Tokenomics Crypto: Why Is It Important
Jan 24, 23 | Bakhtain Afzal
Decades back, the possibility of browsing online aroused legitimate security concerns - however, today, we own digital assets powered by cryptocurrencies. Crypto has taken the world by storm, and everyone's on their toes to generate a revenue stream through the revolutionary concept of digital economics - having a market cap of $1.01 trillion.
While crypto receives global attention, simultaneously, it introduces a study of crypto economics known as Tokenomics - a portmanteau of "token" and "economics".
Tokenomics, a blend of token economics, is a crucial role player when it comes to crypto research. As a matter of fact, Tokenomics describes elements that impact a token's value and use. And it is the primary determinant of a crypto project's success.
While tokenomics plays a significant role in a crypto project, it's essential for investors and stakeholders to asses a project's tokenomics before investing.
Which is why you need to continue reading as we explore the basic tokenomics definition, its features and the key elements of tokenomics crypto.
What Is Tokenomics?
Tokenomics definition says it all, it’s the study of parameters that decide the use and value of a token. It covers everything from the token's supply to its utility - and everything in between. The main reason behind its popularity is its long-term benefits.
Eventually, it's better to invest in tokens that guarantee to outlast in the long run by offering well-designed incentives.
A structured tokenomics design promises to translate into higher demand as the project's price increases or investors flock in. Considering that, the founding party of a crypto project and developers should assume tokenomics crypto when looking for a lasting crypto project's success. You can also find further details about tokenomics on the official tokenomics website.
Before moving with features of tokenomics Crypto, it's essential that we look into Altcoin Tokenomics. Typically, Altcoin is derived from two words, "alternative" and "coin", - where it includes alternative cryptocurrencies than Bitcoin. However, a couple of altcoins employ a differing consensus mechanism that validates a transaction, which in fact, is an attempt to distinguish itself from Bitcoin.
Coming to the main part, Altcoin tokenomics is the same as tokenomics, where the only difference is the cryptocurrency involved. It studies the parameter responsible for determining characteristics and features of Cryptographic tokens, except Bitcoin, to deliver economic value.
Of course, it's frustrating to find a good altcoin project that meets your predictions, as in most cases, we end up with token prices either decreasing or stagnating.
Bear in mind that once you learn the trick of finding the right balance of Altcoin tokenomics, where the token holders hold the top priority - one thing is for sure, the return on your investment will double.
Features of Tokenomics
The incentives to buy or hold a particular tokenomics coin or token depend on how the cryptocurrency economy is set up. Similar to fiat currencies, each cryptocurrency comes with a separate monetary policy.
Token economics determines 2 elements of a crypto economy; token utility and distribution, which influence its future demand.
Here are the main features that developers can modify according to changes demanded by token economics.
Blockchains often permanently burn tokens i.e., removing them completely from circulation or reducing the coin's supply. As per supply and demand rules, reducing a token's supply leads to token scarcity which increases the token's price.
Defi platforms offer high yields encouraging investors to buy and stake their tokens. Meanwhile, stakers can stake tokens in liquidity pools. To define liquidity pools, they are Crypto pools powering lending platforms and Decentralized exchanges (DEXs).
Token Allocation and Vesting Period
A certain number of tokens are often set aside for venture capitalists or developers, but they can't sell them for a certain period. And due to this, the number of coins in circulation changes over time. Conclusively, it affects the token supply over time.
Ideally, a project's team sets a distribution system with the least possible effect on supply circulation and token price.
Limited and Unlimited Token Supply
Tokenomics design decides the maximum supply of a token. For example, the tokenomics of Bitcoin doesn't allow mining more than 21 million coins, and the last coin is expected to be mined around the year 2140.
Ethereum, on the other hand, has no mining limit, but there’s a constrained annual issuance amount.
What Are the Key Elements of the Tokenomics Model?
Here are the key elements of an ideal tokenomics model that an investor should consider when looking at a crypto's tokenomics:
Supply and demand are the deciding factors of an asset's price - physical or digital. There are numerous metrics used for measuring the supply of a tokenomics coin.
The first metric is called maximum supply . It refers to the maximum number of tokens that will be created. Meaning once the maximum supply is reached, no other coins will be mined, minted or produced.
Various tokens don't come with a maximum supply. For instance, Ethereum's network supply annually increases. Whereas stablecoins like USD Coin (USDC), USDT and Binance USD don't have a maximum supply since they are issued based on reserves. Theoretically, they have the potential to keep growing infinitely.
