Tokenomics of crypto passive income
September 2, 2018
The three different forms of passive income in the crypto economics:
- Creating more of the same tokens out of thin air.
- Creating different tokens out of thin air.
- Generating real economic activity, turning that into a profit.
When investing in a passive income project it is very important to understand what kind of economic ecosystem will you be participating in. While many in the crypto community critique central bankers for excessive money printing, many crypto projects are responsible for far greater token generation and overvaluation of their projects. Check out any ICO launched in 2017 and you can observe a 90% decline in the token value.
The promises of passive crypto income are seducing at first sight. It is important to take a deep dive and understand what is the ecosystem that creates the passive income, what supports it, who are the people behind it and why is it sustainable in the long term. Here I will focus on the tokenomics of crypto passive income
1) Creating more of the same tokens out of thin air
Mining, masternodes or staking use this method of creating coins. Coins create more coins. There is usually a limit on the number of coins that can be created. After a certain amount of time the reward of tokens the passive income investor receives halves. Each time it halves the ROI goes down, however, the idea is that between each having the value of the coin goes up in purchasing power which should keep the ROI terms static or in an upward trend. However, this is the exception rather than the rule.
Let’s take Dash as an example. Currently, an MN owner will earn 5.65 Dash per month. This equates to $1,232 a month. The amount of Dash that MN owners receive will be reduced in Dash terms but may increase in dollar or purchasing power terms. This is one aspect of ROI. The second one is the purchasing power of the underlying capital. A Dash MN at one point was worth $1.5 million USD today it is worth only $216,000. While the focus is on the recurring income the total value of the portfolio is not to be ignored.
2) Creating different tokens out of thin air
Some coins when staked generate another coin, the staked coin has a different utility than the coin used to stake.
Examples of this system are VET and NEO. VET generates VTHO and NEO generates GAS. There is a dilemma here. One would like to earn a higher passive income but that means the higher cost of transactions on the network. The higher the cost of transactions the less cost-effective it is. The interest of the managers of these platforms is to make their platform usable by industry and users. The passive income expectations of their investors are not on top of the list.
There is a lot of speculation in the price of these tokens, the underlying assumption is that these networks will have a lot of traffic in the future. In that case, the generation rate will be high and the price per gas token low. Making the staking process profitable.
This game is well played by some poorly by others. Partnership announcements endorse this idea of the high use of the network, however, there is a long windy road between the partnership announcement and actually going live.
3) Generating real economic activity, turning that into a profit.
A crypto project which uses particular token within its ecosystem promises that a share of the revenue will be distributed among the token holders. This revenue is not created out of thin air unlike the two other systems mentioned above. There are two subtypes of passive income in this system; structured and unstructured. A structured one is where the allocation is from revenue and a specific percentage of this is allocated. Example: Binance. An unstructured is where a percentage of profit is allocated. Example: Nexo.
Other examples of structured passive income coins are TrueFlip, Triaconta and Kucoin. These platforms have a real economic activity which gives value to their coin. The value of this activity is not perceived but is factual. These tokens are true utility tokens and are less like money and more like claims on revenue of these platforms.
In the unstructured system, platforms have a difficult decision to make. Use the funds for expansion and or use the funds to distribute the passive income. Startups tend to be cash hungry.
- The purchasing power in USD terms of the underlying capital needs to be taken in consideration
- The alignment of incentives between the owners of the project, the shareholders and the token holders is something to study
- Diversify passive income outside of the crypto ecosystem will reduce risk.
- Crypto is very risky!