Tokenomics: The Economics Behind RSK
The ascend of the crypto-economy has led to an enormous influx of both institutional and retail capital into the burgeoning industry looking for exponential growth which is, unfortunately not possible in the more traditional financial avenues.
Today, the total crypto industry is worth more than $2.3 trillion and if its rate of adoption is any indicator to go by, we might just be at the beginning of probably the most significant development of wealth transfer of the 21st century. This transfer of wealth, however, is essentially being facilitated via coins or tokens that represent a degree of ownership of the underlying blockchain protocol depending on the number of coins an individual or a company hold.
As the value of any digital asset is expressed via the price of the token, it becomes extremely important to learn the ins and outs of the tokenomics of a crypto project before putting any money into it. Notably, there are several pitfalls or issues that a novice crypto investor might overlook while buying coins of a crypto project such as the maximum supply, coins in circulation, market cap, token-vesting schedule, etc. Good crypto or digital assets investment is made after considering the tokenomics of a project.
In this guide, we will delve deep into the importance of tokenomics for a digital asset protocol. Furthermore, we will also have a look at the token designs within the RSK ecosystem.
Why Are Tokenomics Important for a Project?
If one had to define the word tokenomics in a single sentence, it would be the science of token economy for a crypto project. Tokenomics essentially covers all aspects revolving around a digital coin including its creation, management, circulation, burning mechanisms (if any), distribution, etc.
The tokenomics of any project can first be sighted in its white paper which details the token economy of the native coin of the project. It is important for projects to be able to distribute the coins to the protocol users. This way, the project ensures that the protocol is not only running but is also being used by its stakeholders via the underlying coin or token.
To begin with an example, let us consider bitcoin. The basic premise why BTC is considered digital gold of the 21st century and why it has witnessed exponential popularity throughout the last decade is because it has a maximum supply of 21 million. With a hard cap of 21 million BTC, Satoshi Nakamoto ensured that no new bitcoin would ever be created or issued which essentially leads to the creation of a supply-side crisis as more and more bitcoin is mined.
In the example above, notice the importance of the hard supply ceiling of 21 million. If bitcoin did not have this supply ceiling, it would perhaps be no different than gold or fiat currencies with the latter essentially having infinite supply being produced by the central banks via fractional reserve banking and quantitative easing. Therefore, the tokenomics of a project play a key role in determining the future course of the price of the underlying coin or token. However, supply is not the only determining factor when it comes to tokenomics.
In addition to charting the future price discourse of a project’s token, tokenomics offer a wide variety of other use-cases and applications for a protocol. For instance, token-based economies or protocols rely heavily on tokenomics to better align the incentives of both producers and consumers. Tokenomics also help the project’s community bypass venture capital firms and other accredited investors whose ethos might not necessarily align with that of the project. Through carefully designed tokenomics, the project’s community can continue to have a greater say in its governance without fearing any incoming dump from the so-called whales in the crypto space.
Furthermore, proper tokenomics design can also help in paying out incentives to the community or liquidity providers for their support of the protocol. For instance, a lot of DeFi projects and the like allocate a certain percentage of the total supply of their tokens for liquidity mining events. This is done in a bid to attract capital to the protocol to increase its total value (TVL) which, in turn, leads to the token’s price appreciation which further attracts more value into the protocol and so on. This way, a good tokenomics design might help in the development of a positive feedback loop for a crypto protocol.
Finally, tokenomics also enables the protocol to function as a self-sufficient decentralized autonomous organization (DAO). Tokenomics segregate a certain part of the total number of tokens for different purposes for the DAO such as treasury, community rewards, LP, contingency fund, marketing, legal expenses, etc.
Summarizing, tokenomics play a critical role in the transformation of a protocol from just an idea on a white paper to a self-sustaining DAO that can function and is governed by its loyal community at the same time. While there can be no single tokenomics design that can be suitable for all protocols as they differ in functions, it is nonetheless important to have a good tokenomics design in place to ensure the protocol is successful in the long run and does not run out of funds or faces any other similar misfortune due to poor tokenomics design.
