Tokenomics: A Case Study With The Ethos Token

Tokenomics: A Case Study With The Ethos Token

Demand and supply are the opposite extremes of the beam, whence depends the scale of dearness and cheapness; the price is the point of equilibrium, where the momentum of the one ceases, and that of the other begins.
– Jean-Baptiste Say

Demand and supply — the foundational pillars of economics — play a dominant role in the economics of utility tokens (tokenomics) and affect the present and future price of the token. This case study with the Ethos token provides a framework for projecting future demand and price for utility tokens. We introduce the Ethos Tokenomics Calculator that will empower the community to use their own projections to estimate future value of the Ethos token.

Utility Tokens — A Capital Structure Break-through

Traditionally, debt and equity (bonds and stocks) are the two main avenues entrepreneurs use to raise capital for their enterprise. Cash flows (interest payments) are largely predetermined in debt investing. Equities, on the other hand, give the investor exposure to cash flows (via dividends) and future demand for the products or services offered by the enterprise (as rising earnings lead to price appreciation). Although there have been several variants like convertible bonds, preferred equity, etc., over the years, the debt and equity based capital structure has existed for a long time. For context, stocks have been trading for over 400 years. The first recorded IPO (initial public offering, not to be confused with ICO, initial coin offering) occurred in 1602 when the Dutch East India Company offered its shares to the public.

Bitcoin, and several other crypto projects that have followed, expand the capital structure by removing cash flows from the equation, thus providing pure exposure to the growth of the project. The projects are funded with the expectation that the demand for the services provided by the project will rise in the future, and that will lead to a rise in the price of the native token. For those wanting a deeper dive, our previous article provides a useful metaphor for how a token economy built on utility tokens operates and thrives.

 

 

Present Value Of The Ethos Project

Market cap measures the present economic value of a project that investors collectively agree upon; it’s the product of the number of tokens in circulation, and the price of each token.

(Ethos) Market Cap = Circulating Supply * (Ethos) Token Price

It is important to separate the concepts of total supply from circulating supplyat this point. Ethos has a fixed total supply of ~222 million tokens, of which ~78 million are in circulation. It’s the number of tokens in circulating supply that affect the market cap of a project. The total supply of Ethos tokens is fixed and will not change. The circulating supply, on the other hand, will be determined by the economic forces we describe in the next section.

Holding the present value (current market cap) of the Ethos project constant, we can imply that token price and circulating supply are inversely related. In other words, an increase in supply will result in a drop in token price, and a reduction in supply will boost the price.

Token Price = (1 / Circulating Supply) * Market Cap

Future Value Of The Ethos Project

The future value of the Ethos project can be determined by projecting any changes in the circulating supply and the price of the token.

Future Price: Holding supply constant, the price of the token is driven by the value the Ethos project adds through its products and services, and the overall crypto market performance — as the crypto asset class grows, the beta of the asset class will affect prices of all tokens including the Ethos token.

Change in Token Price ~Ethos Value Added + Crypto Beta


Future Supply: 
The future supply of the Ethos token is affected by the number of new tokens released for covering costs, and the number of tokens staked or consumed thereby removing them from circulating supply.

Future Supply = Current Supply + Tokens Released — Tokens Staked or Consumed


Tokens Released: 
Tokens are released into the circulating supply to cover the cost of building the Ethos platform — compensation, technology services, legal fees are some of the key components. Many of these costs are denominated in fiat currency, so the higher the price of the Ethos token, the fewer the tokens that need to be issued to cover costs.

Tokens Staked or Consumed: Ethos is building products and services that will create opportunities for staking and spending Ethos tokens thereby reducing the circulating supply of tokens. When users of the Ethos platform staketokens, the tokens continue to be owned by them but not longer circulate in the open market. On the other hand, when users spend tokens on a service, the tokens are returned to Ethos and can potentially be taken out of circulating supply. Staking or spending does not result in burning of any tokens, and the total supply remains fixed.

