Token Economics 101: Faucets and Sinks

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I'm probably going to have to repeat this 8 millions times as a founder of Steem-Engine. So, here's a quick post that I'll likely refer to. When discussing currencies there's a few things to consider: People, Faucets, and Sinks!

Overall, you have to gather people to USE the currency. The currency will only have as much value as what you can do with it, and better yet what you can do with it that you can't do anywhere else! If all you're doing is handing out tokens and there's no way to spend them then welcome to infinite inflation and a valueless system. Simply sending tokens and holding them is hardly worth anything. The real question is what can you DO with it. An even better question is "what can I do with it that will take it out of supply or reduce incoming inflation?"

The best question would be "what can I use this token for that I can't do anywhere else that's a highly desirable or required thing that all the users will do that also takes it out of circulation?"

What you can do with it gives it value.

What you can do with it that removes it from circulation puts upward pressure on the value.

Let's start with some easy to use terms

In terms meant to be able to be understood by the broader public currencies have faucets and sinks. A faucet is where the currency comes out of. A sink is what the currency goes into never to return.

If the faucet runs forever and there is no sink your kitchen overflows. You have hyperinflation, a pissed spouse, and your token is worthless. Getting people to use the token is great. It's even better if there are ways to remove it from circulation. That puts an upward pressure on the price of your token while the faucet puts a downward price pressure on your token.

Token Economics 101

You can create a token and give it out to people. That's actually not that hard or that expensive to do. The bad news though with how easy it is to distribute stuff using crypto is that it's not a high value thing. Crypto is an accounting tool that makes this shit easy. So, you can get small rewards for that, but it's not the center piece.

Aggroed's Law - 90% of the value of a token is in the use cases and SINK

What's the difference between a use case and a sink? A use case is a product or service that I can trade for using the token. A sink is something that removes it from circulation entirely.

Getting listed on an exchange is an example of a usecase. Now it has value because I can trade it for other things of value. Being playable in a game is another use case. You bought the non-fungible token so that you could play in the game. You use the token to gamble, see nudes, chat with celebrities or whatever else you can think of. The tokens aren't out of existence because I traded them, but the fact that I can trade them for something gives them value.

Setting up a tool that burns tokens (or the weaker cousin of offseting inflation) is an example of a SINK. You could imagine burn bots instead of bid bots. Send tokens to the burnbot, get a vote for Steem, and burn the tokens. Now there's less token supply so the value of all tokens goes up from that event.

Actual Currency Valuation

The value of a currency is equal to the the amount of goods and services that can be purchased or traded with that currency divided by the number of tokens in circulation.

Value of Goods and Services / Currency Supply = Token Value.

In order to make your currency more valuable you need a higher value of goods and services you can trade it for or a lower value of currency supply.

So, your difficult job of balancing things is to figure out a faucet that encourages people to get your token. Find use cases and sinks for the token so that it has value to it. Find ways to remove tokens from circulation over time. And if you do all that correctly you can see your Token Value go up.

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Thank you for that great analogy.

I don’t plan on developing any tokens, but I have been hesitant about blindly collecting tokens.

Now I know what to look for, and how to guess it’s future use/value.

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well assuming they don't cost you to collect them, really no harm in collecting as many as you can even if most end up being worthless.

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Or steem-engine was new and exciting. Some of us created tokens for exposure. Vegeta's just handing out Dragonballs for no reason nowadays.

Ok, so i bought 450 ENG for about $170 usd using Steem and right off the bat, those 450 are worth $130, so what do you do with them at a lose? Obviously one answer is why they hell you bought them and was an accident because i thought you needed them to buy DEC, turns out i got wrong information. Lesson learned. So now they sit, collecting dust until when.......

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They can be used to make tokens or make your own site like steem a la https://www.weedcash.network

Aggroed's Law - 90% of the value of a token is in the use cases and SINK

Deep lines. Use case is very important in the growth of a token.

Great post, you have done something great with the DEC tokens. They really have an amazing sink. When you play and earn them, no one wants to go and sell them, it's a lot more fun to buy orbs with them.

However, people might but the token with Steem when they run out of it in game. Really an amazing job. It's really how I envisioned SMTs being used. Hats off.

And historically the greatest sink has always been the government, mostly in the form of taxes.

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Thank you for explaining this matter in details! Hope reality hues according to your best plans!

Good luck!

Yeah, this is great. The faucet and drain analogy for currency value is a classic.

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Perfect tokenomics explanation!

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A very good discussion of concept of faucet and sink about tokens 👏🏽👏🏽👏🏽

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Hi, @aggroed!

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Thank you @aggroed!, I love this token, money is precious in our lives. Without it lives in this World become difficult for us.

Thank you @aggroed!, I love this token, money is precious in our lives. Without it lives in this World become difficult for us.

Thank you @aggroed!, I love this token, money is precious in our lives. Without it lives in this World become difficult for us.

Thank you @aggroed!, I love this token, money is precious in our lives. Without it lives in this World become difficult for us.

This needs a 'education' hashtag, I bet it was frustrating to write out but it benifits the non tech steemians, and many new users in the future. Resteemed! Great insight to people with no clue so thanks as I saw you use the terms earlier 😀

The real currency of value here for me is Steem. I believe 99% of what reside on Steem-Engine is not worth your hard money to buy.

Already saw two speculative tokens sell of useless coins this week that promised the moon! I not intend to use Steem Engine myself personnaly.

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Save water and world..

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Thank you for the @Aggroed. Without you this platform would be toast.