Nowadays, a lot of projects are popping up within the blockchain industry, claiming to be the next big innovation that will change the world. In reality, only a minority is really disruptive. Because of the innovative character of this blockchain technology, the number of types of tokens and used cases is unlimited: tracking ownership, provenance of documents, supply chain management, insurance and so on.

In this article, I’ll introduce this high-profile concept in crypto space – tokenomics, or token economics. This new paradigm is shaking the traditional economy, but it includes many challenges. I’ll underline its key-concepts, and its main pain points to keep in mind during the creation of a new token ecosystem.

Tokens and token economics

Notion

Token economics (or tokenomics) is the study of a new type of economy that can be defined as the design of a particular ecosystem in a blockchain environment. There are as many ecosystems as startups and projects in the blockchain industry, where tokenization is a popular process. Some of these ecosystems and types of tokens are ingenious and disruptive, others are pretty dangerous and unstable.

Putting it in simple terms every ecosystem is composed of several elements, and the crypto token functions as the central element of this new type of economy. As you might know, a token is a digital asset that can belong to different categories: utility/security and fungible/non-fungible and have a limited supply or lack a maximum supply. Let’s explain what those are, as these are important terms in tokenomics.

Utility or security?

A utility token is a digital asset used to offer the access to products and/or services on a platform. And the other is a ‘security token’ – that derives its value from an external and tangible asset and offers to the token holders a wide range of rights (entitlement to a share of profits, ownership or equity in a legal entity, and so on).

The line between these two categories of tokens is thin, so it can be problematic in tokenomics, given the different regulatory frameworks applicable to these two categories The actual regulatory framework isn’t totally transparent about the criteria for qualifying a token as a security or a utility token. However, there’s still a set of guidelines that allows the blockchain entrepreneurs to create a token that aligns with their expectations as closely as possible, legally and technically. The criteria include (but are not limited to):

• the possibility of varying returns between the token holders based on their participation or use of the network
• the manual action that is required outside the network in order for the holder to get the benefit of the token
• the timing of the token sale.

Fungible or non-fungible?

Depending on the business scope of the project, a token might be fungible or non-fungible. The difference is quite easy to figure out. Fungible tokens are interchangeable and can be divided into smaller token units (example: Binance Coin). Non-fungible tokens are non-interchangeable and can’t (actually) be divided (for example, CryptoKitties. Each token represents a unique cat).

In a tokenomics analysis, the choice between a fungible or non-fungible token will entirely depend on the used case-study. Let’s take an example of a Cyber Security platform where a Cyber Analyst is rewarded for providing insights on cyber security. It wouldn’t make sense for them to receive a non-fungible token. The reward is like a paper bill. Imagine that the token is worth 10 dollars, and the reward is worth 5 dollars. The Cyber analyst won’t care about a 0.5 token, because the value is the same for him or her. Now, let’s imagine a diamond supply chain platform. Each non-fungible token is linked to one diamond. It makes sense for the buyer of a diamond to receive THE token that has his diamond as asset-back, and not a random non-fungible token.

The Ecosystem

Token-flow

Designing an ecosystem requires a careful analysis of the token-flow. When doing your tokenomics analysis, ask yourself these questions:

• What are the values that the ecosystem is trying to promote and how is the incentivization organised to adopt a determined behaviour?
• What are the sources of input (injection) and output (rewards) of tokens?
• How can we build a sustainable and stable ecosystem in the long-term?

Building your ecosystem is thinking about the future and drivers that lead the user to come, stay and interact with the platform. That’s the core of token economics! Plenty of projects have badly designed ecosystems. The system is based on a disproportionate allocation of tokens. Combined with a hard cap of tokens emitted, this can lead to the collapse of the ecosystem because there won’t be enough available tokens.

Architecture: dual or simple structure

In order to choose between a simple and a dual token architecture, you should take several criteria into account. The alignment of the interest between the users of the platform developed and the investors, cost of development (e.g. listing of tokens on the exchanges) but before all: a real raison d’etre. Tokenomics make sense only if you know what the goal of the project and the purpose of the token is. So you must design the ecosystem of the project to be suitable for a given structure. In some cases, a simple token structure will fit better with the goal pursued by the project.

Steemit is the best example of a dual-token Ecosystem. The raison d’etre of the Steem Dual Token structure is to incentivize the commitment of the community in the long-term. So, it affords a long-term growth of crypto assets rather than a short-term one.

