# Token Economics (Tokenomics)
Morpher Tokens, abbreviated as MPH, power our unique trading platform. MPH is used as the currency for all investments. All trades are denominated in and settled in MPH, instead of something like USD or Bitcoin. This means you need MPH to place a trade, and your returns/losses are also paid out in MPH.
# MPH: ERC20 Token
The entire Morpher protocol and platform are built on top of the Ethereum blockchain. So MPH is also built on Ethereum, it's a cryptocurrency following the ERC20 token standard. ERC20 has become ubiquitous, so every cryptocurrency you know (other than Bitcoin) is likely an ERC20 token also. The popularity of the ERC20 token standard makes MPH natively compatible with most crypto wallets and crypto exchanges.
# Token Distribution
At the token creation event 1 Billion MPH tokens were generated. They were allocated as follows:
- 50% of the total initial supply is reserved to be distributed among users via airdrop for several months after protocol launch.
- 30% of the total initial supply are the company treasury and controlled by Morpher.
- 10% get locked in the Governance Contract to operate 4 validators
- 6% are available to Morpher as liquidity reserve
- 14% are locked in the Escrow Contract and paid out to Morpher in 14 equal monthly installments of 1% at the end of each of the first 14 months after launch
- 20% are allocated to team and investors.
- 12.5% are controlled by Draper Associates (cold storage)
- 7.5% are controlled by Morpher’s founders and team
A fair and even token distribution among the users of a protocol maximizes its utility and value for everyone. Hence, Morpher aims to distribute token among natural persons with a high probability of becoming long term users of its protocol rather than among investors with no intention of ever using the protocol. A more even token distribution leads to higher stability and greater resilience against price manipulation.
Morpher will distribute 50% of the total initial token supply as signup, referral, and loyalty bonuses (collectively the ‘airdrop’) among its users in the months after the protocol launch. Upon completing registration on Morpher, new users receive a free token allocation to their wallet. This enables them to use the trading platform right away without any financial risk. Additional free token can be received for referring new users to Morpher. The signup and invite bonuses are described in more detail in Token Airdrop.
# Loyalty Rewards
Over 300 million MPH Token, or 30% of the total initial supply, will be paid out to active users over time as loyalty reward.
The definition of an active user may change over time at Morpher’s sole discretion to best reward loyal users and HODLers of MPH while preventing an abuse of the loyalty bonus. Morpher does not currently plan to publish the criteria for qualification as active user to avoid gaming the loyalty reward system.
The airdrop/referral program will be continued, constantly re-evaluated, and adjusted if necessary, until a total of 500m token (50% of the initial supply) are distributed. We assume the airdrop and reward program will continue well into 2023.
# Token Supply
The supply of MPH is not fixed, it changes over time proportionally to the collective investment success/failure of Morpher’s users. There are two more influences on the token supply: tokens burned through bid/ask spreads and tokens minted for operator rewards.
The three key factors that affect token supply:
- Collective investment success of Morpher traders
- Market Spreads
- Operating Rewards
# Investment Success
Every Virtual Future is created and settled in MPH token. If a user’s prediction is correct, the smart contract creates new token. If it is incorrect, the smart contract destroys token permanently. If the collective investment success of all traders on Morpher is positive, newly minted token are added to the supply. If it is negative, token get destroyed reducing the overall supply.
The collective investment success on Morpher can only be estimated at this point, as there is no empirical data yet. But it can reasonably be assumed that
Expectations about the markets among traders are diverse. This implies that some traders expect rising prices of a market and open long positions, while others expect falling prices of the same market and create short positions. Simultaneous long and short positions on the same market cancel each other out, so the only contribution to a change of the overall token supply is the net exposure, or the difference between long and short positions. Simply put: long and short positions will partially cancel each other out.
Morpher’s traders are on average equally successful as traders on other platforms. Trading is a zero-sum game for options, derivatives, and forex. One side loses what the other side gains. It can be argued that stocks and cryptocurrencies do create value and trading them is not a zero-sum game. Regardless of the asset class however, traders do not outperform the market on average. Consequently, the systematic impact of successful trading on inflation can be estimated with the average market return.
