Prof Sudesh Kumar

In a broader sense, any kind of manipulation linked to behavioral psychology can be considered social engineering. However, the concept is not always related to criminal or fraudulent activities. In fact, social engineering is being widely used and studied in a variety of contexts, in fields like social sciences, psychology, and marketing.

When it comes to cybersecurity, social engineering is performed with ulterior motives and refers to a set of malicious activities that attempt to manipulate people into making bad moves, such as giving up personal or confidential information that can be later used against them or their company. Identity fraud is a common consequence of these types of attacks and in many cases leads to significant financial losses.

Social engineering is often presented as a cyber threat, but the concept exists for a long time, and the term may also be used in relation to real-world fraudulent schemes, which usually involve impersonation of authorities or IT specialists. However, the emergence of the internet made it much easier for hackers to perform manipulative attacks on a wider scale and, unfortunately, these malicious activities are also taking place in the context of cryptocurrencies.


How does it work?

All types of social engineering techniques rely on the weaknesses of human psychology. Scammers take advantage of emotions to manipulate and trick their victims. People's fear, greed, curiosity, and even their willingness to help others are turned against them through a variety of methods. Among the multiple sorts of malicious social engineering, phishing is certainly one of the most common and well-known examples.

Phishing

Phishing emails often mimic correspondence from a legitimate company, such as a national bank chain, a reputable online store, or an email provider. In some cases, these clone emails will warn users that their account either needs to be updated or has shown unusual activity, requiring them to provide personal information as a way to confirm their identity and regularize their accounts. Out of fear, some people promptly click the links and navigate to a fake website in order to provide the required data. At this point, the information will be in the hands of the hackers.

Scareware

Social engineering techniques are also applied to spread the so-called Scareware. As the name suggests, scareware is a type of malware designed to scare and shock users. They typically involve the creation of false alarms that attempt to trick victims into installing a fraudulent software that looks legitimate, or into accessing a website that infects their system. Such a technique often relies on users’ fear of having their system compromised, convincing them to click on a web banner or popup. The messages usually say something like: “Your system is infected, click here to clean it.”

Baiting

Baiting is another social engineering method that causes trouble for many inattentive users. It involves the use of baits to lure victims based on their greed or curiosity. For instance, scammers may create a website that offers something for free, like music files, videos, or books. But in order to access these files, users are required to create an account, providing their personal information. In some cases, there is no need for an account because the files are directly infected with malware that will penetrate the victim’s computer system and collect their sensitive data.

Baiting schemes may also occur in the real world through the use of USB sticks and external hard drives. Scammers may intentionally leave infected devices on a public place, so any curious person that grabs it to check the content ends up infecting their personal computer.


Social engineering and cryptocurrencies

A greedy mentality can be quite dangerous when it comes to financial markets, making traders and investors particularly vulnerable to phishing attacks, Ponzi or pyramid schemes, and other types of scams. Within the blockchain industry, the excitement that cryptocurrencies generate attracts many newcomers to the space in a relatively short period of time (especially during bull markets).

Even though many people do not fully understand how cryptocurrency works, they often hear about the potential of these markets to generate profits and end up investing without doing appropriate research. Social engineering is particularly concerning for the rookies as they are frequently trapped by their own greed or fear.

On the one hand, the eager to make quick profits and earn easy money eventually leads newcomers to chase false promises of giveaways and airdrops. On the other hand, the fear of having their private files compromised may drive users to pay a ransom. In some cases, there is no real ransomware infection, and users are tricked by a false alarm or message created by hackers.


How to prevent social engineering attacks

As mentioned, social engineering scams work because they appeal to human nature. They usually use fear as a motivator, urging people to act immediately in order to protect themselves (or their system) from an unreal threat. The attacks also rely on human greed, luring victims into various types of investment scams. So it is important to keep in mind that if an offer looks too good to be true, it probably is.

Although some scammers are sophisticated, other attackers make noticeable mistakes. Some phishing emails, and even scareware banners, often contain syntax mistakes or misspelled words and are only effective against those who don’t pay enough attention to grammar and spelling - so keep your eyes open.

In order to avoid becoming a victim of social engineering attacks, you should consider the following security measures:

Educate yourself, family and friends. Teach them about the common cases of malicious social engineering and inform them about the main general security principles.

