Briefly: Tokenomics deals with the economic aspects of all matters relating to crypto tokens.
Table of contents:
What does Tokenomics mean?
Token Economics stands for Token Economics. Tokenomics refers to the quality of the token and anything that affects the value of the token. Quality and value will determine whether or not it is worth investing in the token.
The idea of a symbolic economy was put forward in 1972 by B.F. Skinner, a Harvard psychologist who believed that a symbolic economic model could control behavior.
Symbolic economics uses incentive theory, which is essentially a theory of human behavior. Incentives play an important role in the economics of tokens by motivating users to participate in the exchanges of value offered by blockchain networks.
The token economics model should be configured to enable participants to earn more tokens by contributing positively. In this case, the tokens ensure that the incentive token is financial in nature, given its financial value and its contribution to the overall market capitalization of the project.
Token economics studies the economic institutions and policies associated with the creation and distribution of token goods and services.
The tokens of a particular cipher, its functions, purpose, allocation policy, etc. are represented in the white paper of the project. Therefore, investors should look into the project’s white paper to learn about the target asset’s tokens and determine if the project is attractive to them.
To know all about tokenomics, it is essential to understand the different types of tokens and their importance.
1. What is the code
The structure of tokens can be categorized into two different types: Layer 1 and Layer 2 tokens.
Layer 1 tokens (protocol) are the underlying blockchain itself, while they are also used to power all services in the blockchain, i.e. Ether or ETH on the Ethereum network or BNB on the Binance Chain.
Layer 2 tokens are typically used for decentralized applications in the DeFi (Decentralized Finance) sector and are built on top of the existing Layer 1 blockchain, i.e. OmiseGO, a decentralized project built on top of the Ethereum blockchain and powered by OMG (Layer 2 tokens). Uniswap and Sushiswap with their respective tokens, UNI and SUSHI, are created on the Ethereum network and are designated as ERC20 tokens.
We also distinguish between security tokens and utility tokens.
Tokens that pass the Howey test gain credentials for security tokens. Most ICOs (Initial Coin Offering) are investment opportunities in the company itself; Hence, most tokens are considered as securities.
Utility tokens are issued to raise funds for a project that can later be used to purchase the project’s goods or services.
Tokens are also categorized into replaceable and non-fungible (NFT) tokens.
Fungitimate tokens have the same value and can facilitate the interchangeability of commodity units with other units of said commodity such as Bitcoin or Ethereum.
Non-fungible tokens, i.e. encoding assets such as photos, collectibles, real estate, and artwork using NFT, are unique and therefore cannot be exchanged.
Tokens can also be categorized based on the following perspectives:
- Rights: Granting its owner access or ownership rights.
- Durability: stability in the face of censorship and attacks.
- Organizational: Easy to categorize and organize (if needed).
- Purpose: To serve as evidence of behavior (value creation) or a representation of existing assets/access rights.
- Supply: Either with a fixed supply of tokens or an unlimited supply.
- Code Flow: It is generated linearly (destroyed after use) or remains in circulation.
- Temporary: Presence/absence of an expiration date.
2. Token vs Coin
Coins are the original cryptocurrencies in the blockchain and work like coins.
Tokens have unique use cases and represent things like stake or voting rights. It can exist in many block chains.
Read on for a list of key metrics that affect token coins.
1. Total width
The token supply is a key factor in its tokens. There are three types of width – rolling width, total width, and max width.
The token circulating supply is the number of tokens issued so far that are currently in circulation. The total token supply is the number of tokens present, excluding any tokens that have been burned. The maximum token supply is the maximum number of tokens that can ever be generated.
If the project developers regularly increase the circulating supply of a particular token over time, you can assume that the value of the token will rise in the future. If too many tokens are issued simultaneously or frequently, the value of the token may decrease.
2. Supply and market value
The market cap of the token shows the full amount of money invested in the project. Besides the market value, you can also check the entire diluted market value of the project.
The higher the market value of a token and the lower its circulating supply, the more valuable it will be in the future.
Proof of Work application, Proof of Work model, helps in creating scarcity along with avoiding inflation. Miners verify transactions to secure the network by solving cryptographic puzzles in blocks. The growth of the network gradually leads to a decrease in the number of coins awarded to miners. Therefore, the equations that you have to solve to verify transactions on the network become more difficult.
