens are created on a blockchain platform such as Ethereum or NEO. For example, if a company offers a loyalty program, the customer must purchase company tokens to participate in the program. Additionally, these tokens can then earn rewards such as discounts or freebies. 

The main advantage of tokenization is that it can be versatile. Companies can use tokens to represent shares of stock or voting rights. Tokens can also be used for payment purposes or to clear and settle transactions. Another benefit is fractional ownership of assets, meaning tokens can be used to represent a small piece of a more significant investment. For example, one could own a percentage of the property through tokens rather than owning an entire property. 

Tokenization also allows for the quick and effortless transfer of assets since these digital assets are sent and received using blockchain technology. This method enables settling transactions quickly and without needing a third-party intermediary. Another strength of tokenization is that it increases transparency and immutability. Since tokens are stored on a blockchain, they can be viewed by anyone at any time. Also, once a transaction is recorded on the blockchain, it cannot be altered or deleted, making payments incredibly secure.

Disruptive impact

One of the most common uses for tokenization is loyalty programs. By issuing tokens, companies can reward customers for their patronage. An example is Singapore Airlines, which launched KrisPay in 2018. The program uses a miles-based digital wallet that can convert travel points into digital rewards. The company claims that KrisPay is the world's first blockchain-based airline loyalty digital wallet. 

Firms can also use tokens to track customer behavior and preferences, allowing businesses to provide targeted discounts and offers based on customer interests. And as of 2021, various companies are starting to use tokenization for fundraising purposes; ICOs (initial coin offerings) are a popular way to raise money by issuing tokens. People can then trade these tokens on cryptocurrency exchanges for other digital assets or fiat currencies. 

Tokenization is also being used in the real estate industry. For example, a property in Manhattan was sold using cryptocurrency tokens in 2018. The property was purchased with Bitcoin, and the tokens were issued on the Ethereum blockchain platform.

While the system is transparent and convenient, tokenization also has some risks. One of the most significant challenges is that tokens are subject to volatile price swings, meaning their value can go up or down suddenly and without warning. In some cases, crypto coins can completely dissolve or disappear. Another risk is that tokens can be hacked or stolen since these assets are stored digitally. If the tokens are stored on a digital exchange, they could also be hacked. And, ICOs are largely unregulated, meaning there is a higher risk of fraud when participating in these investments. 

Implications of token economics

Wider implications of token economics may include: 

• Governments attempting to regulate tokenization, although regulation would be complex in a decentralized platform.
• Some crypto platforms being established to support tokens that require more robust and flexible use systems.
• Increased ICO offerings and tokenization of capital investments, such as Security Token Offerings (STOs) for startups and small businesses, which can be more accessible than IPOs (initial public offerings).
• More companies transforming their loyalty programs to digital tokens by partnering with different crypto exchanges and vendors.
• Increased investments in blockchain cybersecurity as more tokens and consumers enter the field.
• Traditional financial institutions shifting to integrate digital tokens, altering the banking and investment landscapes significantly.
• A surge in educational programs and resources focused on cryptocurrency and token economics, aiming to enhance public understanding and participation in the digital economy.
• Enhanced scrutiny by tax authorities worldwide, leading to new taxation frameworks for digital assets and token transactions.

Questions to consider

• If you have invested in any crypto platform and token, what do you like or dislike about the system?
• How can tokenization further affect how companies build customer relationships?