Be cautious with email attachments and links. Avoid clicking on ads and websites of unknown source;

Install a trustworthy antivirus and keep your software applications and operating system up to date;

Make use of multifactor authentication solutions whenever you can to protect your email credentials and other personal data. Set up two-factor authentication (2FA) to your Binance account.

For businesses: consider preparing your employees to identify and prevent phishing attacks and social engineering schemes.


Closing thoughts

Cybercriminals are constantly looking for new methods to deceive users, aiming to steal their funds and sensitive information, so it is very important to educate yourself and the ones around you. The internet provides a haven for these types of scams, and they are particularly frequent in the cryptocurrency space. Be cautious and stay alert to avoid falling for social engineering traps.

Furthermore, anyone that decides to trade or invest in cryptocurrency should do prior research and make sure to have a good understanding of both the markets and the working mechanisms of blockchain technology.

TL;DR

Tokenomics is a term that captures a token’s economics. It describes the factors that impact a token’s use and value, including but not limited to the token’s creation and distribution, supply and demand, incentive mechanisms, and token burn schedules. For crypto projects, well-designed tokenomics is critical to success. Assessing a project’s tokenomics before deciding to participate is essential for investors and stakeholders.

Introduction 

A portmanteau of “token” and “economics,” tokenomics is a key component of doing fundamental research on a crypto project. Aside from looking at the white paper, founding team, roadmap, and community growth, tokenomics is central to evaluating the future prospects of a blockchain project. Crypto projects should carefully design their tokenomics to ensure sustainable long-term development.

Tokenomics at a glance 

Blockchain projects design tokenomics rules around their tokens to encourage or discourage various user actions. This is similar to how a central bank prints money and implements monetary policies to encourage or discourage spending, lending, saving, and the movement of money, Note that the word “token” here refers to both coins and tokens. You can learn the difference between the two here. Unlike fiat currencies, the rules of tokenomics are implemented through code and are transparent, predictable, and difficult to change.

Let’s look at bitcoin as an example. The total supply of bitcoin is pre-programmed to be 21 million coins. The way bitcoins are created and entered into circulation is by mining. Miners are given some bitcoins as a reward when a block is mined every 10 minutes or so. 

The reward, also called block subsidy, is halved every 210,000 blocks. By this schedule, a halving takes place every four years. Since January 3, 2009, when the first block, or the genesis block, was created on the Bitcoin network, the block subsidy has been halved three times from 50 BTC to 25 BTC, 12.5 BTC, and 6.25 BTC currently.

Based on these rules, it’s easy to calculate that around 328,500 bitcoins will be mined in 2022 by dividing the total number of minutes of the year by 10 (because a block is mined every 10 minutes) and then multiplying by 6.25 (because each block gives out 6.25 BTC as rewards). Therefore, the number of bitcoins mined each year can be predicted, and the last bitcoin is expected to be mined around the year 2140.

Bitcoin’s tokenomics also include the design of transaction fees, which miners receive when a new block is validated. This fee is designed to increase as transaction size and network congestion rise. It helps prevent spam transactions and incentivizes miners to keep validating transactions even as block subsidies keep diminishing. 

In short, the tokenomics of Bitcoin is simple and ingenious. Everything is transparent and predictable. The incentives surrounding Bitcoin keep participants compensated to keep the network robust and contribute to its value as a cryptocurrency. 

Key elements of Tokenomics

As a catch-all term for a wide range of factors influencing a cryptocurrency’s value, “tokenomics” refers first and foremost to the structure of a cryptocurrency’s economy as designed by its creators. Here are some of the most important factors to consider when looking at a cryptocurrency’s tokenomics. 

Token supply

Supply and demand are the primary factors impacting the price of any good or service. The same goes for crypto. There are several critical metrics measuring a token’s supply. 

The first is called maximum supply. It means that there is a maximum number of tokens coded to exist in the lifetime of this cryptocurrency. Bitcoin has a maximum supply of 21 million coins. Litecoin has a hard cap of 84 million coins, and BNB has a maximum supply of 200 million.

Some tokens don’t have a maximum supply. The Ethereum network’s supply of ether increases every year. Stablecoins like USDT, USD Coin (USDC), and Binance USD (BUSD) have no maximum supply as these coins are issued based on the reserves backing the coins. They theoretically can keep growing without limits. Dogecoin and Polkadot are two more cryptos with uncapped supply.

The second is circulating supply, which refers to the number of tokens in circulation. Tokens can be minted and burned, or be locked up in other ways. This has an effect on the price of the token as well.

