Supply and demand are two fundamental components of any economy, and their relationship will determine its boom or bust. Token economies are no exception.
Leveraging Supply and Demand
Whenever the demand for a token increases and the number of tokens in circulation decreases, the result is that the token has a higher purchasing power in the blockchain market. This is why it is so important for token economies to be based in the correct models.
For example, a particularly successful token economy can be achieved using escrows. A blockchain platform can provide this service through smart contracts that act as a decentralized escrow for specific transactions. The platform then charges a much lower commission than a regular, centralized version would. Thus, it attracts buyers and sellers who find it more convenient to transact through the platform.
Good use cases abound in industries such as agriculture. There already are blockchain escrow services that allow farmers to sell futures on their crops before the harvest. This possibility benefits buyers who can purchase at a discount and sellers who will have a better cash flow.
Even more interesting is how the concept of tokenized escrow can create organic demand. Since the tokens are used to hold the transacted funds for a determined period of time, the quantity of tokens available on the market decreases while being frozen. This organic reduction in supply creates greater demand and the token’s price is mathematically bound to produce gains.
A platform working with this business model has a greater capacity to manage supply and demand. There are three tools that are available for these purposes.
Burning Commission
If a tokenized escrow platform charges a commission fee in the form of its own token, it can then burn the percentage of tokens paid. A particular service could charge a 1% commission fee, for example, where the remaining 99% of the funds are transferred from the buyer to the seller and 1% of the transaction is used to reduce the supply of tokens.
Incentives for Token Holdings
When either the buyer or seller that participates in the platform chooses to hold the tokens used for escrow, each party benefits from the token’s price gains. This already is a reasonable case for them to keep their funds on hold. In addition, the platform may motivate participants by rewarding them if they decide to hold. For example, token holders might receive a 10% compensation for not switching to fiat. Again, this contributes to a limit in the number of tokens in circulation and drives up the price.
Limits on Escrow Service
Third, a platform may choose to assign limits on their escrow services. This also guarantees that tokens will be out of circulation for predetermined periods of time. One way to do this with low interference is to require unapproved sellers to keep their funds in tokens. If a seller hasn’t been verified as reliable or trustworthy, their account would be limited to token-based operations. In doing so, every unverified account on the platform would contribute to reduce the supply of tokens.
There are many different methods that can be applied as either incentives or requirements to guarantee a healthy amount of tokens are held at an escrow service platform. All of which can be implemented to varying degrees. Each strategy catalyzes the creation of real demand and promises gains for investors.
About Nick Evdokimov
Nick Evdokimov is a serial entrepreneur who first achieved success through his contributions to search engine optimization. Further accomplishments followed him as an investor, token designer, blockchain evangelist, fintech leader, and author of seven marketing books, including a textbook on contextual advertising for MBA students.
He is now a leading expert in the field of blockchain technology and Initial Coin Offerings (ICOs). After becoming involved with cryptocurrency mining, Nick went on to develop more than 40 tokens as an engineer. He has also invented a model for conducting mixed deals in which investors buy equity and conduct hedging transactions.
Nick is the founder of ICOBox, the world’s largest service provider for ICO solutions. In 2018, citizens of the world’s first decentralized blockchain-based state Decenturion appointed him as a Minister of Information.
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