Tokenomics: Guide on Cryptocurrency Marketplace Dynamics. Tokenomics, a common term for describing the inner workings of crypto projects, explains the asset’s operation and the psychological and behavioral factors that could influence its value. To ensure a project’s success, tokenomics is carefully crafted to encourage buying and holding. Conversely, projects with weak tokenomics will fail eventually. Problems will soon arise as a result of flawed token mechanics. Before deciding to purchase a cryptocurrency, it is essential to have a good grasp of tokenomics. This article explores tokenomics in-depth, covering its workings, key aspects, supply and demand for cryptocurrencies, token burning, allocations, and more. In this lesson, you will learn tokenomics and how to use it to value cryptocurrencies.
A combination of the terms “token” and “economics,” the term “tokenomics” describes the market dynamics surrounding a cryptocurrency project. It considers all aspects of a cryptocurrency token’s economics, including its issuance, attributes, distribution, supply, and demand. Understanding the distinctions between token and conventional economics will be helpful in economics. Governments have continuously been printing more money whenever they need it. The costs of dealing with drought or waging war can add up quickly. When dealing with this, authorities often find minting currency a more straightforward method of raising revenue. The value of already-existing currency declines as a result of money creation.
On the other hand, token issuance data are predetermined and generated algorithmically to Determine how many coins will be in circulation at any given moment. Additionally, the allocation of coins to different stakeholders is deliberated beforehand. The distribution strategy and issuance timetable changes are theoretically feasible but challenging.
By establishing the usefulness of tokens, which is an essential component in determining their demand, and by offering incentives to token holders, tokenomics established the framework for the economy of a cryptocurrency project. Tokenomics is dependent on several parameters, some of which developers manipulate. These factors include:
The availability of coins is a crucial indicator in the tokenomics of different projects. You have to think about the total and the circulation simultaneously. For example, the entire supply of Bitcoin (BTC) cannot exceed 21 million coins, and the last coin is anticipated to be mined at around 2140. The price of one coin is USD 42,739. In contrast, are 508,000,000 SOLs available in the Solana SOL $99 market.
Similarly, projects involving nonfungible tokens (NFTs) limit the total supply of tokens. Take CryptoPunks as an example; their v1 and v2 contracts include 10,000 Punks, and Bored Ape Yacht Club’s total NFTs amount to 9,999. The NFTs’ price goes up because they are rare and exclusive.
Token Allocations and Vesting Periods
Now more than ever, crypto projects routinely distribute tokens to stakeholders in great detail. The current standard is to set a vesting term for tokens given to developers or venture capitalists to prove the product’s legitimacy. The vesting period protects investors from scammers by locking developers’ tokens for a specific time.
Mining and Staking
First, blockchains such as Bitcoin and Ethereum provide tokens to reward users for verifying transactions. Adding new locks to the blockchain requires miners to employ their computational capacity. Payouts in proof-of-stake (PoS) blockchains with a staking model for validators are given to participants who have secured a specific amount of coins in a smart contract. This is the direction Ethereum is heading in with the consensus layer upgrade.
Anyone with cryptocurrency can participate in a yield contract to earn more tokens. You may lend your money to anyone who needs it through smart contracts, and you can get tokens for permineralized and principal. Yield farming is the engine that drives the massive yield pools in DEXs.
To keep tokens out of circulation and inflation at bay, cryptosystems must burn them. The price will likely rise, and the supply of tokens becomes more limited.
The price of a cryptocurrency is highly dependent on market forces like supply and demand. How do developers come up with tokenism?
Economics is fundamentally about currency supply and demand. These two characteristics indicate currency desirability. The same hypothesis works in tokenomics, revealing token supply and demand. If there are fewer tokens, economic theory says their value will rise. This is deflation. However, more tokens mean less value. This is inflation. Undersanding Bitcoin’s supply side will help. The supply of Bitcoin is limited to 21,000,000 and supplied at a rate of halving every four years until 2140. With over 19,000,000 Bitcoin mined by June 20 2, an additional 2,000,000 are expected to be released over the next 120 years. From 2022, just 10% of Bitcoin will be mined for over 100 years, preventing inflation.
Just the supply side creates no value. Instead, demand makes a token valuable. Imagine having ten lovely baskets at home. The complex design makes you think they’re famous. Fix supply doesn’t inherently equal value. People must assume the item is valuable now and will be later. Consider ROI, game theory, and memes to determine token demand.
ROI is the predicted cash flow from holding a token. Avalanche AVAX $35.96 holders can stake their tokens to secure the network and earn extra AVAX. Stakeholders can share protocol revenues in some protocols. SushiSwap SUSHI $1.10 holders can get protocol earnings. Without an inherent ROI, individuals won’t hold the token. You will invest if others believe the token has worth.
Energy Levels of the Community
Community enthusiasm reveals the token’s investors’ faith—and sesses their energy on Discord, Twitter, and other platforms. Also, community energy levels drive future token demand. Dogecoin DOGE $0.08 shows how belief can propel a token. Due to its cult following, a meme token made the top crypto tokens.
Game theory underpins all technologies. It is the systematic study of how and why people make decisions. I analyze decision-making using mathematical models of conflict and cooperation. In the crypto area, it lets developers interactively assess stakeholder decision-making.
Tokenomics elements boost token demand. Lockups are a good tokenomics game theory. The system pays token holders for locking tokens in contracts. Locking your Curve Protocol (CRV) tokens earns you cash on Curve. Holding tokens longer will boost your earnings. With significant incentives to stake CRV longer, stalkers have few reasons to unlock tokens.
Near Protocol: Example
Upclose to Protocol The Near Protocol’s native token, NEAR $3.32, has many potential applications, including protocol security, internal and external application resources and currency, and more. There will be a limit of 1,000,000,000 N AR tokens issued. The system has a predetermined yearly token issue of about 5% of the overall supply. Validators secure transactions, store, and compute with 90% of tokens as a reward. The network keeps inflation in control by burning transaction fees.
A solid grasp of tokenomics equips you with the essential ability to assess a crypto project. You may learn about the token market’s supply and demand from their documentation or white paper. After reading this, you should have no trouble understanding the team’s strategy for increasing token demand and making an informed decision about the token’s future.
When predicting a token’s value relative to fiat currencies, cryptocurrencies, or the US dollar, tokenomics is critical. By analyzing the data, you can see if the developers have thought outside the box regarding token distribution or have merely followed the herd. To further increase the investment’s worth, choosing projects with strong tokenomics is crucial.