How can you determine if a project is a good investment or not? The best way to decide is to understand tokenomics.

What is Tokenomics?

To begin defining what tokenomics is first think of it like this: it's two words 1) token & 2) economics both put together to create the word "tokenomics".

Tokenomics relates specifically to a crypto project & refers to a crypto project's supply & demand & takes into account the economics of a crypto token such as issuance of tokens, token distribution & token supply.

Tokenomics is a Tool

Before making an investment decision, tokenomics is a valuable tool at your disposal.

Read the Whitepaper

Prior to the launch of a crypto project, they should have a corresponding document which is called a whitepaper & this whitepaper should provide an explanation of what the function of the proposed cryptocurrency is & how the technology works.

If a project's incentives to buy & hold cryptocurrency for the long-term are smart & well-designed this would indicate that the project should be likely to perform well. A well-built platform over time attracts investors & if a project attracts investors then this boosts prices.

On the other hand a platform that is poorly designed will find difficulty attracting investors, a poorly designed platform not only is likely to perform poorly, but, will act as an indicator that the project may not be a good investment.

Key Features of Tokenomics

A cryptocurrency's economic structure determines incentives which either will attract investors or repel investors.

Here are some incentives:

• Mining: base layer blockchains such as Bitcoin offer mining as an incentive. Bitcoin miners offer their computer or device power to discovering new blocks, filling them with data & adding them to the blockchain. Bitcoin mining is an example of individual Bitcoin miners, each miner offering their computer to form a decentralized network of computers (miners) who validate transactions & Bitcoin miners are incentivized with new tokens as a reward for offering their computer's or (smartphone or tablet) device's power to validate transactions.
• Staking: users who lock away a number of their tokens into a smart contract & as a reward earn new tokens, for instance, as an investor myself who has invested into the Sweat economy, I can decide to stake a certain number of my Sweatcoins & opt to lock away a certain number of Sweatcoins into a smart contract for 3 months, this means that I cannot access those Sweatcoins locked into a smart contract for 3 months, but for that 3 month period I grow the number of Sweatcoins I initially locked into the smart contract as I earn more new tokens as a reward for staking.
• Yields: high yields are an incentive for people to buy & stake tokens in liquidity pools. Liquidity pools are huge pools of cryptocurrencies which power things such as decentralized exchanges & lending platforms. Yields are paid out to users who have staked their tokens in liquidity pools in the form of new tokens as a reward.
• Limited & Unlimited Supply: Tokens such as Bitcoin have a cap on supply but Ethereum on the other hand have no limits to supply & Ethereum supply is unlimited.
• Token Burns: token burns are the permanent removal of tokens from the circulation of tokens. There is a law of supply & demand and according to this law the reduction of token supply helps support price, this is due to the remaining tokens that are in circulation becoming scarce.
• Token Allocations & Vesting Periods: oftentimes a specific number of tokens are reserved for venture capitalists or developers which they can in fact decide to sell, but only after a certain time which affects the circulating supply of tokens over time & a project's team should have a system in place for token distribution so that the impact to the circulating supply of tokens is minimized which minimizes the impact of token price.

Token Governance 

The majority of tokens are known as "governance tokens" meaning that token holders are handed voting rights to influence the future rules & decisions of a crypto project. In a publicly traded company governance is centralized & means that a group of centralized decision-makers call the shots & vote on how a publicly traded company is run, but members of the general public can hold stocks & are incentivized for the number of stocks they hold in the form of a monthly or quarterly dividend, but, do not have any voting rights. 

Simply put, a governance token is a share & a governance token holder is a shareholder & governance token holders have voting rights which enables token holders to vote on how the project is run & all these decisions are made at a protocol level, but without a CEO.

The founding developers will install most of the tokenomics into the computer code of a particular cryptocurrency.

Tokenomics Doesn't Always Run as Planned

I'm sure most will be acquainted with a quote: "Failing to plan is planning to fail" in other words, success must be planned, but in life the reality is nothing goes according to plan, I'm sure if you have your daily To-Do-List & enumerate six things to do for the day, very rarely do you have all those six tasks for the day checked off on that checklist before you go to bed, so why would tokenomics be any different?

Tokenomics doesn't always run according to plan & due to this there is the existence of hard-forking a cryptocurrency. Hard-forking is the process forcing a new tokenomic plan into existence when the original plan of tokenomics has failed. Hard-forking a cryptocurrency is the process of copying the codebase of a blockchain, then making a few non-backward compatible amendments & then finally migrating old cryptocurrencies & validators onto the new protocol.

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