The second type is the circulating supply, it's the number of tokens in circulation. Through this, tokens can be burned, minted or locked up in several ways - affecting the overall token price.
Token Distribution Analysis
Besides supply and demand, it's essential to consider the token distribution process. Token distribution differs based on the type of investors and institutions - making it essential to analyze entities holding a token.
Knowing this will equip you with an insight into how likely investors trade their tokens. In addition, this knowledge helps quickly analyze a token's value.
Generally, there are two ways to launch and distribute tokens.
In a Fair launch, there is no early access and private allocation to tokens before it is minted or distributed to the general public. Dogecoin and BTC are two examples of Fair launches.
Pre-mining allows mining and distributing a portion of crypto to a selected group, i.e., private allocation of cryptocurrencies. BNB and Ethereum are two primary examples of Pre-mining launches.
Other than that, always overview a token's lock-up and release schedules to gain an idea about the number of tokens selected for circulation. Ultimately, this puts pressure on the token's value, resulting in a decrease.
Token utility refers to token use cases. For instance, the BNB utility powers the BNB chain, which pays translation fees to serve as a community utility token in the BNB chain's ecosystem. Meanwhile, users can stake BNB tokens with numerous products within the ecosystem and benefit from an additional income.
There are various other use cases for tokens. For example, Governance tokens allow investors to vote on changes to a token's protocol. Meanwhile, the architecture of Stablecoins enables it to be used as a currency. On the other hand, Security tokens represent financial assets.
To further illustrate that compound tokenomics - the compound protocol - enables investors to vote on proposals for operational purposes. Also, as compound tokenomics states, people who own COMPs can transfer their voting rights.
The incentive mechanism of a token plays a vital role in tokenomics. Mainly, tokenomics is all about how it incentivizes long-term participant sustainability. Bitcoin's block subsidies process and transaction fees are an ideal example of an incentive model.
The proof-of-Stake mechanism is a popular validation method. The PoS design lets people lock their tokens to enable transaction validation. In general, the more tokens you lock up, the more likely you are to become a validator and get crypto rewards. It also means that validators will have to put their own assets at risk. These things give people a reason to be honest and keep the protocol strong.
Many DeFi projects have grown through the incentive mechanism. Compound, a platform for lending and borrowing cryptos, allows investors to deposit cryptos, collect interests and receive COMP tokens as crypto rewards. Also, COMP tokens, a part of compound, serve as Governance tokens for the Compound Protocol.
Why Do We Need Tokenomics?
Moving forward after the tokenomics definition, it’s time to look into its significance. Tokenomics is the key to the success of a project. To put it this way, bad governance decisions undoubtedly kill top Defi projects - making Tokenomics essential for investors.
If all else fails, the remaining choice is to force a new tokenomic strategy, "hard forking". This means copying the codebase of a blockchain, making a few changes that aren't compatible with the old code, and moving old cryptocurrencies and validators to the new network.
What Is Considered Good Tokenomics?
Here are the factors that contribute to good tokenomics:
Spending Use Cases
While planning to invest in a token, one of the first questions you should ask yourself is whether the token will be for investment purposes or it will focus on paying for services offered by the project.
Other than that, it's crucial to consider whether a token's price is tied to the demand for the underlying protocol or the cycles of the crypto market. Also, most projects don't want their services to become too expensive, which is expected when the price of the spending token rapidly increases.
Similar to the central banks regulating and stabilizing sovereign currencies, it's suggested that a likewise approach can be a positive feature of tokenomics. In the case of a market downturn, projects can allocate a portion of their profits to repurchase tokens.
Increased token supply in an overheated market can dampen volatility while stabilizing a token's price. An additional supply can also be allocated to token holders so that they don't go through the effects of a downturn.
Minimalistic Tokenomics Design
Most of the time, projects that are too complicated hide ponzi-nomics instead of real tokenomics that are valuable for investors.
On the other hand, a simplistic tokenomics design attempts to give easy solutions to problems that tokenomics can't solve, such as generating an income and staying an active participant in the market.
Tokenomics Use cases
Block rewards are constantly giving out tokens. During its ICO in 2014, the project sold about 7 million Ether to help get more people to use it. Ether doesn't have a hard cap yet, so the number of tokens can continue to grow as the network grows. But it needs to be clarified how Ethereum's tokenomics model has changed when the network switches to a Proof-of-Stake consensus system.
Since the Ethereum Merge, the tokenomics model has switched from a Proof-of-Work to Proof-of-Stake consensus mechanism, resulting in the introduction of Optimism tokenomics. Users are able to access Ethereum's dApps with reduced transaction costs and a more streamlined experience thanks to Optimism tokenomics.