The Ethos Rate Card details various products and services we have on the roadmap that require staking or spending tokens. A few key opportunities are highlighted below:

  • Bedrock API Access: The Ethos Bedrock API enables developers and businesses to build secure Blockchain applications on top of safe and secure standards and protocols such as Ethereum. It is designed to be an architecture to both create a financial ecosystem for cryptocurrency, as well as bridge the traditional and blockchain ecosystems. Ethos hosts full blockchain nodes, and enables developers to create wallets, query balances, verify sources of funds and identities, enable payments, and other useful transactions.
  • Verified Wallet Domains: A verified wallet address enables a registry to a public Blockchain Name Service (BNS) that creates and broadcasts a branded name and verified wallet. This is useful for companies that want to reserve their brand on the blockchain, or users who want to use their names for simple payments. Benefits include not having to use long-form crypto addresses, verified identity written into all Blockchain transactions, and reduced error and fraud rates.
  • Robo Wallet & Automated Trading: As Shingo Lavine highlighted in his recent post describing the Ethos roadmap, we will leverage the Ethos platform and the research that has been conducted by the portfolio management team to build diversified crypto baskets — or “one-click diversification”.

Users will be required to stake or spend Ethos tokens to access these services which will effectively reduce the supply of Ethos token, resulting in an appreciation in the price of the tokens that remain in circulating supply.

What does this mean for investors?

The price is the point of equilibrium, as the French economist Jean-Baptiste Say correctly observed. The direction and momentum of the price is determined by the value added by Ethos products and services, any changes to circulating supply of the token, and the overall crypto market performance (crypto beta). We are building products and services that will increase user adoption, and drive demand for the Ethos token. We are also confident that demand for the broader crypto asset class, and commitment demonstrated by several projects like ours will positively influence crypto beta in the long run.

Tokenomics is a nascent and rapidly evolving concept. We encourage investors to make well-considered and well-informed decisions — to use tools like the Ethos Tokenomics Calculator to model their projections and estimate future prices.


Balancing Decentralization

Balancing “Decentralization” —  Purpose & Utility of ETHOS Tokens within an Inclusive Financial Ecosystem

A very common question that many crypto firms today face is “Why do you need a token?” It is a fair question and something that we try to tackle head on. I’ve said time and time again that blockchain is a tool. Blockchain is not a “Sledgehammer.” As Abraham Maslow once said, “if all you have is a hammer, everything looks like a nail.” Right now the world has been given “The Blockchain” and everyone is trying to figure out what “nails” to hammer the blockchain with.

In reality, “The Blockchain” — whatever people mean by that — is much more of a “scalpel”. Blockchain technology should be seen as a precision tool which when used correctly, can prove to be quite powerful in solving difficult problems. This is a theme that we will expand upon at Ethos and will become increasingly apparent as the blockchain industry matures.

In general there are 5 main reasons we have a token which are laid on in our FAQ on ethos.io/faq which are:

  1. Reduce costs for consumers for crypto-related transactions.
  2. Enable low-cost blockchain applications for developers.
  3. Create a scalable micropayment transfer mechanism for all platform services.
  4. Support an open financial ecosystem that bridges traditional and crypto assets.
  5. Enable verified source of funds and identity for transactions through the Ethos ecosystem.

For the sake of transparency and education I will lay out what each of those means here and people can reference back to this answer. Without further ado, let’s jump right in…

Reduce Costs for Consumers

Using USD for transactions generally has many intermediary fees associated with it. Withdrawing money from a bank account, using a credit card or wiring funds all require fees that add up to a significant percentage of the transaction. The transformative power of the blockchain means that for the first time there is a completely open financial ecosystem that has no prerequisites for participation. There are no intermediaries which removes a lot of barriers and costs. To illustrate this, imagine you wanted to buy a diversified basket of assets. You may have to ask an investment advisor to provide suggestions, decide to purchase shares of a mutual fund, have a broker-dealer purchase on your behalf through the investment advisor, have a mutual fund manager manage the money while the shares are held in custody by a custodial bank — not to mention the money being held and transacted through a bank. At each intermediary, there are costs that ultimately are shouldered by the user.

