What is the Token Economics of Ether (ETH)?

This post covers the issuance, emission, and utility of Ether (ETH).

Token economics (tokenomics) studies the design and implementation of blockchain-based tokens. Understanding token economics is crucial for anyone considering investing in or using a particular token.

This post covers the issuance, emission, and utility of Ether (ETH).

1. Issuance

Token issuance is the creation and distribution of tokens as part of a specific event or offering e.g. airdrop, ICO, reverse ICO, IEO, IDO, DAICO, ETO, STO, and SAFT.

The first Ethereum token sale took place in 2014. 60 million ethers were sold to the public. These were unusable till the genesis block was created on 31 July 2015.

12 million ethers were allocated to the Ethereum Foundation and early project contributors. Of these 3 million were allocated to a long-term endowment, 6 million to 85 developers, and the rest to a developer purchase program. This program gave Ethereum developers the right to purchase ether at crowd-sale prices.

A total of 31,591 BTC, valued at $18.3 million, were raised.

DAO hack

A significant milestone in Ethereum's history was the DAO hack which led to the forking of the blockchain.

The world's first decentralized autonomous organization (DAO) was created on Ethereum in 2016. A DAO is like a cooperative society (think co-op banks or even the Amul milk co-op) which exists only on a blockchain and its rules are coded in smart contracts.

This DAO raised about $150 million in ether through a token sale. But a hacker exploited a bug in the smart contract and siphoned out all the money! To recover these stolen funds, a hard fork was implemented to roll back Ethereum's history to before the hack.

This reallocated the hacked ether to a different "smart contract" and allowed investors to withdraw their funds.

The purists hated this, which led to Ethereum splitting into 2 blockchains: Ethereum (ETH) and Ethereum Classic (ETC).

2. Emission

Token emission is the ongoing process of creating and releasing new tokens into circulation e.g. through mining or staking.

ETH is an inflationary token with fixed emissions and no hard cap. There is no maximum limit on the number of ETH that can exist.

Ethereum started off as a proof-of-work blockchain and then moved to proof-of-stake.

Solo ETH staking involves depositing 32 ETH, activating validator software, and then storing data, processing transactions, and adding new blocks.

Other models include staking as a service, pooled staking, and staking through centralized exchanges.

3. Utility

Token utility covers the usefulness and utility of a token. Here are some of the use cases of Ether (ETH):

• Payment of fees for transactions on the Ethereum network.

• Medium of exchange especially in cryptocurrency trading.

• Settlement layer for cryptocurrency exchanges.

• Digital currency for online marketplaces.

• A capital-raising mechanism for initial coin offerings (ICOs).

• A highly speculative store of value.