Satoshi Nakamoto introduced this protocol so that block rewards could keep a steady flow of tokens coming into the network. After a "miner" successfully verifies a block, they get brand new bitcoins.
Before the miner can get their reward, they must confirm 101 more blocks. This gives them a reason to keep validating transactions. Over time, the number of tokens for each validated block is cut in half. This is done to stop too many bitcoins from entering the network at once.
Most NFT tokenomics projects give out a fixed amount of NFTs.
Think about PFP NFTs like Meebits. These NFT tokenomics projects all at once release thousands of NFTs, for example, Meebits offered 20,000 NFTs on the day it came out.
Use Cases of Tokenomics Crypto Game
This is the first use case of the tokenomics crypto game. Its system's own currency is AXS, which stands for Axie Infinity Shards. Even though there are many ways to get AXS tokens, like staking, most players get new tokens by just playing the game.
$AXS is a direct reward for playing different games in this gaming ecosystem. As a result, it gives users another reason to play.
By letting other players into their plot of land, players can get SAND. A player could, for instance, purchase property, build it and then hold events to make money from their builds. In the same way, players can make assets and then sell them as NFTs for $SAND.
Blast Royale is a competitive arena in the style of battle royale, where many players fight to the death against each other. Meanwhile, this is another top use case of the tokenomics crypto game.
The Blastoken ($BLST), based on Ethereum's ERC-20 tokens, is the most important part of this platform. Even though they aren't as far along as some of the other projects on this list, the plans for what their native token can do are very similar to $SAND and $AXS.
Users can earn $BLST by doing well in games. The best players in each lobby get a bigger share of $BLST per game.
Why Is Tokenomics Important in Cryptocurrency?
Micro-economies can be made with the help of blockchain technology. To support themselves, they need to have a firm understanding of tokenomics meaning and understand a token’s working in their ecosystem.
When it comes to tokens, there is no "one-size-fits-all." Instead, blockchain technology has paved the path for numerous use cases of tokens, offering the utmost digital security.
Tokenomics lets teams make a new model or change an existing one to fit the project's goals. If done right, this can make a stable platform that promises long-term success.
Over the past year, the cryptocurrency market has grown exponentially. According to CoinGecko, since November 2020, its total market cap has increased by about 600% and is now worth about $2.8 trillion. As per the tokenomics website news, digital assets have grown, the number of tokenomics coins and tokens available for investors has increased to almost 6,000.
The 3 Best Tokenomics Crypto List
The 3 best tokenomics crypto are the following:
- Knox (GNOX)
- Horizon (Zen)
- Fantom (FTM)
What Are Injective Tokenomics?
As mentioned above, in tokenomics meaning, there are different types of tokenomics, one of which is Injective Tokenomics.
The injective tokenomics is a public utility token and a token of governance for the Injective Protocol that is decentralized.
The significance of injective tokenomics is determined by its effects on governance, collateralization of derivatives, protocol security, relayer incentives, and more.
Are Uniswap Tokenomics Still Represented?
Two years after its launch, Uniswap tokenomics still makes it the top decentralized exchange (DEX) for DeFi. By keeping and improving its automated market maker (AMM) protocol, the Uniswap tokenomics team offers to bring large amounts of liquidity to Ethereum's DeFi ecosystem.
The Future of Tokenomics
Tokens, coins, and crypto projects are based on ideas, perspectives, and models. These ideas, perspectives, and models are still being tested to see what works and what doesn't.
Various projects won't work, and we don’t expect them to linger long. But the ones that do will continue to influence and inspire new projects foundationally.
What Is Tokenomics in General?
Tokenomics, aka Token economics, refers to the study of different parameters capable of deciding features of crypto currencies.
In a nutshell, it's a portmanteau of “token” and “economics", comprising different characteristics and elements that make a specific type of cryptocurrency favorable for investors.
What Is a Tokenomics Example?
A popular tokenomics example is Near Protocol.
What Is Tokenomics in Crypto?
Tokenomics meaning states that it helps crypto projects build trust and create a long-term and sustainable ecosystem.
While crypto gets the “hot seat” in every conversation, Tokenomics and other tools broaden the horizons for fundamental analysis for making a good decision about a crypto project’s success. Although we walked you through an overview of tokenomics meaning, tokenomics crypto along with its key elements, and emergence of Optimism tokenomics since the Ethereum Merge. Besides that, you can head towards the tokenomics website for further information.
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