TOP Token Part 2: Lock-Ups And Token Burning
Token economics, or tokenomics, is a topic not yet well understood. The “field” is still in its adolescence, with only the inklings of what might be considered accurate modeling. Furthermore, by virtue of its novelty, there is little data on what works, and what does not. To make matters worse, each blockchain ecosystem is different, so models applied to one may be completely irrelevant for another.
However, there are some general principles that can be applied which should result in predictable outcomes. One such principle which can be leveraged derives from a basic law of economics: the law of supply and demand. This law describes how the value of a commodity is affected by shifts in the supply and demand of that commodity.
In general, if the supply of a product is increased, while demand for that product remains constant, its value will be negatively affected. While on the other hand, if the supply is decreased, while demand remains constant, value will be positively affected.
Essentially, if a product becomes more scarce, with all other things being held equal, the value of that product rises. In fact, reducing supply is a strategy sometimes utilized by business owners, wherein they deliberately withhold the supply of a product to warrant a raise in price.
What does this have to do with TOP?
In TOP Network, there are various mechanisms built into the protocol which act to naturally remove tokens from the circulating supply, and even total supply. These mechanisms are not put in place solely to reduce the supply of tokens, but instead are coupled with functions which serve important roles in the network.
In general, supply reductions of TOP token occur in two scenarios: token lock-ups, and token burning.
Lock-ups play an important role in TOP Network. There are several ways in which TOP tokens are locked-up, and therefore removed from the circulating supply.
- Node Collateral Deposit
Every node in the TOP Network ecosystem is required to lock-up a certain number of TOP tokens. This locked portion of tokens acts as collateral, which provides a financial disincentive for nodes to act maliciously.
TOP Network is run by a multitude of nodes, with four different types of mining nodes, and many services nodes that provide various cloud communication services. As the network grows, so will the number of nodes in the ecosystem. As a result, an increasing number of tokens will be locked, gradually decreasing the amount of tokens in circulation.
Token holders can “stake” their tokens in support of nodes. In return, nodes reward stakers for their votes with a portion of the rewards. When staking TOP, the tokens are locked in a smart-contract for a certain period of time, which takes them out of circulation. This is a very effective way for token holders to put their tokens to use, and so a large portion of tokens will likely end up being locked through staking.
- Network Resources (CPU, Bandwidth, RAM, and On-Chain Storage)
TOP Network functions as a DApp platform, meaning that in the future it will need to host various DApps, including our own. In some sense, you can think of TOP Network as a decentralized AWS of sorts. Analogous to cloud service providers like AWS, DApp developers on TOP Network rent out resources like CPU, Bandwidth, RAM, and On-Chain storage to run their applications.
TOP tokens must be locked-up in exchange for access to these resources. The amount of resources available for use is proportional to the amount of TOP tokens locked. So for instance, a popular DApp that uses many resources may need to lock-up a large number of TOP tokens, while a smaller DApp would only need to lock-up a relatively small portion.
As more DApps are built on TOP Network, more tokens will be locked to gain access to network resources. Therefore, the amount of tokens taken out of circulation grows in proportion to the usage and adoption of TOP Network.
Burning is a deflationary mechanism that involves removing tokens from the supply forever. There are several burning mechanisms built into the TOP Network protocol.
- Gas Fees
Running smart-contracts requires gas fees. On TOP Network, all gas fees are burnt. While gas fees on TOP Network will be very small, if the ecosystem has many millions of users, these burnt fees could add up to an amount that is not insignificant.
- Service Fees
DApps using cloud communications services need to pay service nodes in TOP tokens via the decentralized marketplace. A portion (currently set at 10%) of these service fees will be burned. Again, the more DApps utilizing cloud communications services, the more tokens that will be burned, further deflating the supply.
- Issuing TTS-1 Tokens
On TOP Network, it is possible for anyone to issue their own TTS-1 (TOP Token Standard) token. Issuing a TTS-1 token costs a fee of 100k TOP tokens, which is burned.
One way to think of burning and lock-ups is through the familiar example of stock buybacks. Briefly, stock buybacks occur when a company repurchases their own stock from the open market, and subsequently locks it into their treasury out of the available supply. This is somewhat analogous to token lock-ups or burns, except there is no company arbitrarily choosing when to initiate the buyback. Instead, it is built into the protocol level in a way which shifts according to the usage of the network.
By implementing strategies based off of well established economic principles that are proven to work in the real world, we can build a token economy that works for all participants.