A tokenized system can provide consumers the “market price” of a product or service without the markup that happens through inefficient mechanisms or profit motive. Markets are the most efficient way to allocate scarce resources in a way that is fair to everyone. Uber uses markets to pair riders and drivers and Google uses markets to match advertisers with ad spots to maximize consumer and producer surplus. The Ethos token is designed to match consumers to transactions for the lowest possible cost.

Enable Low-Cost Applications for Developers

In a similar vein to “Reduce Costs for Consumers”, the Ethos token provides prorated access to the Bedrock API. By enabling pro-rated access to an API, there are no over or under charges to developers, and participants in the Ethos Ecosystem can get exactly what they are entitled to. This is similar to an Amazon Web Services model, but even more thinly sliced to the API level, similar to how Ethereum uses Ether gas to power Smart Contracts with the added benefit of eliminating payment risk from the business and the consumer. This allows the ecosystem to operate much more efficiently — basically at the lowest possible cost the ecosystem will allow — and is beneficial to both businesses and consumers. Ethereum’s gas market has shown the power and potential of a computer system that can be “rented out” on a microscopic scale. We took many of the best ideas from Ethereum and expanded upon them for Ethos Bedrock.

Create a Scalable Micropayment Transfer System for all Platform Services

Ethereum, along with the many layer 2 scaling proposals for ERC20, enable highly scalable systems that can build the foundations for payments infrastructure and consumer application rails which are simply not possible in a USD world. ERC20 enables us to fully utilize the security and scalability of a tried and tested blockchain while at the same time providing a unique digital commodity to power an ecosystem. These applications span underserved unbanked populations to high throughput payment and settlement systems. Again, these sorts of applications are simply not possible without a unique digital asset. There is no way for an unbanked consumer to transfer a dollar without incurring significant fees. By using an near infinitely subdividable digital asset along with a micropayment transfer mechanism, any person in the world can be able to send micropayments securely and safely.

Support an Open Financial Ecosystem that Bridges Traditional and Crypto Assets

A huge part of our mission is making the financial ecosystem accessible and connected for consumers and institutions. Bridging the gap between traditional and crypto is an important part of this mission for Ethos. A digital asset simply makes a lot of sense when you want to begin establishing marketplaces that form an ecosystem linking both worlds. As more and more firms join the Ethos Ecosystem and begin operating within it — it becomes increasingly important to establish connections between the different marketplaces to support an all-inclusive capital market that can better serve individuals and institutions alike.

Enable Verified Source of Funds in the Blockchain

A major source of headaches for regulators is the perception that cryptocurrency can be used for money laundering, terrorist financing, drug transactions and the like. Even though there exists this perception, many studies have shown that illicit actors still prefer to use fiat over cryptocurrency due to the linkability and transparency of the blockchain. The blockchain is often more transparent than the existing fiat financial ecosystem, and can be used to create a safe and clean digital financial ecosystem.

Ethos is building standards that will help people stay on the “light side” with crypto and power all the transformative possibilities that crypto promises while at the same time maintaining the integrity of a clean financial system. This includes identity for all Ethos participants. Instead of sending funds to an anonymous address, Ethos users can link identity to funds. We see this starting with a “DNS-like” Wallet domain marketplace powered by the ETHOS token that enables verified users the ability to leverage the plethora of capabilities that are available in the crypto world. Users can register a unique wallet handle, much like a web domain, that will make it easy to receive funds of any kind through the Ethos Ecosystem.

Additionally, ETHOS-VSF is a standard that proposes a way to encode verified source of funds into blockchain transactions powered by the Ethos ecosystem. A digital asset that powers a new, decentralized, inclusive and compliant future is something that should appeal to both users and regulators alike.

This post was inspired by a telegram comment that I responded to! Visit our telegram at t.me/ethos_io and ask the Ethos team more questions to receive information straight from the source. Ethos strives to be transparent and forthcoming with all activity and it is a big part of our mission to drive clarity and education in the industry.