These days, it seems like everyone and their pet is a "web3 expert." What does it mean to be an expert and how do you identify what to listen to, and what to disregard?
Having taught and studied the economics of blockchain and digital currencies at the University of Nicosia, Iâve found that students often have some beliefs about what tokens are and how business and token economies work. Anytime there is a new technology that enters the landscape, people rush over to capitalize upon the momentum. But to actually speak and build credible in the area of tokenomics, people must be well-versed in the fundamentals of microeconomics and macroeconomics.
Many self-professed âexpertsâ provide advice that sounds fine and even sensible in theory, but that fails in practice. In sum, what matter when designing tokenomic incentives are the answers to the following questions:
Is the economic strategy repeatable? (That is, you don't want to just implement a strategy that coincidentally worked once -- you want to understand why and how a strategy worked so you can learn from it and do it more at scale.)
Is there a way of diagnosing when and how to deploy the strategy for your token and the estimated value of doing so? (That is, you need to understand the specific costs and benefits around a strategy so that you can weigh the tradeoffs to different approaches.)
Is there research that validates the strategy so you can talk about it more credibly? (That is, if you're trying to build support for a strategy that sounds good, but doesn't have any research and evidence to substantiate it, you're going to have a tough time building a coalition!)
A good example of a myth in tokenomics is that deflationary coins are always better. (Â âDeflationaryâ just means an ever decreasing supply of tokens, which in theory increases the purchasing power and value of each remaining token. âInflationaryâ means the opposite: an ever increasing supply which, in theory, reduces the value of each token.)
In reality, whether the token is inflationary or deflationary is a second-order question -- that is, it just doesn't matter as much as some people think. In fact, the price of a token can always adjust to meet supply, and each token can be arbitrarily fractionalized, so a fixed supply is a moot point if the token does not provide value to end-users!
When you hear advice about what to invest in or how to launch a project, don't forget to ask these important questions!