Let us now discuss the various factors to be considered when designing tokenomics for a project.
What Makes Good Tokenomics?
Several factors are considered for good tokenomics design. The number of tokens locked with VCs, vesting periods, the maximum supply, the elasticity of supply, buy and burn mechanisms and many other variables play an important role in deciding the future price trajectory of a token.
Allocation to Seed Investors & VCs
While the crypto industry is continually touted as the one that is aiming to level the playing field for all different sorts of investors regardless of the amount of capital they possess, lately there has been a stark rise in the number of projects that raise huge amounts from VCs and then dump it all on retail investors as soon as they get the opportunity to trade the same on public listings.
For example, consider a project named XYZ with a maximum token supply of 10 million ABC coins. Out of the 10 million ABC coins, 5 million were sold to VC firms and angel investors for $1 per ABC while the price of ABC during its public listing on a crypto exchange was $10 per ABC. This leads to a natural incentive for angel investors to dump their holdings as they are currently sitting at an attractive 10x profit on their initial investment. Hence, while designing the tokenomics, it must ensure that not a significantly high proportion of the total token supply is handed over to VCs at dirt-cheap prices.
A simple way to avoid the immediate dump of coins by VCs is by including vesting periods for early investors. Long term vesting periods ensure the angel investors’ incentives are tied to that of the project and there would be less incentive for them to dump on it at the early stages.
The Elasticity of Token Supply
Another key factor to consider while designing a good tokenomics map for a project is to ensure there is a fixed supply of the protocol’s coin. Sure, there can be instances where the protocol by design is not able to implement a fixed-token supply. However, with an infinite token supply, it tends to become difficult for coins to surge up due to impending fear of new tokens being introduced into the circulating supply which exerts upward pressure on its supply, leading to lower prices and therefore boring price action.
There are, however, instances where tokens of a protocol undergo yearly inflations to cater to several particular needs such as bolstering the treasury, continuing the liquidity mining incentive program, etc. However, to ensure good tokenomics, it is important the project comes together to agree on a fixed amount of supply and stick to it.
Buy and Burn Mechanisms
The buy and burn mechanism in the crypto industry can be compared to stock buy-back options in traditional finance where a company buys back its equity from the open market to exert a degree of demand pressure to inflate its price. However, crypto took this practice a step further and decided to not only buy back the coins from the open market but also to effectively remove it from circulation forever and thus reduce the overall maximum supply of the concerned coin. Typically, burn mechanisms tend to generate an increase on the price of a token in the long run.
Another, relatively novel way of ensuring the ‘stickiness’ of tokens is through staking. Proof of stake networks enable token holders to stake their tokens for the protocol’s decentralization and receive rewards in return. Including a staking option in the project’s roadmap can have a direct impact on the tokenomics as staking reduces the active supply of the tokens temporarily at least.
The aforementioned are some of the key points that make for a good tokenomics design. Next, let us pivot to the tokenomics of the RSK ecosystem.
Major Tokens in the RSK Ecosystem and Their Utility
Before we delve deeper into their tokenomics, let us first unravel the major tokens in the RSK ecosystem and the kind of utility they serve.
Two of the major tokens in the RSK ecosystem are RBTC (smart bitcoin) and RIF, the native token that powers the suite of products and services offered by the RSK Infrastructure Framework. Let us now examine both these coins and their utility in detail.
RBTC is the smart-contract compatible version of the leading cryptocurrency that enjoys greater utility in the RSK ecosystem. Just like bitcoin, RBTC has a maximum supply cap of 21 million which ensures it never deviates away from the bitcoin price peg.
RBTC is used as the gas to pay for the execution of transactions in RSK. Users can seamlessly convert their BTC to RBTC via the PowPeg. Several reputable cryptocurrency wallets support RBTC such as Ledger, Trezor, Metamask, Defiant, rWallet and many more. Further, RBTC can also be freely traded on several top-tier crypto exchanges.