Stabilization mechanism

It’s important to manage the threats linked to a crowdsale bonus that can have a negative impact on the token economics. Indeed, some blockchain startups are proposing high bonuses (up-to 80% bonus) to early bird investors. This can lead to various dangerous situations where a single investor can have a critical influence on the coin price stability.

Monetary policy

Token economics and crypto coins are closely linked to a predetermined monetary policy.

A monetary policy consists of measures an institution can take in order to create stability for a certain currency. For example, the central bank has three important instruments to achieve this stability:

• changing the credit policy towards other banks,
• buying or selling government bonds and foreign currencies in order to change the money supply
• and lastly changing the reserve ratio for banks.

These actions form the core strategy of stabilizing a currency.

You have to adopt the right monetary policy for each ecosystem. If an inflationary monetary policy will afford more stability in a non-profitable ecosystem (Steemit), a deflationary system will be more suitable for a profitable ecosystem. So it’s important to build a core strategy in order to maintain a safe value for the potential token holders.

Conclusion

Token economics isn’t easy. Designing your ecosystem has its pitfalls. It’s more than a threat for the future development of a project. A weak ecosystem based on a wrong business model could lead to legal issues and dramatic consequences for the token holders.  I’ve seen some terrible ecosystems in my career and saved people from really bad ideas and failure-gonna-be crypto projects. So don’t hesitate to contact me here at Espeo (box down below). I’m confident that our team will build the most suitable ecosystem for your project that will help you save both crypto assets and your fiat currency.

A spotlight on our client, Gabro, who noticed loyalty program management wasn’t working and decided to fix that using blockchain. We’ve talked to their CEO, Andy Chen, as well as the architect of the blockchain solution, our very own Marcin Zduniak. How exactly will Gabro work, is it a blockchain loyalty program? How will Gabro innovate on customer loyalty program software? Read on.

What made you feel there were problems that needed fixing in customer loyalty management?

Let me start by telling you a little secret about loyalty programs. Most of them don’t work.
What do I mean by that? Our research shows that 78% of customers are dissatisfied with their loyalty programs because they have to carry all these plastic cards/paper coupons or remember so many accounts and passwords. There’s no good customer loyalty program software that can help the user. Not only that, but loyalty program management operators bring in additional obstacles by setting blackout periods and ridiculous expiry dates. So, it’s highly difficult for consumers to redeem their points or coupons.

It’s actually not an accident. Every expired point becomes profit for the company. So you may ask why bother having all these programs in the first place if the redemption is only 7% and all the customers walk away feeling cheated…

So that’s how Gabrotech was born? How did the team come together?

Yes, pretty much – it was born out of frustration. The loyalty programs often seemed like a waste of time and money. I remember how many points I’ve wasted.
So, the 6 of us wanted to resolve this problem: how can we make loyalty programs really work for the customer? We all went and analyzed different solutions, and we have all came to the same conclusion – we need to use blockchain to resolve this – let’s do a big blockchain loyalty program! Only after some time, we then realized that our blockchain solution could really disrupt the loyalty industry. Finally, we decided to create Gabrotech to get more like-minded people on board.

Speaking of like-minded people. How did you find Espeo, and how is our cooperation going?

Espeo has a great reputation in this industry. Like Gabrotech, they are creative in their solutions and our partnership has gone from strength to strength.
Actually, Espeo is part of what makes us different from other ICOs. We incorporated the most innovative blockchain technology with customer loyalty management, thanks to you. Our Token GBO will be a currency as well as a trading tool to use, exchange, and sell on one blockchain-based platform.
Our blockchain solution provides proof of ownership for rewards, contracts (terms) and conversion capability at low operating costs. New partners and coalition could be added to the program almost instantly, with low security risk even if a partner is unknown and not trusted yet.

So what exactly are you offering? Customer loyalty program software? Or an app?

No, it’s something completely different. It’s not the question of having another discount app. At Gabrotech, we have designed a whole new ecosystem based on decentralization. It’s also more than just a blockchain loyalty program. Customer loyalty programs can no longer set these ridiculous rules or charge you with hefty fees, making it hard for you to redeem the points you’ve earned.
Also, users can freely trade their loyalty points between different programs. When you don’t have enough hotel points, how about using your air miles to get the upgrade you want instantly?
As a part of our special customer loyalty program software, our digital wallet 2.0 will allow you to manage all your programs with only one app and one password. And if you have idle points, you can give them to your friends, swap them with something else or even sell them. Additionally, when you’re traveling abroad and don’t have the local currency, you can use your Gabro pre-paid card and spend your air miles just like cash.

