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What are Tokenomics in the crypto sphere?

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What are Tokenomics in the crypto sphere?

tokenomics

Many topics have been discussed throughout the crypto sphere, and one of the main words you may have come across when discussing the crypto space as a whole is the word “tokenomics”.

  • Tokenomics is a combination of the words “token” and “economy” and describes the factors that go into the value of a cryptocurrency.
  • It includes a variety of different factors, such as the maximum token supply, how new tokens are added or removed from circulation, and its usefulness and incentive for token holders.
  • Tokenomics is a simple term used to refer to all economies that form a specific cryptocurrency and project.

But what is the meaning of this word and what does tokenomics really represent for a crypto-related project? Let’s dive in and review everything you need to know.

Tokenomics: everything you need to know

Tokenomics is basically the topic surrounding the supply as well as the characteristics of a specific cryptocurrency.

Before diving into tokenomics, however, it is important for everyone to understand what a token actually means. A token is basically a digital unit of a cryptocurrency that is used as a specific asset or is meant to represent a particular use case of a blockchain.

Tokens Explained

In the crypto sphere, tokens have a multitude of different use cases. However, the most common include security, utility, and governance tokens.

Cryptocurrencies and tokens that are built on a blockchain have predefined issuance schedules created by algorithm, and that means we can accurately predict how many coins can be created at any given time.

In the world of decentralized finance (DeFi), we have decentralized applications (dApps) and use cases that are powered by two types of tokens:

  • Fungible tokens – Bitcoin (BTC)Ethereum (ETH), Polygon (MATIC) and other tokens of equal value to other blockchain tokens.
  • Non-Fungible Tokens (NFTS) – Collectibles, artwork, or any other unique item that cannot have exactly the same value as any other NFT.

These tokens can be redeemed manually. However, DeFi transactions are executed through smart contracts. Smart contracts automatically execute at a given time when their pre-programmed terms and conditions are met.

All DeFi transactions are recorded on the blockchain, which is the distributed ledger, and are usually paid out in the form of the native cryptocurrency that powers that specific network.

Use cases for tokens

There are many use cases for tokens, including:

  • Ownership – a token can represent ownership or be used as a means to access specific features of a network, such as voting in a Decentralized Autonomous Organization (DAO).
  • Value exchange – tokens are primarily used internally and externally as a means of exchanging the value created by a project in the DeFi sphere.
  • Utility – DeFi projects feature infrastructure, where utility tokens are used to reward miners or coiners for tokens, for any other purpose. Ethereum, for example, has gas fees, which are paid in gwei. Gwei is a denomination of the cryptocurrency ether (ETH), where a gwei is one billionth of an ETH.
  • Distribution of benefits – tokens are responsible for the equal distribution of increased value and allow owners of a token to share the benefit of holding them, for example.

Towards Tokenomics

Tokenomics is the study of choice as well as scarcity, where the goal of tokenomics is basically to analyze and understand the potential value surrounding a DeFi project by considering all aspects of creating and managing a token , including its supply, allocation and distribution. .

Due to the fact that the law of supply and demand is immutable, tokenomics has a huge impact on the value of every cryptocurrency, NFT, DAO or any other type of project that features its own native coin or token. .

Typically, the analysis of tokenomics begins with the allocation as well as the distribution of tokens. Here, the project must answer questions such as whether the tokens are pre-mined and whether it is a fair launch.

When there is a pre-mined token launch, investors, developers, as well as specific individuals and institutions get exclusive access to tokens before the public offering.

During a fair launch, there is no early access to tokens and there are no private allocations before the tokens become publicly available.

Additionally, when assessing the potential value of a cryptocurrency, two main numbers are considered in terms of token supply, namely the circulating supply as well as the maximum available supply.

  • When we look at the circulating supply, it is the total number of tokens in existence, excluding tokens that have been burned, lost, or inaccessible.
  • When we look at the maximum supply, it is a representation of the maximum number of tokens that can ever be created, i.e. the mining or minting process. In the case of using NFTs, each token is unique. In other cryptocurrencies, such as Bitcoin, there is a maximum number of 21,000,000 coins that can be mined, but some projects have no limit or cap.

Then there is market capitalization. Market capitalization is the sum of invested funds. The fully diluted market cap would be the market cap if the maximum number of available tokens were in circulation, which is an indicator of a token’s value. In other words, a token that has a high market cap but a low circulating supply could increase in value over time.

There are also inflationary and deflationary tokens. If there is unlimited supply, then a token can be considered inflationary. For example, Ethereum (ETH) is inflationary because it has no maximum supply limit, while Bitcoin (BTC) is deflationary because it does.

The essential

All DeFi projects have extensive documentation regarding their founding principles, goals, and the type of governance they implement.

Make sure to always read these documents before investing in a DeFi project and review all aspects surrounding its tokenization in order to know what kind of potential value the cryptocurrency in question can actually have.

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