3. Does bigger offer mean more value
No. The fully diluted market value will be the same. This means that one currency with a greater total supply than another does not necessarily mean a greater market value.
This also means that a crypto project with a lower market capitalization is likely to have fewer coins in circulation, which means that this is likely to be a good investment opportunity in tokens.
Many projects are increasing the overall supply by injecting new tokens into the ecosystem. On the other hand, many projects are using token burning functionality to permanently remove coins from their ecosystem to keep their token supply in check.
However, there are other factors to consider when assessing the feasibility of a token project, such as use cases and future plans (road map), team, etc.
4. How do you decide to supply the token
This depends on the policy of each crypto project. A larger offer, as mentioned above, does not translate into a greater value. Tokenomics does not directly depend on this parameter but on economic factors related to the project.
ADA, for example, Cardano’s original coin, has a total supply of 45 billion coins and a market capitalization of $91 billion at press time. The price of one coin is also $2.86.
On the other hand, Binance Coin (which belongs to the Binance Smart Chain) has a total fixed supply of about 168 million tokens, a market capitalization of $83 billion, and a current price of $498 per coin.
A big difference in the price of the individual coin and the total supply, but the market value is very similar. How is that? Because investors are not necessarily interested in buying a certain amount of coins but instead focus on the value of their investment.
200 ADA coins of $1 each or one BNB coin of $400 that don’t vary greatly in value. However, the difference lies in the use cases and the trust that the team behind each project is able to gain from investors.
Token Distribution Strategies
The issuance of an initial coin offering, or ICO, is an essential aspect of making tokens. Projects must have the ability to distribute coins to potential users.
Token distribution is achieved by rewarding miners or users who validate transactions with newly minted coins. Some networks choose to sell a portion of the token supply to potential users through the initial coin offering; Others offer rewards to users for checking facts in their betting network.
Tokens of price stability also indicate the need to study the implications for price stability.
1. Initial coin offerings
An Initial Coin Offering (ICO) is a popular fundraising method primarily used by startups wishing to offer products and services related to the cryptocurrency and blockchain space. It is an opportunity for early adopters to buy some project tokens with digital currency or cryptocurrency. These tokens are similar to company shares sold to investors during an IPO.
Early investors are usually eager to buy tokens in the hope that they will profit when the value of the tokens rise above the price set during the ICO.
2. Icon customization
Another important aspect of tokenomics is the allocation of tokens.
We can identify some important actors here:
- Development Team and Supporters – The credentials and reliability of the team that makes the project possible
- Initial backers – those who initially invest in the project, in private investment rounds
- Ecosystem funds – this means funds intended for stakes or for financing project functions
- Community Sales – In ICO أشكال Forms
Most tokens are generated in two basic ways – either pre-mined or just released.
A fair release is when a cryptocurrency is mined, earned, owned, and managed by the entire community. There is no early access to private tokens or customizations before they are publicly available.
Pre-mining is when a number of tokens are generated and distributed among exclusive titles (usually project developers, other team members and early investors) before they are released to the public.
3. Entitlement to share ownership
Many successful projects tend to devote significant funds to ecosystem and community related initiatives. This helps build trust between developers and supporters.
To increase confidence, developers may lock in part of their coins or those of early investors (or both) for some time. This is known as the “pump and dump” scheme and is a challenge in the newly emerging DeFi market.
Another vital aspect directly related to symbology is staking. This process involves storing the value in the wallet and token holders getting rewards for verifying transactions.
The delegated Proof of Stake model, a prominent type of consensus algorithm, is an excellent example of the token economics use case for staking.
Along with entitlement, staking can be used as a way to prevent massive token sales and gain credibility.
The last important aspect of a reliable project is having a reliable team behind it. Having famous and reputable people behind the project means that the coin has a great opportunity to gain widespread adoption.
Tokenomics still has plenty of room for growth and innovation. There are many strategies and aspects to consider when starting or investing in a crypto venture.
Whether you are interested in stock tokens, stablecoins or regular coins, creating tokens with solid token fundamentals is sure to bring more value to the ecosystem.
Most of the features of the project tokens can be found in their respective white papers, so be sure to read them!