The Essentials of Token Economics

In the field of psychology, “token economics” refers to a system of contingency management for cryptocurrencies. It also represents an application of the three-term contingency, which utilizes stimulus control. Moreover, it uses positive reinforcement as a means to help change behavior.

When it comes to cryptocurrency, a token economy draws from the systematic support of target behavior. The primary reinforcers are symbols (or tokens) that one can exchange for other reinforcers. A token economy bases its foundation on the conventions of operant conditioning, as well as behavioral economics.

There are three requirements that are essential in maintaining a token economy: tokens, back-up reinforcers, and specific target behaviors.

Requirement #1 – Tokens

Tokens are a vital component when it comes to making sure that reinforcers are effective. By definition, a token is an object or symbol that is exchangeable for material reinforcers. In addition, one can exchange them for services and/or privileges (i.e. back-up reinforcers).

In applied settings, you can use an array of tokens. These include objects as standard as coins, but it can also include a variety of symbols. Such examples of this are checkmarks, images of small stars, and points on a counter. Both these symbols and objects are comparatively ineffective when outside patient-clinician or teacher-student relationships. However, their value ties into the fact that we are able to exchange them for other things.

Technically speaking, tokens are not exactly the preeminent reinforcers. In fact, they are actually secondary (or learned) reinforcers.

Requirement #2 – Back-up reinforcers

Tokens hold little to no intrinsic value, but one is able to exchange them for other valuable reinforcing events. The most prominent example being back-up reinforcers, which function as rewards. A majority of token economies provide a selection of distinct back-up reinforcers that can be just about anything. Some potential reinforcers might be one of the following:

  • Material reinforcers: These include an array of items, ranging from food to other objects like cigarettes or money. Although, it’s important to realize that money holds value beyond the relationship between patient and clinician.
  • Services: These include having someone clean your room and also partaking in fun activities. These can often mean doing something as simple as watching a movie
  • Privileges and a variety of other extras: These include passes that are useful for leaving a building or area and phone calls. Another example of this is having your name or picture present on the wall.

Choosing back-up reinforcers is done so in the function of the individual or group. This individual or group is who the assembly of the token economy is for. Alternatively, it depends largely on the possibilities that are available to the staff. Before commencement, the staff chooses how many tokens participants have to pay for each back-up reinforcer. Most of the time, price lists are either visible or the clients receive them.

There are a handful of back-up reinforcers that one can purchase at any point in time. This is because other exchange times are limited (e.x. the opening times of a token shop).

Requirement #3 – Specific target behaviors

There is a wide range of potential target behaviors, like attending scheduled activities or avoiding a disruptive attitude. A token economy goes beyond simply employing the use of exchangeable tokens. If a token economy wants to succeed, there has to be a specific, clear-cut criterion. A staff member that hands tokens over to a client due to them believing that they are behaving positively is not part of a token economy. This is because it is not being carried out in a systematic manner.

There are times when client manuals contain specifications about how many tokens one can earn by each target behavior. For example, if making the bed is a target behavior, then staff and clients need to know about a well-made bed’s appearance. Be that as it may, these specifications are often very hard to make. Such behavior like talking politely and positive cooperation is difficult to stipulate.

While charting out how many tokens can be earned by each target behavior, there are some factors one needs to take into consideration. On the one hand, clients need to be able to earn a minimal amount of tokens for minimal effort. On the other hand, it is imperative that clients not earn too much too soon. Doing so would result in additional effort becoming useless.

We’re just beginning to define token economics

It is not unheard of for people to lean towards the side that prefers the bear market. The reason for this being that it could potentially crowd out the bubbles (an increase in an asset’s price that does not reflect an increase in value). ‘Crowd out’ is the occurrence of increased government involvement in a section of the market economy. This, in turn, affects the remainder of the market considerably.

As hard as it is to hear, the comfort in taking this side will not help make the market surge again. The key elements that actually help are studying, researching, and practicing to find suitable signals. Only then will you be able to finally swing into action.

What are the signals you should be aware of?

