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Behavioural Economics: How it can make or break your token

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Introduction

What we’ve been noticing

The success of a token depends on its ability to incentivize desirable behaviour and discourage undesirable behaviour within a blockchain ecosystem. To achieve this, token economics must be designed with a deep understanding of how people make decisions and respond to incentives. This is where behavioural economics comes in. By applying principles from behavioural economics to token economics, we can create tokenomic systems that are more engaging, sustainable, and effective. Tokenomics that are well-designed and informed by behavioural economics can create an environment where users are encouraged to act in ways that benefit the blockchain ecosystem as a whole, leading to greater network adoption and more widespread use cases. In this article, we will explore how behavioural economics can be applied to token economics, and how this can lead to better outcomes for blockchain networks and their users.

Key topics this article will cover:

  • What is behavioural economics?

  • Behavioural economics strategies in crypto

  • Behavioural economics practical application in blockchain-based games and tokenomics

  • Conclusion

What is behavioural economics?

Behavioural economics is a field of study that combines economics with psychology to understand how people formulate decisions and how they respond to various incentives. It looks at the psychological and social factors that influence human behaviour, such as biases, heuristics, emotions, and social norms. Behavioural economics challenges traditional economic theories that assume people always act rationally and make decisions based on complete and accurate information. According to behavioural economics, humans make irrational, biassed, and multifaceted decisions. This can help us understand why people often make irrational financial decisions, based on their own perceptions and biases. 

The application of behavioural economics to cryptocurrency, or crypto, is a relatively new area of research. This is because both the field of crypto and the study of behavioural economics have emerged and gained popularity in the last decade. The first notable attempt to apply behavioural economics to crypto occurred in 2014, when a group of researchers from the University of Tulsa published a paper titled “Bitcoin and Behavioral Finance.” The paper examined the impact of cognitive biases, such as overconfidence and loss aversion, on the behaviour of Bitcoin investors. The authors argued that these biases could help explain some of the volatility and irrationality observed in the Bitcoin market.

One example of behavioural economics in crypto is “fear of missing out (FOMO)”. If investors in a crypto or NFT project perceive the supply is somehow diminishing, they may be more prone to purchase it now, rather than waiting for a better time to buy.

Behavioural economics strategies in crypto

  • Loss aversion: It is a psychological bias that causes people to feel the pain of a loss more strongly than the pleasure of an equivalent gain. This has been applied in the context of crypto through the creation of HODL, where investors are encouraged to hold onto their assets even during market downturns. By creating an emotional attachment to the asset, investors are less likely to sell during periods of market volatility.

  • Anchoring bias: Refers to the tendency of people to rely too heavily on the first piece of information they receive when making a decision. In crypto, this can be in the form of investors placing too much importance on the ICO or IDO price of a coin or token, even if that price is not an accurate indicator of its true value.

  • Nudging: It involves designing choices in a way that influences people’s behaviour without restricting their freedom of choice. In crypto, nudging can be in the form of staking. Investors are encouraged to lock in their tokens long-term in exchange for more tokens.

  • Social proof: The idea that people are influenced by the actions of others. This principle has been applied to crypto through airdrops on social media platforms, where users can send small amounts of crypto to others as a form of endorsement. This creates a sense of social proof and can encourage others to get involved in the crypto community.

  • Gamification: This is the use of game-like elements in non-game contexts to increase engagement and motivation. This has been applied in the context of crypto through the creation of “mining” systems, where users can earn tokens by contributing computing power to secure the blockchain network. By making the process of earning tokens feel like a game, users are more likely to stay engaged and continue contributing to the network.

  • Scarcity: The most appropriate representation of this in crypto is token burning. Token burning is the process of permanently removing tokens from circulation. This has been used as a way to increase the scarcity of a token and drive up its value. 

Behavioural economics practical application in blockchain-based games and tokenomics

Behavioural economics has practical applications in many areas, including blockchain-based games. In particular, it can help game designers create better tokenomics, improve player engagement, and drive adoption.

One of the main ways that behavioural economics can be applied to blockchain-based games is through the design of tokenomics. Tokenomics refers to the study of how tokens function within a blockchain ecosystem, and includes everything from token issuance and distribution to how tokens are used within a network. By understanding the psychological and social factors that influence player behaviour, game designers can design tokenomic systems that are more engaging, sustainable, and effective. For example, game designers can use the principles of behavioural economics to develop incentives that encourage players to hold onto their tokens for longer periods of time. They might do this by offering rewards for long-term holding, or by creating a sense of emotional attachment to the tokens through social features or gamification. This can help drive adoption and create a more vibrant community around the game.

In addition to designing effective tokenomics, behavioural economics can also help game designers improve player engagement. By understanding how players make decisions and what motivates them to continue playing, game designers can create more compelling and immersive experiences. For example, they might use the principles of behavioural economics to create “nudges” that encourage players to take certain actions within the game, such as completing a task or interacting with other players. These nudges might take the form of notifications, rewards, or other visual cues that are designed to appeal to players’ innate desires for social status, achievement, or other forms of recognition. Moreover, game designers can use behavioural economics to create more personalised experiences for players, by analysing data on individual player behaviour and preferences to tailor the game’s mechanics and rewards to each player’s unique profile. This can lead to increased player retention and loyalty, as players feel more invested in the game and its community.

By understanding how players interact with technology, game designers can build interfaces that are intuitive, easy to use, and visually appealing. This can help attract new players to the game, as well as retain existing players by creating a more enjoyable and engaging experience.

Conclusion

The success of a token in a blockchain ecosystem is heavily dependent on its ability to incentivize desirable behaviour and discourage undesirable behaviour. The application of principles from behavioural economics can help us to design token economics that achieve these goals. By understanding how people make decisions and respond to incentives, we can create tokenomic systems that are more engaging, sustainable, and effective. Through the use of airdrops, community governance incentives, and referral programs, among other tactics, projects can encourage users to participate and become advocates for their success. By designing tokenomics with a deep understanding of human behaviour, we can create more successful blockchain networks and better outcomes for all involved.

The team at Economics Design offers tokenomics consultancy for builders and an advanced Token Economics 201 course for aspiring economists looking for advanced assistance with token economics design and token engineering. 

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