Why did you choose blockchain for customer loyalty management? Is it truly as ‘revolutionary’ as people say?

Since we are targeting 60,000 merchant outlets and 60 million customers, blockchain is the secret sauce for our customer loyalty management ecosystem. It’s because:

1. The complicated terms and conditions and conversion rates could be developed using smart contracts for speed (4 weeks vs 5 mins)
2. Blockchain is immutable and could reduce fraud or running the risk for being redeemed twice
3. Adding a new merchant in blockchain is fast and could greatly reduces costs

Let’s take a closer look at the technology behind Gabro. A few words from Marcin Zduniak, Head of Blockchain at Espeo.

The initial scope of Espeo Blockchain’s involvement was to design the architecture of the complete GabroTech solution, both the centralized part of it and all of the blockchain related building blocks and internal components. All the details can be reviewed in the technical whitepaper we prepared (see it here). But let’s look at some of the more interesting technologies we’re planning on implementing.

• our own Plasma Cash implementation for trustless, cheap and rapid loyalty points transfer
• private permissioned Ethereum ledger (PoA) for the trustless loyalty points redemption and issuance rules
• advanced cryptography and schemes (BIP-32, PBKDF2, Shamir’s Secret Sharing) for the secure wallet development
• user-friendly access and authorization to the wallet (biometric factors like face recognition using 3D scanning directly from the mobile phone)
• multi-currency exchange (with decentralized and also centralized processes, depending on the needs of given market — like level of trustlessness, liquidity needs, pace of the trading)
• atomic swaps of the points and tokens where it is technically feasible and economically practical
• integration with existing loyalty points providers and issuers and the way these legacy points could be fairly tokenized and redeemed and/or exchanged for other providers’ points
• a scheme of using the blockchain technology in the off-line Point-of-Sale scenarios (similar to NFC in regular micropayment schemes)
• integrated analytical tools employed with machine learning algorithms and Big Data-type of storages that could suggest the best loyalty point deals for the end-users and points-holders and also suggest ideas for new profitable promotions to the merchants

After an extensive research period, we came up with the technology stack and process flow design. Right now, we can say it’s both secure and economically viable. What’s more, it appears to be attractive to the end customers. Both loyalty points holders and merchants that are about to redeem them will likely find this an improvement on customer loyalty program software. We’re now planning on the next phases of our cooperation, namely the implementation phase and the precise release roadmap.

Why invest in GBO?

The sum of all loyalty points issued across industries globally is more than $500 billion. Most of these points are idle. So, essentially, Gabrotech is helping to monetize your idle loyalty points. This will attract millions of consumers to give up their points in return for GBO. Our merchant partners would also want to hold GBO for hedging purposes. So, when reaching our target of 6,000 merchant outlets and 10 million users, we will become a loyalty currency on our own. The merchants might even reward their customers with GBO directly rather than their own branded customer loyalty points. Just like banks buy air miles to reward the customers spending on their credit cards.
The network effect is created when we add more merchants to our ecosystem. This means they will bring more of their loyalty members into our platform. It will then attract more merchants to join us in order to increase their customer base. Gabro clearly offers more benefits than regular customer loyalty program software.
Our tokenomics model shows that 43 to 50% of our tokens would end up in the hands of consumers and our merchant partners. This creates a huge demand of GBO and boosts up the price steadily. Just like bitcoin, the more widely it is accepted and used, the more the price will go up.

Can I convert my GBOs into real money?

Yes! Our Multi-Currency Conversion Engine allows you to rapidly convert your GabroToken to fiat currency at the real time market value. In addition, Gabro may also be exchanged to points in any blockchain loyalty program.

How do you see yourself and Gabrotech in the future – say, in 5 or 10 years?

Gabrotech will revolutionize customer loyalty program software! It will be the largest loyalty exchange platform in Asia and cover all industry verticals. Closed loop loyalty platforms become obsolete. Gabro releases billions of dollars from the idle points sitting everywhere… sounds amazing, but it’s not unrealistic!