  1. The progress of technology facilitating in solving the current issues prevalent in several subjects. These include throughput, scalability, security, and privacy, among others.
  2. The blockchain is more than a technical tool. Upon its implementation into your business or start a new blockchain endeavor, you will discover something interesting. That being the logic for business operation is completely different. This is due to the blockchain and the involvement of the token. For that matter, you need a set of rules to both explain and guide you on properly releasing blockchain’s potential.

This is the point where token economics comes in.

token economics

What is the need for token economics?

As a symbol of value, a token is the core piece of the entire model of economics. Token economics puts all of its focus on a variety of matters. This includes:

  • The creation of value
  • How to administer and circulate it among members of your community
  • What the mechanisms useful for consuming the tokens are

In addition, token functions as a confirmation of rights. One that allows you to receive the reward and rights upon your contribution to the community. This is what transforms it into an object of incentive; by contributing, you will get a reward for your efforts.

For the sake of providing a real-world example, let’s take a look at the textile machine. This is an innovative piece of 17th-century technology that was introduced in England. Since its creation, it would go on to make significant changes to the way in which people work and live. Before this, the conventional workplace was often a small family workshop. What’s more, the production of textiles was a strictly manual process.

However, with the introduction of the machine, there came a brand new type of organization. This would be  the traditional factory that we recognize today. With this new organization, people could start working in a factory with steady working time. For their efforts, they receive a specific payment in accordance with their workload. Moreover, there was the creation of an array of management methods that would facilitate the entire process.

With this example in mind, it’s easy to make the argument that blockchain technology is the new textile machine. The new organization in this particular case is Decentralized Autonomous Corporation (DAC).

Chain involvement

DAC is an autonomous entity whose formation comes from a group of people sharing the same consensus. They are open to contributing and sharing the benefits that come from the success of DAC. It brings forth innovative methods concerning collaboration and incentivization, both of which are building blocks of token economics.

Now, when you look at the traditional methodology of industry chains, a company is itself an independent entity. The primary objective of this entity is to enhance the competitive benefits within it and turn a profit for itself. However, there is a catch to this system. The more profit you garner, the less the other industry chain members will receive. In this sense, it is a zero-sum game.

For DAC, on the other hand, people are focusing on how to expand the value for the entire ecosystem. By utilizing this system, community members will be able to receive tokens by way of contribution or exchange of resources. Overall, each and every member will become a stakeholder. Token holders can take part in the control, operation, and data usage of the community. With blockchain technology, it enables the automation procedure of this mechanism in a way that is fair and accessible for participants. In contrast to conventional industry chains, it is a win-win situation.

Separating ‘Internet’ and ‘Sharing’ and the relation to token economics

Along with token economics, there is also the ‘Internet economy’ and ‘sharing economy’. It is important – essential, if you will – that you understand the differences between the three of them. Doing so will allow you to properly define each of them and recognize their individual features.

Internet Economy

Alternatively ‘digital economy’, this term relates to an economy that largely draws on techniques in digital computing. By doing this, it can oversee business by way of markets whose foundation stems from the Internet. A notable example of this is the online retailer company, Amazon.

Some of its major features include the following:

  • The transactions can be controlled by online procedures. This is mostly because the transaction-related information is already digitized, including product or service information and methods of payment.
  • The Internet economy is very dependent on streamlined logistics processes. It is what allows the delivery of the product or service, thus completing the transaction.
  • Internet economy requires an offline location in order to interact with customers. So, this particular economy is light-asset based and it is more profitable in competitive pricing.

Sharing Economy

Alternatively ‘collaborative consumption’, sharing economy is indicative of peer-to-peer transactions that derive from the Internet. The facilitation of these transactions is often through online services that are community-based. The difference between it and the Internet economy is that the platform solely assists in the online connection of product or service providers and consumers. The intent of this platform is to connect, not directly sell the product or provide the service.

Final thoughts

If you recall at the beginning of this article, token economic have a core function that is tied to the topic of “behavior.” It is predominantly psychological, however, that does not detract from the fact that it is prevalent to finances.

Overall, it refers to the system of incentives that draw from cryptocurrencies reinforcing and constructing preferable behaviors. Specifically, behaviors within the blockchain ecosystem. To assemble the consensus in the blockchain, it needs validation services at the hands of miners for the sake of the transactions. Token economics, as a whole, is the method for fully incentivizing miners to put in the best service on the network.

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