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.
What is tokenomics?
Tokenomics is the science of the token economy. It covers all aspects involving a coin’s creation, management, and sometimes removal from a network.
Why is it important ?
Blockchain technology enables projects to create micro-economies. To become self-sustaining, they need to figure out how tokens should work within their ecosystem.
There can be ‘no one size fits all’ attitude when it comes to tokens. Blockchain has enabled a diverse range of use cases and implementations. Tokenomics enables teams to create a new or adapt an existing model that works with what the project wants to achieve. This can create a high-functioning and stable platform, if done well.
Token distribution
Projects need to be able to distribute coins out to prospective users. If not, the network can exist but no one will be able to use it!
There are different ways this can be achieved. The networks reward validators, or miners, with newly minted coins; others sell a portion of the token supply to prospective users in an initial coin offering (ICO).
Other tokens distribute to users via certain actions and behaviours. Augur for example, rewards people for verifying facts on its betting network.
Price stability
Cryptocurrencies are notorious for their volatility. This is a problem as fluctuations attract speculators who can stop the network from working properly by buying and selling en masse.
Projects can combat this by ensuring there are enough coins to match the levels of supply. This helps to create a stable price for the coin, which encourages people to use the tokens for what they’re designed for.
Governance.
The core team behind each project devises the rules by how tokens are created, or ‘minted’, as well as how they are injected into, and taken out of, the network. Different projects take different approaches.
Future adaption
Most teams building a network won’t go on to be its rulers. That’s not how decentralization works. However, most developers know that what they build now may not necessarily work in the future. The way in which tokens are governed may need to be altered as the network grows and matures.
summary
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.