Next on the list is RIF, the native token of the RSK Infrastructure Framework. The RIF token has a maximum supply of 1 billion. The RIF token plays a crucial role in powering the RIF landscape within the wider RSK ecosystem since it´s the utility coin that powers all RIF services.
In a nutshell, $RIF allows token holders to consume not only the services from the tech stack but also the services that are compatible with RIF´s infrastructure. Such services may include third-party developed infrastructure services and any other apps that might be integrated into the RIF OS Marketplace and agree to accept RIF tokens as a means of consuming those services or apps. Also, infrastructure providers in the RIF OS marketplace will be required to deposit a certain amount of RIF tokens that will be locked to protect consumers from breaches in the service level agreement.
Notably, the RIF token is built on RSK’s RRC677 token standard which simplifies the transactions between a regulator non-contract address and contract addresses. RRC677 tokens can simply be sent by calling the transfer function in the smart contract with no difference if the receiver is a contract or a wallet address.
The RIF token is supported by the majority of leading crypto wallets such as Metamask, MEW, Trezor, Ledger, Defiant and many others. Similarly, it is also available for trading on several cryptocurrency exchange platforms.
In addition to its own utility, the RIF token also powers several other applications, use-cases, and ecosystems within the RIF ecosystem. One of them is the RIF Dollar On-Chain which has its own fiat-pegged stablecoin called RDOC.
Individuals interested in availing the RIF ecosystem services simply need to first create a wallet and receive the RIF tokens in it. With RIF tokens at their disposal, users can unlock a wide swathe of use-cases in the RIF economy including purchasing or selling domains, file storage space, exchanging tokens via RIF Payments, etc.
Now that we have discussed the two major coins in the RSK ecosystem and the utility behind them, let us discuss their tokenomics.
Tokenomics of RSK Ecosystem Coins
As mentioned earlier, RBTC replicates BTC in terms of a total maximum supply of 21 million. However, RBTC is much more than just being a store of value as it also enables smart contracts on top of Bitcoin´s blockchain which essentially makes it the world’s most secure smart contract platform.
Getting back to RIF, it has a maximum supply of 1 billion with a circulating supply of more than 775 million at the time of writing. Now, there are several points to highlight in terms of RIF tokenomics:
- First, it has a fixed maximum supply which means it can never be increased to dilute RIF token holders’ position or ownership of the total token supply.
- Second, more than 70% of RIF tokens are already in circulation. This means that price fluctuation due to the release of new tokens in the market will be relatively small compared to tokens that have a small proportion of circulating supply vs maximum supply.
- Finally, the fact that RIF is listed on major cryptocurrency exchanges provides greater liquidity which further mitigates any fears of a dramatic drop in the price of RIF.
Naysayers might wonder about creating a separate utility token such as RIF instead of just using RBTC. However, there are some important reasons as they are different tokens for different uses as previously explained. RIF is a neutral token since it´s price is not tied to any single blockchain enabling a vast array of use-cases.
Furthermore, there is the portability factor. RIF token’s portability makes it ideal to create economies of scale and making the decentralized web of tomorrow less fragmented and more agile. Having a single token in place to utilize all the services offered by RIF makes sense as it can be conveniently redenominated according to the need as and when required.
In the long term, the vision is to have a unified marketplace built on top of RIF that offers off-chain infrastructure services consumable by the smart contract-based crypto-economy of tomorrow from platforms such as Ethereum, EOS, RSK and many others.
To conclude, the tokenomics of a project can very well make or break its future despite how good its fundamentals might be. As the blockchain industry decentralizes finance, it is important for protocols to devote their maximum resources towards building and more importantly, retaining a community.
Staying true to the ethos of decentralization, RSK’s tokenomics are a breath of fresh air. Unlike the vast majority of other projects which raise the bulk of the capital from private investors, who then, dump the coins as soon as it lists on an exchange, RSK ensured that no such thing occurs by distributing coins to the community at large.
The RSK ecosystem is blossoming unlike any other which reflects in the increasing TVL being deployed on the protocol. With more and more features, dApps and other services’ launches on the horizon, RSK and all its associated platforms are set for a bright future.