Looking at the token supply gives you a good picture of how many tokens there will be ultimately.

Token Utility

Token utility refers to the use cases designed for a token. For example, BNB’s utility includes powering the BNB Chain, paying transaction fees and enjoying trading fee discounts on the BNB Chain, and serving as community utility token on the BNB Chain ecosystem. Users can also stake BNB with various products within the ecosystem to earn additional income.

There are many other use cases for tokens. Governance tokens allow the holder to vote on changes to a token’s protocol. Stablecoins are designed to be used as a currency. Security tokens, on the other hand, represent financial assets. For instance, a company could issue tokenized shares during an Initial Coin Offering (ICO), granting the holder ownership rights and dividends.

These factors can help you determine the potential use cases for a token, which is essential in understanding how the token’s economy will likely evolve.

Analyzing token distribution 

Aside from supply and demand, it’s essential to look at how tokens are distributed. Large institutions and individual investors behave differently. Knowing what types of entities hold a token will give you insight into how they are likely to trade their tokens, which will in turn impact the token’s value. 

There are generally two ways to launch and distribute tokens: a fair launch and a pre-mining launch. A fair launch is when there is no early access or private allocations before a token is minted and distributed to the public. BTC and Dogecoin are examples of this category. 

On the other hand, pre-mining allows a portion of the crypto to be minted and distributed to a select group before being offered to the public. Ethereum and BNB are two examples of this type of token distribution. 

Generally, you want to pay attention to how evenly a token is distributed. A few large organizations holding an outsized portion of a token are typically considered riskier. A token held largely by patient investors and founding teams means stakeholders' interests are better aligned for long-term success. 

You should also look at a token’s lock-up and release schedule to see if a large number of tokens will be placed into circulation, which puts downward pressure on the token’s value. 

Examining token burns

Many crypto projects regularly burn tokens, which means pulling tokens out of circulation permanently. 

For example, BNB adopts coin-burning to remove coins from circulation and reduce the total supply of its token. With 200 million BNB pre-mined, BNB’s total supply is 165,116,760 as of June 2022. BNB will burn more coins until 50% of the total supply is destroyed, which means BNB’s total supply will be reduced to 100 million BNB. Similarly, Ethereum started to burn ETH in 2021 to reduce its total supply. 

When the supply of a token is reduced, it’s considered deflationary. The opposite, when a token’s supply keeps expanding, is deemed inflationary. 

Incentive mechanisms

A token’s incentive mechanism is crucial. How a token incentivizes participants to ensure long-term sustainability is at the center of tokenomics. How Bitcoin designs its block subsidy and transaction fees is a perfect illustration of an elegant model.

The Proof of Stake mechanism is another validation method that is gaining prevalence. This design lets participants lock their tokens in order to validate transactions. Generally, the more tokens are locked up, the higher the chance to be chosen as validators and receive rewards for validating transactions. It also means that if validators try to harm the network, the value of their own assets will be placed at risk. These features incentivize participants to act honestly and keep the protocol robust. 

Many DeFi projects have used innovative incentive mechanisms to achieve rapid growth. Compound, a crypto lending and borrowing platform, lets investors deposit cryptos in the Compound protocol, collect interests on them, and receive COMP tokens as additional reward. Moreover, COMP tokens serve as a governance token for the Compound protocol. These design choices align the interests of all participants with that of Compound’s long-term prospects.

What’s next for tokenomics

Since the genesis block of the Bitcoin network was created in 2009, tokenomics has evolved significantly. Developers have explored many different tokenomics models. There have been successes and failures. Bitcoin’s tokenomics model still remains enduring, having stood up to the test of time. Others with poor tokenomics designs have faltered.

Non-fungible tokens (NFTs) provide a different tokenomics model based on digital scarcity. The tokenization of traditional assets such as real estate and artworks could generate new innovations of tokenomics in the future.

Closing thoughts

Tokenomics is a fundamental concept to understand if you want to get into crypto. It’s a term capturing the major factors affecting the value of a token. It’s important to note that no single factor provides a magical key. Your assessment should be based on as many factors as possible and analyzed as a whole. Tokenomics can be combined with other fundamental analysis tools to make an informed judgment on a project’s future prospects and its token’s price.

Ultimately, the economics of a token will have a major impact on how it is used, how easy it will be to build up a network, and whether there will be much interest in the use case of the token.