Under (1) and (2) an inflation rate of more than 10% annually resulting from successful trading seems unlikely.
# In Case of Runaway Inflation
Should the inflation rate exceed 10% per year, e.g. because assumption (2) does not hold and the Morpher community consistently outperforms the market, a new opportunity arises: the collective positions of the community could be traded on traditional markets. The resulting profits can be used to buy back and burn token, keeping the community incentivized while sharing profits and mitigating the impact of inflation at the same time.
Traders on Morpher are unlikely to significantly outperform traders on all other platforms. If that comes to pass, however, their collective investment decisions can be the basis a highly successful hedge fund. 📈
The spread is the difference between the bid and the ask price. Spreads introduce a small cost to buying and selling and thus mitigate token inflation from predatory trading strategies like scalping. Spreads implicitly burn token with every transaction, effectively reducing the total supply. By adjusting the width of the spread, Morpher can control the overall inflation rate of the token economy and reach any desired target inflation rate. Simply put: Morpher can reduce the inflation rate by widening spreads dynamically.
# Operating Rewards
As reward for operating the protocol, Morpher receives 0.015% of the total token supply in newly minted token every day. That compounds to about 5.6% newly minted token per year and is comparable with the inflation rate of Ethereum between May 2019 and May 2020 (~4.6% per annum).
# Token Demand
The total demand for token can easily be modeled as the product of the number of users and their average account size in USD equivalent. Over time average account size will approach a constant value, suggesting demand for the token will grow directly with the number of users on the platform.
Equilibrium and a fair token price are reached at the intersection of supply and demand for MPH token.
Morpher’s economy will undergo two different phases: The adoption phase, and the steady state phase. Each phase has their own equilibrium.
# Adoption Phase
New technologies, services, and platforms typically undergo an S-shaped adoption curve.
Morpher estimates its adoption curve will start to plateau about 10 years after the protocol’s launch. During the adoption phase the demand for token from a growing user community outpaces the growth rate of the token supply creating a systematic upwards pressure on the token price.
A token inflation rate of 10% annually can still result in a higher token price if the number of protocol users increases by more than 10%.
Consequently, token inflation will likely be irrelevant during the first years after protocol introduction, and the analysis needs to focus on the steady state economy about 10 years after inception.
# Steady State
The economy will reach its steady state when the market is saturated, and Morpher’s annual growth rate drops to single digit percent. For simplicity, it can be assumed that in the steady state economy everyone who wants to use Morpher is already using it, and everyone else will never become a user.
There is no significant upwards price pressure through adoption on the token anymore in the steady state. The volatility of the token price will decrease. For simplicity, we can assume a constant market capitalization of the token, i.e. the collective value of all MPH Token in existence remains constant.
Despite a constant overall market capitalization, the token supply may still change. An increasing token supply will lead to falling token prices, a decreasing supply to rising prices.
Regardless of the nominal inflation rate (i.e. the increase or decrease in supply), a trader will be profitable if they outperform the inflation rate and sustain losses if their returns are below the inflation rate. Trading better than average gives you a bigger piece of the pie, even if the size of the pie does not change.
Just like on traditional markets, traders on Morpher need to outperform inflation to increase their buying power. For example: US stock investors need to generate returns over 2% to pocket any gain against annual USD inflation.
# Token Value
The price of MPH is free floating, and determined on crypto exchanges by supply and demand for MPH. The forces affecting supply and demand have already been illustrated above.
Buyers and sellers of MPH will meet on centralized and decentralized crypto exchanges and transact token for prices they deem fair. While trading within the Morpher Protocol comes with infinite liquidity, Morpher depends on third party exchange partners for the liquidity of MPH Token.
Ultimately, the token will have the value users assign to it.
The information outlined here or elsewhere in this guide should never be treated as investment advice. This is not an investment prospectus. No investment is being solicited.