Token Economics Taking a Front Row When Analyzing Blockchain Projects
In the first quarter of 2018, initial coin offerings (ICOs) raised $6.3 billion, which is more than in the whole year of 2017. How to identify and analyze token is a difficult problem for this new industry. Eric Wang, a speaker at the 2018 Global Token Galaxy Expo gives an answer from his own view.
Eric is a partner at Cipher Epoch Capital and also the CEO of a blockchain EdTech start-up. He believes that the most important thing to analyze a token is to begin with the technology in most instances. In this instance, what is the problem that the technology is trying to solve? Has something similar been done before, and if so what gives this project a competitive edge? Importantly, the project needs to have a very good justification for using the blockchain, as well as using tokens beyond as a medium of exchange. If a blockchain and a token are useful, the essence should be how the token economy works, and some otherwise very promising projects have suffered from poor token economics.
More generally, it is about how a project can maintain and increase the token price. Tokens that solely act as a medium of exchange suffer from a lack of incentive from users to hold these tokens other than for speculation, and Eric predicts that with the rise of decentralized exchanges and more efficient token exchange mechanisms, these tokens, at least in the application layer, will be worthless to hold, as they can almost instantaneously be exchanged with platform tokens such as Ethereum.
However, having good tokeneconomics is a very difficult endeavor, he says. Some example methods can include a token sink or mechanisms that encourage lockdown periods, such as in the case of VeChain. On the other side of the spectrum, there are some token projects that promise certain attributes, like Steem believing its Steem Dollars to trade at the exchange rate of one USD, but fail to deliver on these promises. Even financially successful blockchain projects have suffered from their token economics going awry.
He cautioned that “even if the technology checks out, there are many considerations one must make as to the scope of the project.” “Many projects promise extremely ambitious roadmaps or implementations, but only few teams are able to deliver on these promises; being realistic about the team and the technology is important.”
Eric also boldly predicts that at least 80% to 90% of ICOs projects will fail. Among them, at least a half are scams or ungrounded. With more and more infrastructure tokens, there will be less need and space for many blockchain projects.
With many token sales already failing in an unpredictable market, it stands the test of time to see which token projects will succeed. But tokeneconomics will definitely become more important as ICO investors become increasingly aware of what constitutes a good token project.
Author： Ninuo Zhang
Executive editor： Nino