What is tokenomics?
The word "tokenomics" is a portmanteau, or combination, of the words "token" and "economics" and it is a relatively new term that rose to popularity in the middle of 2017. As with anything new, the meaning has yet to be standardized, with many industry leaders attempting to provide their own definition. This is similar to attempting to define blockchains or the internet in the early days, as there are a range of ideas that are encapsulated within the idea of tokenomics.
Tokenomics, however, encompasses the concept of the study, design, and implementation of an economic system to incentivize specific behaviors in a community, using tokens to create a self-sustaining ad hoc mini economy. It includes game theory, mechanism design, and monetary economics.
If we think back to the loyalty points we get from our local supermarket or an airline, when we collect or redeem them some of us analyze the economics. For example, I need to purchase another $50 worth of groceries in order to receive a $15 gift voucher because it only gets paid out after 200 points have been collected, and I'm on 195 points ($10 of spending for one point). Another example is asking how many flights do I need this year to achieve gold status and how many flights do I need to maintain gold status? Anyone who has gone through these scenarios could argue that they were analyzing the tokenomics of the loyalty points system.
Tokenomics was selected as the title of this book because with all the ICOs in the last few years, and this new tokenized economy that is emerging, token supply, inflation rate, and even the various incentive schemes can all be encapsulated into this word.
Micro and macro
In economics there are two major fields: microeconomics and macroeconomics. Microeconomics focuses on individuals or companies, which could mean studying the supply and demand for a specific product or the production that an individual or business can produce. Macroeconomics focuses on the aggregate issues that affect the overall economy, such as the gross domestic product of an economy or the effects of imports or exports.
Tokenomics is similar. Microtokenomics can be considered as features that drive the functions of individual participants within a blockchain economy. Examples include mining rewards and how they change over time, and the mechanics needed to adjust the token supply, demand, and velocity, such as vesting periods, the mining difficulty, and the inflation rate.
Macrotokenomics consists features that relate to the interaction with the wider blockchain economy and they tend to include governance (such as who decides what the next new feature is), the participant interaction within the ecosystem, and also the external factors of the token growth and volatility (such as the utility of the token and the liquidity on exchanges). It is the interaction of all these variables that produces what is known as a 'token economy.'
First occurrence of the word
One of the earliest occurrences of the word was in a tweet with the hashtag #TOKEnomics, in March 2012, from DJ Hustlenomics, an American rapper:
Figure 1: One of the earliest uses of the word "tokenomics" by an American rapper. (https://twitter.com/DjHustlenomics/status/185205191480582144)
'Hustlenomics' was the second studio album by American rapper Jasiel Amon Robinson, who is better known for his stage name 'Yung Joc.' Needless to say, this was probably nothing to do with blockchains or the new decentralized economy.
The next occurrence was from someone on Twitter with the handle @thewayoftheid. Again, we can probably safely assume that Jamie is not talking about blockchains to @Mami_LongLegz:
Figure 2: Another use of the word "tokenomics" on Twitter in December 2013. (https://twitter.com/thewayoftheid/status/416599434097463296)
Almost a year later, in August 2014, there was a more relevant tweet from Dave Feuling, or @GoodForOneDrink, who tweeted Enjoying Tokenomics at the good ol Hammond Hotel. Feuling explained where he heard the word from:
"A local bar (no longer in business) held Tokenomics on Wednesday nights for a certain length of time. It was called this bc (sic) every drink you bought awarded you a drink token that was good for one free drink of equal or lesser value. It was basically a special happy hour" (https://twitter.com/seandotau/status/1024041929158221824).
This tweet may not be directly referencing blockchains or ICOs, but we are getting closer because there is a token involved that can be redeemed for a drink at the Hammond hotel in Wisconsin, USA:
Figure 3: The earliest mention of the word "tokenomics" that has reference to an actual token (https://twitter.com/GoodForOneDrink/status/497159085721391104)
Fast forward to March 2015 and the word "tokenomics" was mentioned again in a tweet by @mmoblogosphere, who was actually referencing @casualnoob blog post titled Tokenomics. @casualnoob is a female blogger with the pseudonym "Da Cheng", who is a mage (a magician) character in the computer game World of Warcraft (WoW).
Figure 4: A blog post on tokenomics, analyzing the WoW token
The tokenomics blog was in reference to a WoW token released by Blizzard Entertainment and "Da Cheng" analyzed the economics of the token. Essentially, Blizzard created two in-game tokens. One token could be bought from Blizzard for an initial price of $20 per token and another could be sold to Blizzard to add 30 days of game time to your account. The final tokenomics recommendation from "Da Cheng" was:
"Recommendation: buy Gold WoW tokens on day 1. Buy all you can afford. There will never again be such a concentrated glut of sellers. The price will never drop to 40 000g again. Don't buy $teel WoW tokens before week 5, once the upward price momentum of gold tokens is obvious."
The final occurrence before the floodgates opened wasn't until June 2017 (https://twitter.com/search?l=&q=%22tokenomics%22%20since%3A2014-07-03%20until%3A2017-07-04&src=typd&lang=en) by William Mougayar, a thought leader in tokenomics, who wrote an article titled Tokenomics — A Business Guide to Token Usage, Utility and Value. (https://medium.com/@wmougayar/tokenomics-a-business-guide-to-token-usage-utility-and-value-b19242053416). Mougayar provided a detailed analysis, where he defined a "token" as just another term for a type of privately issued currency.
Figure 5: The tweet that opened the floodgates on the word "tokenomics." (https://twitter.com/wmougayar/status/873912937676779522)
