Nowadays, cryptocurrencies have grown in popularity as investments. Thus, the term “Tokenomics” has emerged to characterize the economics of crypto ventures. Tokenomics sections can be found in certain cryptocurrencies’ white papers or websites. However, even if they do not, you can learn about them as you research what a cryptocurrency works as follows.
List of Contents
What Exactly Is Tokenomics?
Genuinely, the word “Tokenomics” is a combination of the words “token” and “economics,”. A token is a digital currency unit created by cryptocurrency initiatives on top of an existing blockchain. Moreover, tokens, like traditional currencies, have a monetary value and are exchangeable. Tokenomics defines the elements that influence a token’s use and value such as the creation and distribution of the token, supply and demand, incentive systems, and token burn schedules. Moreover, tokenomics is very important to the success of crypto initiatives. Assessing the tokenomics of a project before deciding to engage is critical for investors and stakeholders.
Types of Tokens
If you want to learn about tokenomics, you must first grasp the many types of tokens and their significance. Tokens can be divided into three main categories: Structure, Usage, and Value.
Structure
Tokens can be divided into two kinds based on their structure: Layer 1 tokens and Layer 2 tokens.
- Layer 1 Tokens
Layer 1 tokens are regional to a single network and are used to operate all blockchain services. The BNB on Binance Chain is a famous example of a Layer 1 token in cryptocurrency. Additionally, the Ethereum or ETH is another popular example of a Layer 1 token.
- Layer 2 Tokens
This type of token has a distinct significance in the context of “what is tokenomics.” They are employed in the case of decentralized applications within a certain network. OMG tokens, for example, are classed as Layer 2 tokens since they are used in OmniseGO. It is a decentralized project on the Ethereum network.
Usage
From the two major classifications mentioned above, tokenomics also categorizes tokens based on their usage. Security tokens and utility tokens are two notable types of tokens based on their usage.
- Security Tokens
Investment contracts are the name given to security tokens. Importantly, security tokens must have a monetary commitment, a shared enterprise, and income from several contributors’ computation work. Moreover, they entail a sophisticated contract verification process known as the Howey Test. Tokens that pass the Howey Test are granted the security token credential. One famous example of a security token is the operation of the Siafunds or SF on the Sia network.
- Utility Tokens
Utility tokens are another essential type of token that you will come across in tokenomics. They are used to fund a network and are distributed through an ICO (Initial Coin Offering). The ICO is critical for project development money. The BAT, or Basic Attention Token, is an example of a utility token that was initially distributed through an ICO. Now, BAT could be useful for decentralized advertising on the Ethereum network-powered Brave browser.
Value
It is also worth noting that tokens can be divided into two types based on their value: fungible tokens and non-fungible tokens.
- Fungible Tokens
Fungible tokens are distinguished by having the same value as well as the ability to replicate. Importantly, the fungible token is abundantly visible in the instance of Ether (ETH) on Ethereum. The value of ETH tokens is the same and they can be interchanged because they have the same value.
- Non-fungible Tokens
Non-fungible tokens do not have the same value, implying uniqueness. NFTs have acquired prominence in recent years, fueling interest in tokenomics, particularly through high-profile NFT auctions. Examples of tokenization assets are photographs, collectibles, real estate, and artworks NFT. All of them have not only sparked a new wave of digital ownership revolution but have also demonstrated the potential of tokens. NFT usage scenarios bring a higher value of non-fungible tokens than fungible tokens since there is no possibility for replication.
Tokenomics’ Key Elements
Here are some of the most significant elements to consider when examining the tokenomics of a cryptocurrency.
Token Supply
The major elements influencing the price of any goods or services are supply and demand. Genuinely, there are two crucial components for determining a token’s supply: Maximum Supply and Circulating Supply.
- Maximum Supply
It means that there is a limit to the number of tokens that can exist over the lifetime of the toke. For example, the maximum supply of Bitcoin is 21 million coins. The hard cap for Litecoin is 84 million coins, whereas the maximum supply for BNB is 200 million.
