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What is Tokenomics?

Blockchain protocols and cryptocurrencies can be valued in multiple ways but a project’s “tokenomics” and value capture are front and center to the discussion. Crypto tokenomics refers to the economic principles and design of a cryptocurrency or token. It includes the total supply, distribution, and use of the tokens within a blockchain network or ecosystem. Tokenomics can also include the way in which tokens are created, distributed, and used to incentivize network participation, such as through mining or staking rewards. It plays important role in the overall design and functioning of a blockchain or cryptocurrency project.

Crypto tokens are digital assets that can represent ownership or decision-making power within a blockchain network or ecosystem. Tokenomics, also known as token economics, is the study of how these tokens are created, distributed, and used within a project. It includes the total supply, distribution, and use of the tokens within a blockchain network or ecosystem. Tokenomics also include the way in which tokens are created, distributed, and used to incentivize network participation, such as through mining or staking rewards.

A well-designed token economy can help a project grow by creating a positive feedback loop where the value of the tokens increases as the project becomes more successful. However, the success of a project ultimately depends on the strength of the product or service being offered.

Tokenomics can also be affected by changes in the distribution of tokens, such as the shift from initial coin offerings (ICOs) to more professional investors having a larger share of tokens.

In addition, tokens can also be used for governance, allowing holders to vote on important decisions for the project. However, the lack of clear regulations and best practices for tokenomics can create challenges for established companies. They have to navigate the uncertain regulatory environment and exploit risk from new tokenomic models, and greater visibility of these firms keeps them trapped in the status quo.

Aspects of Tokenomics

• ​​What kind of asset is it? Store of Value, smart contract gas token, privacy currency, utility, meme, collectible, security, governance/voting, staking, IOT, etc? 
• Initial supply and allocation to team, investors, community, and other stake
• Methods of distribution including token purchases, airdrops, grants, and partnerships
  • Who decides how tokens get distributed?
  • Does distribution improve the coordination or ultimate goal of the project?
• Is the token sufficiently distributed?
  • Intotheblock.com
• Unlocks (https://token.unlocks.app/) and vesting periods?
• Revenue split between users, service providers, and protocol
• Treasury size, structure, and intended uses
• Emission schedule including inflation, mint/burn rights, and supply caps
• Coin governance including voting, escrow, stake-weighting, vesting, and gauges
• Miner and validator compensation such as fees, emissions, and penalties
• Usage of protocol’s native tokens versus external tokens (e.g. ETH, USDC)

Issuance/monetary policy

• l2fees.info: Cost of L2 chains compared to ETH L1
• MoneyPrinter.info: Issuance rate of protocols
• Revenue/fees stats
• Stakers.info: tool tracking the validator count for several blockchains.
• Staking Rewards: data provider for staking and growth tools.

For DeFi protocols

• Token Terminal Revenue: Top dApps and blockchains based on cumulative protocol revenue.
• Token Terminal P/E ratio: Top dApps and blockchains based on lowest P/E ratio.
• Token Terminal P/S ratio: Top dApps and blockchains based on lowest P/S ratio.
• Token Terminal TVL: Top dApps based on total value locked.

A different way to measure “profitability” https://parpu.0xatlas.com/

Resources for further reading

• Grayscale report on Tokenomics Dec 2022 
• More tokenomics - https://twitter.com/officer_cia/status/1570208171259568128
• Intro to tokenomics - https://docs.google.com/document/d/1gTPIQMLVcv_OQ8flblVTCWWfrGadQNxZXNZTvDh6iKA/edit