What is Tokenomics? A beginner’s guide on supply and demand of cryptocurrencies. Tokenomics, a word used to describe cryptocurrency initiatives, explains how the asset works and the psychological or behavioral factors that affect its value. Tokenomics—incentivizing token purchases and holding—is essential to project success. Subpar token economics leads to long-term failure. Token abuse signals doom. Tokenomics is vital when investing in crypto. This page discusses tokenomics, its main features, cryptocurrency supply and demand, token burning, allocations, and more. This lecture explains tokenomics and how to evaluate tokens and tokenized assets.
What is tokenomics?
Tokenomics, a combination of “token” and “economics,” defines cryptocurrency token supply and demand. Economic aspects, including crypto token issuance, attributes, distribution, store, and order, are considered. Let’s analyze crypto token components. Blockchain-based projects create this cryptocurrency. Crypto tokens are tradeable like currency.
Comparisons between token and conventional economics are helpful. Every government has been able to “print” money. War and drought may be expensive. Minting currency is a quick remedy for governments that can’t raise revenue. As the currency is printed, its value decreases.
Algorithms create crypto project token issuance schedules. However, The amount of coins in circulation can be accurately determined. The parties’ coin distribution is also scheduled. Changes to the issue schedule and distribution technique are theoretically conceivable but challenging to implement.
How does tokenomics work?
For a cryptocurrency project to function economically, tokenomics must define the token’s utility and provide incentives for token holders. Developers can tinker with several factors to modify aspects of tokenomics, such as:
Many projects’ tokenomics depend on the number of coins available. Total and available stock must be considered. Bitcoin BTC $34,275 restricts creation to 21 million coins, with the last cash made in 2140. The entire Solana SOL $36 supply is 508,000,000. Non-fungible token (NFT) projects cap token supply. CryptoPunks’ v1 and v2 contracts require 10,000 Punks, while Bored Ape Yacht Club’s require 9,999 NFTs. Scarcity and demand make NFTs more expensive.
Token allocations and vesting periods
Stakeholders in cryptocurrency initiatives now expect detailed token allocation plans. Currently, it is common practice to impose a vesting term on tokens given to investors or developers to prove the product’s legitimacy. The vesting period prevents developers from selling off their tickets too quickly, protecting investors from “pump and dump” schemes.
Mining and staking
Miners receive tokens from Bitcoin and Ethereum, two of the original blockchains, for confirming transactions. PoW refers to this process. Miners must “mine” new blocks with their computing power to grow the blockchain. PoS blockchains with a validator staking paradigm reward smart contract stakes. Ethereum’s upcoming consensus layer update favors this design.
With yield farming, cryptocurrency holders can mine for additional tokens. Smart contracts make it possible to make loans to anyone who needs them, with the lender receiving interest and repayment in token form. Massive yield pools in DEXs are powered by yield farming.
Token burning is a necessary part of many crypto protocols for preventing token inflation. The value of a token is expected to rise as its supply decreases. Binance periodically destroys its receipt. BNB $227 to cut the pool in half. Stellar destroyed 55 billion XLM $0.118 tokens, or half of its total supply, in November 2019, causing a temporary price spike of over 30 percent.
Prices in the cryptocurrency market are primarily determined by supply and demand. Let’s look at the process that goes into creating a token economy:
The fundamental concept of economics is money supply and demand. These two traits determine the desirability of a currency. In tokenomics, the same theory holds, showing token supply and demand.
Begin with the supplies. We must decide whether the value of a token will rise in absolute terms or be inflated by supply. However, Economic theory predicts that as tickets get scarcer, their value will rise. This is called deflation. However, increasing the number of tickets reduces their weight. This is called inflation.
When evaluating the supply side, utility and the ability to create money for holders or others are not considered. Only supply shifts over time are essential. You analyze the number of tokens in existence and the number planned to be mined or distributed in the future during release.
Understanding the supply side of Bitcoin will be beneficial. The supply of Bitcoin is limited to 21,000,000 and is halved every four years until 2140. Over 19,000,000 Bitcoins will be mined by June 2022, with a further 2,000,000 released over the next 120 years. From 2022 forward, just 10% of Bitcoin will be mined, limiting inflation.
The demand side
Only the supply side adds value. Instead, demand raises the token value. Recognize this. Consider having ten lovely baskets at home. They appear popular due to their elaborate design. You agree not to bring more home, limiting supplies. Is the job decent? Create diamond-studded baskets. Brilliant move? No. Fixed supply doesn’t always mean value. Calculate token demand using ROI, game theory, and memes.
The return on investment (ROI) is the expected profit from holding a token. The Avalanche AVAX $11.47 holder can stake their tokens to improve network security and earn more AVAX. Staking allows protocol members to share gains. If you own $0.64 of SushiSwap SUSHI, you get a cut of the protocol’s profits. Without an ROI, no one will keep the token. If you and others value the ticket, you’ll invest more.
Energy levels of the community
Community support shows investors’ faith in the coin. Their passion is evident on Discord and Twitter. Determine how long people have been here. Will they integrate the token into themselves? The token’s future demand also depends on community enthusiasm. Dogecoin (DOGE) $0.07 shows how broad confidence can boost a ticket. A meme token becomes a premium cryptocurrency.
Game theory explains any technological system’s structure. Moreover, It’s the scientific study of what impacts and how people make decisions. However, It uses mathematical models of competition and cooperation to analyze decision-making. When applied to crypto, it shows programmers how parties make real-time decisions.
Tokenomics framework characteristics promote token demand. Tokenomics uses lockups as game theory. The protocol encourages token holders to invest in contracts for higher payments. Lock your Curve Protocol (CRV) tokens to earn. Locking tokens longer makes more significant money. If there are substantial incentives to stake CRV for a long time, stakeholders have little incentive to surrender their permits.
Tokenomics examples: Near Protocol
Protocol Snooping NEAR $1.32, the Near Protocol’s cryptocurrency, is a means of exchange, unit of account, and security mechanism. Never more than 1 billion NEAR tokens will exist. About 5% of the token supply is released annually under the protocol. Validators receive 90% of tickets for securing tokenized transactions, data, and computation. Burning network transaction fees controls inflation.
A firm grasp of tokenomics will equip you with the foundational knowledge to assess a cryptocurrency project. However, Token supply and demand can be inferred from the project’s documentation or white paper. Moreover, You can examine the token’s chances with more information on how the team generates interest.
However, The token’s economics will play a significant role in defining its value about fiat currencies, Bitcoin, and other cryptocurrencies. Furthermore, You can see if the developers have introduced new, valuable ideas into the token distribution process by analyzing their code. Investing in companies with solid tokenomics is another way to get a return on your money.