This article will explain what the term tokenomics means and its 7 important characteristics.
The terms "token" and "economics" are omitted in tokenomics. It entails delving into the reasons behind a token's value and price. Tokenomics offers a solution to the economizing issues with tokens and their use in blockchain technology by examining numerous elements that make up the cryptocurrency industry.
1. What is tokenomics?
Tokenomics, a blend of "token" and "economics," is a catch-all term for the characteristics that provide a certain cryptocurrency value and appeal to investors. This covers everything from a token's quantity and issuance method to factors like its utility.
A project that has thoughtful and well-designed incentives to buy and hold tokens for the long haul is more likely to outlive and perform better than a project that hasn't created an ecosystem around its token, so tokenomics is a crucial concept to take into account when making an investment decision. A solid base frequently leads to greater demand over time as more investors pour money into the enterprise, which raises pricing.
Similar to this, in order for a project to succeed and attract investment, its founding members and developers must carefully evaluate the tokenomics of its native coin.
2. Key characteristics of tokenomics
The incentives that attract investors to purchase and keep a particular coin or token depend on the way a cryptocurrency's economy is set up. Each cryptocurrency has a unique monetary policy, similar to how different fiat currencies are from one another.
The incentives that define how a token will be distributed and the usefulness of the tokens that affect their demand are both determined by tokenomics in a crypto economy. Price is greatly influenced by supply and demand, and projects with the appropriate incentives may see a significant increase in value.
The primary parameters that developers alter to influence tokenomics are listed below:
Mining and staking: The primary motivation for a decentralized network of computers to validate transactions is mining, which is also known as staking, in base layer blockchains like Ethereum 1.0 and Bitcoin. In this case, new tokens are awarded to individuals who use their computers to find new blocks, populate them with data, and add them to the blockchain. This is how blockchains like Tezos function; Ethereum is going toward this paradigm with its 2.0 update. Staking pays people who perform a similar job but by locking away a number of coins in a smart contract.
Yields: To encourage users to acquire and stake tokens, decentralized financial systems provide high yields. Tokens are staked in liquidity pools, vast collections of cryptocurrency that drive services like lending systems and decentralized exchanges. New tokens are issued as payment for these yields.
Token burning: Some blockchains or protocols "burn" tokens, removing them from circulation permanently, to cut down on the amount of currency in circulation. Reducing a token's supply should serve to boost its price as the remaining tokens in circulation become more rare, according to the principles of supply and demand. Ethereum began burning some of the tokens used as transaction fees in August 2021 as opposed to delivering them to miners.
Limited vs unlimited supplies: Tokenomics estimates a token's maximal supply based on restricted vs. infinite supplies. For instance, according to the tokenomics of Bitcoin, only 21 million coins can ever be produced, with the final coin scheduled to enter circulation in the year 2140. In contrast, Ethereum has no upper limit, despite the annual constraint on its issuance. Projects using non-fungible tokens (NFTs) push the limits of scarcity; some collections may only print one NFT per work of art.
Token allocations and vesting schedule - Some cryptocurrency projects keep track of a precise token distribution. A specific amount of tokens are frequently set aside for investors or developers, but there's a catch: they may only sell those tokens after a particular period of time. Naturally, over time, that has an impact on the amount of coins in circulation. A mechanism where tokens are distributed in a way that minimizes the influence on the circulating supply and a token's price is what a project's team should have ideally established.