Monetary tokenomics is the way to use token issuance as an incentive mechanism to obtain healthy behavior from network participants in a decentralized ecosystem. Tokens are non blockchain native digital assets which can be used as an incentive mechanism. As programmable assets they can be granted to network participants under specific conditions.

1. Monetary Tokenomics
Creating incentives in a decentralized ecosystem

2. Introduction
Monetary tokenomics is the way to use token issuance as an incentive
mechanism to obtain healthy behavior from network participants in a
decentralized ecosystem.
Tokens are non blockchain native digital assets which can be used as an
incentive mechanism. As programmable assets they can be granted to network
participants under specific conditions.
This research will cover:
• Traditional onetary creation from central banks
• Monetary crypto-economics as an incentive to reach consensus between
blockchain’s nodes
• Monetary tokenomics as an incentive to develop the network

3. Monetary economics for fiat currency
In the fiat currency world, monetary economics is managed by central banks. Central banks
mission includes:
• Ensuring economic growth
• Managing inflation
To pursue their mission, central banks use several tools:
• Central bank rate: the rate at which depository institutions (banks) lend reserve balances
to other banks on an overnight basis. This rate affects all interest rates on the market
• Open Market Operations: buying and selling of government securities in the open market
in order to expand or contract the amount of money in the banking system
• Reserve Requirements: the amount of money that a depository institution is obligated to
keep in central bank vaults, in order to cover its liabilities against customer deposits. This
is done to expand the economy by freeing up capital that can be loaned out to other
parties
Thanks to their tools, central banks are able to encourage saving and investment behavior
according to economic cycles.

4. Monetary crypto-economics
In the crypto-space, monetary crypto-economics is a tool used to encourage good behavior.
Each blockchain project is based on a distributed ledger shared among all the network
participants.
The goal of distributed ledger technology (or blockchain) is to prevent the double spending of
the native crypto-asset circulating on the blockchain. To ensure the quality of the
distributed ledger and avoid double spending, two consensus protocols exists: Proof-of-Work
and Proof-of-Stake.
In crypto-economics, money creation is used as a tool to reward good behavior and maintain
the distributed ledger consensus.
Proof-of-Work Proof-of-Stake
Desired behavior Adding valid blocks to the blockchain
Incentive for good validators Get rewarded with the native crypto-asset of the blockchain
Penalty for bad validators None They lose their stake
Blockchain Bitcoin, Ethereum Cardano, NXT

5. Monetary tokenomics : overview
Monetary tokenomics refers to money creation for tokens. Tokens differ from
coins such as bitcoin, Ether or Cardano because they are not the native crypto-
asset of the blockchain.
Hence, tokens are not involved in distributed ledger consensus mechanism nor
double spending issue: these points are managed by the native crypto-asset of
the blockchain.
Tokens are minted to be used in decentralized applications. Tokens are minted
for two reasons:
• Raising funds via Token Sales/Token Generating Events
• Creating incentives thanks to rewarding or burning
Rewarding and burning policy is the core of monetary tokenomics. These tools
must be used to enhance value creation and network growth.

6. Monetary tokenomics: network engagement
• Use-case: let’s take a decentralized Uber as an example (application similar
to Uber but without a central company running the network) selling tokens
to pay fees on the platform
• Problem: without a central company, how to promote the application ? how
to bring new drivers/users ?
• Desired behavior: existing drivers/users act as network ambassadors
• Incentive: when a driver/user join the network he can mention the user
who promoted the app (the ambassador), the ambassador will receive free
tokens as a reward
• Outcome: existing users/drivers are encouraged to act as ambassadors to
receive free tokens as a reward for each user/driver they bring, they can use
the tokens receiven to pay fees on the platform

7. Monetary tokenomics: loyalty scheme
• Use-case: let’s take a software company (saas) as an example, the company
pre-sells subscriptions to future users
• Problem: how to create a loyalty scheme to retain consumers ?
• Desired behavior: consumers subscribe for a long period of time
• Incentive: the longer the subscription is, the more free tokens the consumer
receive as a reward
• Outcome: consumers are encouraged to subscribe for long period of time
because they will receive free tokens representing a voucher for the service

8. Monetary tokenomics: nonprofit
• Use-case: let’s take a nonprofit membership organization as an example, for
instance the Red Cross, the tokens sold represent a membership right
granting access to events
• Problem: how to engage volunteers ?
• Desired behavior: volunteers works to member of the organization
• Incentive: as long volunteer works for the organization, they are given
membership tokens as a reward, when they stop working the tokens are
burned
• Outcome: volunteers will keep working for the organization to enjoy
membership privileges

9. Mechanism design & money creation
Money creation can be used to create incentives according to the pre-defined goals:
Field Economics Crypto-economics Tokenomics
Underlying asset Fiat currency Coin Token
Goal • Ensuring economic growth
• Managing inflation
• Reaching consensus among
blockchain’s nodes
• Creating network effect
• Encouraging early adoption
Desired behavior • Saving/investment
behavior matches
economic cycles and
support the economy
• Validators add valid blocks
to the blockhain to maintain
consensus
• Network participants act as
ambassadors
• Consumers renew their
subscription
Tools • Expand or contract the
amount of money in the
banking system
• Giving coins as a reward
• Burning coins as a penalty
(Proof-of-Stake)
• Giving tokens as a reward
• Burning tokens as a penalty
Outcome • Interest rate change
overtime creates
incentives to
investment/saving vs.
consumption
• Validators are encouraged to
add valid blocks to the
blockchain because they will
be rewarded or lose their
funds
• Good behaviors are
encouraged with reward
• Bad behaviors are
discouraged with burning

10. Tokencapitalmarket.com
Reyan.lamrani@tokencapitalmarket.com
@TheTokenomist