Tokenomics is simply the amalgamation of two words: Tokens and Economics. So what is a token? According to Merriam-Webster Dictionary, it is “a piece resembling a coin issued as money by some person or body other than a de jure government. “ In essence it can be anything that represents legal money or anything that is of value. Based on this definition your Octopus Card is a token, your Starbucks Card is a token and a share of a stock is a token since they all represent something of value. Their values are recognized by the central authority and are protected by legal means.
In the world of blockchain, the word “token” is defined more narrowly. It represents a record on a blockchain. When you buy a Bitcoin, all really is happening is that your private key and the transaction is recorded on the blockchain. Only now ownership does not require the endorsement of the government. It is instead validated by cryptography. No intermediate and central authority is required.
What about economics?
Economics is a social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices about how to allocate resources. Fiat currency plays a central role in economics as it is 1) store of value 2) medium of exchange and 3) unit of account. It is far more efficient than the barter system. However, I believe fiat currency is increasingly becoming obsolete. Tokenomics, in the basic form, is the replacement of fiat currencies by crypto-tokens in economic transactions. The advantages and implications are mind-boggling.
Written by Dr. Kyle Wong, CFA, President of Association of Blockchain Development
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