Bitcoin & The Best Tokenomic Structure
By Josh Bobrowsky
Before I start I want to reiterate that nothing here is financial advice and all my thoughts are simply my speculation.
I was recently asked:
“What is the best example of successful tokenomics?”
My answer is Bitcoin and here is why.
The following bullet points are numbered but they are not numbered in order of importance.
1. Bitcoin tokenomics bridge the gap between digital and physical assets
This comes from a proof of work structure. In the simplest sense you have code that is written that rewards investors in both hardware and the asset itself.
When someone invests heavily in Bitcoin mining they must also invest in energy production and the physical world. Which in turn goes hand in hand with software security.
Why is this important?
Once an investment is made it is hard to back out of the investment, in turn this creates defenses of the investment.
Example: If you invested $100 million into a physical Bitcoin mining location with ASIC miners (Application-Specific Integrated Circuit miner) it would likely take 18 months to set up a full facility and if on the 19th month you wanted to back out of the deal it would be nearly impossible without selling to another Bitcoin miner.
Historically Bitcoin mining facilities take roughly 7 years to pay back their initial costs.
Someone must be VERY sure of their bet to build a Bitcoin mining facility and once this facility is operational large players are going to use their resources to defend their investment.
The miners operating at the largest scale have deep resources they may deploy and are often publicly traded companies.
2. The defense of invested capital
Once the capital is deployed those who invested in mining rigs will defend their capital by many ways including but not limited to re-investing in Bitcoin, helping local energy networks become more efficient and working with politicians in their local area to help ensure the profitability of their investment.
This creates a doubled ended defense of capital through both network effect and sunk cost investing. The network effect is the larger group of people interacting and invested as retail investors, while the miners have a sunk cost and reason to stay long term.
A publicly traded company like RIOT platforms is currently valued at roughly $3 billion with over 100,000 ASIC miners. Shareholders will make solid efforts to help the future of Bitcoin.
This is not to say that other platforms like ETH do not have defense of capital through alternative methods such as people who are building on their platform through software, L2s, NFTs and other mediums (because it does have a very strong network as well) but I do believe it is harder to pivot quickly away from Bitcoin due to physical mining costs.
3. Fair distribution
Bitcoin had a fair distribution of coins that was delivered by the mining of blocks. There was no VC pre-sale, thus, there was no way to buy Bitcoin before it launched.
To get Bitcoin you initially needed to either mine Bitcoin or buy Bitcoin from a miner (or someone who bought from a miner).
The first 10.5 million bitcoins were distributed via mining before the first halving in November of 2012 (roughly 1,470 days from mining of the genesis block of Bitcoin).
This is a simple and eloquent solution:
4. 21 million Bitcoin hard cap
There can only be 21 million Bitcoin. This can not be altered or amended. This makes Bitcoin different from resources like gold. If the price of gold goes up, the supply will also go up as more expensive mining becomes financially viable.
Bitcoin has a hard cap on supply agnostic of price.
5. Time and trust
Part of a great tokenomics structure is the ability to stand the test of time. Many people mis-understand and think that because Bitcoin was first that is why it holds the dominant leader position (Bitcoin was not first cryptocurrency)1. However, Bitcoin needed to both be first in terms of large adoption, and to have a structure that can last.
Part of this structure involved addressing the double spend issue, which is a mark of cryptographic genius.
Double spend: is when a digital asset can be easily replicated, potentially allowing a user to spend the same Bitcoin more than once if done at the exact same time.
To solve this, Bitcoin uses public-private key encryption, where each user has a private key (essentially a strong password) that generates a linked public key. The public key is shared for transactions, but the private key is required to access the funds, ensuring that each Bitcoin can only be spent once.
Bitcoin has created a tokenomic structure that has never been hacked and never gone down.
This is an insane accomplishment of tech, innovation and part of the tokenomics although some would argue this is cryptography which is not connected to tokenomics, however I believe they are one in the same.
It is easy to make something to last a week, it is exponentially harder to make something that can last 15 years without a single issue of a a hack.
6. Largest investors buying more
In the best asset classes the biggest investors are adding more capital to the asset class. This is because they believe the long term viability of the asset is strong.
This may sound simple but I believe this holds a very high signal to noise ratio.
What do I mean by this?
The largest investors in Manhattan real estate are looking to add more property to their balance sheets despite already owning billions. They are rarely looking to trade out of their real estate assets and return to US Dollars. Because they believe this is the best place to allocate their money.
The same is true of almost every great asset class.
Berkshire Hathaway (Warren Buffet’s firm) is famous for long term buy and holds and adding to their positions in stock.
This is true in Bitcoin at a scale that is simply not seen in any other crypto asset today.
Conclusion
It can be easy to look at Bitcoin and say it was first and that is why it is the most valuable. Being first was a necessary but not sufficient reason for why Bitcoin is the most valuable cryptocurrency.
The thoughtful tokenomic structure that blends software and hardward while rewarding both sides is likely a larger reason for why Bitcoin has the best tokenomics. At least in my opinion.
Cheers
Josh Bobrowsky
Bitcoin was not the first Cryptocurrency a point that a good friend Mikhail Gurvich accurately believes is important to point out. Precursors to Bitcoin include Ecash, B-money, Bitgold and Hashcash. Ecash was developed in the 1980s and was an early form of electronic money.