However, some tokens have an unlimited supply. For example, the Ethereum network’s ether supply grows every year. Stablecoins such as USDT, USD Coin (USDC), and Binance USD (BUSD) has no maximum supply because they are issued depending on the reserves that back them up. They can theoretically continue to grow indefinitely.
- Circulating Supply
It refers to the number of tokens that are currently in circulation. Tokens can be minted and burned, or they can be stored in different ways. This has an impact on the token’s price as well.
Token Utility
Token utility refers to the use cases that have been built for a token. BNB’s utility, for example, includes powering the BNB Chain. It pays transaction fees, receives trading fee reductions on the BNB Chain, and acts as a community utility token on the BNB Chain ecosystem. Users can also make additional cash by staking BNB with various products inside the network.
These factors can help you determine the potential use cases for a token, which is essential in understanding how the token’s economy will likely evolve.
Significant Aspects of Tokens in Tokenomics
In reality, you can understand how tokenomics operate if you understand how tokens work. Here are some of the significant aspects of the token operation that you should always pay attention to.
1. Price Stability
Tokenomics also emphasizes the importance of researching the implications of price stability. Cryptocurrencies are well-known for their volatility, but not in a good way. The volatility of cryptocurrencies is one of the major causes of variations that might impair investor interest. Furthermore, volatility could pave the way for speculators to prevent the network from functioning properly through large purchases and sales of tokens.
Nevertheless, token systems could address this issue by maintaining appropriate storage of currencies to match supply levels. As a result, the coin’s price might be fixed, encouraging users to use tokens for specific objectives. Moreover, tokenomics assists businesses in stabilizing token prices through the formation of equilibrium. Additionally, it could encourage an increase in token prices through increased demand.
2. Token Distribution
One of the most important components of token operation is the issuance of ICO (Initial Coin Offerings). Projects should be able to send Bitcoin to prospective consumers. If the initiative fails to distribute coins to interested people, it will simply exist without anyone who can utilize them. Since token distribution was a big innovation in tokenomics, there are numerous ways to replicate it.
3. Business Dimensions
The business dimensions of tokens are another important component that may be found in a tokenomics system. The basic usability of a token is determined by the token’s utility in exchange for the products and services that it serves. Many businesses have built decentralized markets that allow users to trade tokens for products and services available on the marketplaces.
Furthermore, businesses ensure profit distribution in the form of dividends as well as other financial benefits to users. As a result, businesses might quickly boost their levels of user loyalty. At the same time, projects might ensure the availability of a strong network defined by constant token circulation.
4. Future Readiness
Tokenomics is also heavily reliant on knowing how a token initiative can address future difficulties. Many teams in charge of developing a network in the crypto sector do not end up ruling it. As a result, developers must accept that what works now for their token projects may not work in the future. Since the network’s growth and maturity, the approach to token governance may need to be modified.
Conclusion
To sum up, if you want to invest in cryptocurrency, you should grasp tokenomics first. It is a term that describes the primary elements that influence the value of a token. Moreover, it is critical to understand that no single factor gives a magical key. Your evaluation should be based on as many criteria as feasible and assessed holistically. Tokenomics can be used in conjunction with other fundamental analysis methods to make an informed decision about a project’s future prospects and token price. Finally, the economics of a token will have a significant impact on how it is used, how easy it is to construct a network, and whether there is much interest in the token’s use case.
FAQs
Cryptocurrencies and tokens are subclasses of digital assets that use cryptographic technology. The native currency of a blockchain is digital currencies, while tokens are distributed by a blockchain-based business or application.
Token governance means the management of a token ecosystem. It includes determining who makes decisions and how conflicts are resolved. Token governance is essential for creating a healthy ecosystem, as it can affect token value and the ecosystem’s general health.
Tokens can be used to promote positive behaviors in networks by rewarding users for ecosystem contributions. This may involve tasks such as staking, voting, and governance participation. By promoting positive behavior, tokenomics can boost the development of a sustainable ecosystem that is beneficial to all users.
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Source: 101 Blockchains