While doing research on crypto projects, it is simply impossible to ignore such a phenomenon as tokenomics. The word itself comes from the two terms – "token" and "economy". You’ll often encounter this word in the Web3 space. But what is it and why is there so much noise around it? Let’s find out.
What is tokenomics?
For now, there is no exact definition of this concept. Some call tokenomics the science of the economics of tokens and the formation of their value. Others refer to it as a separate concept that companies develop to maintain the popularity of their token. They create an entire ecosystem around it so users will be interested in their token.
It is believed that the first wave of hype around the new project quickly vanishes, and a period of “silence” begins. If during this period the token managed to stay afloat, then, after some time, new investors might come to the project and the cost of the token may increase.
Tokenomics is almost the central object of study when working with cryptocurrency investments, in particular, when selecting potentially profitable crypto projects. It includes an analysis of the internal mechanics of a project: how and why certain processes are launched, for how long they will function, what is the estimated value of a crypto asset in a year, two, five, ten, etc.
Tokenomics tracks all processes associated with cryptocurrencies, such as:
- How many tokens are being produced now and how many more are planned?
- How will the distribution process occur?
- For what, how many, and to whom the tokens will be distributed?
Fundamentals of tokenomics: features and nuances
In order not to waste your investment, it is necessary to be able to evaluate the tokens themselves and analyze their economy. Proper research reveals the motivation system that encourages investors to buy or hold their coins. We list the main categories of incentives:
- Mining and staking
New tokens can be given to users as a reward for the mining or staking.
- Yield
Usually DeFi platforms take advantage of this incentive. They promise a high level of return to their clients, thus attracting new investments.
- Burning of tokens
This process helps to maintain the token price. When the first signs of the tokens oversupply on the market appear, developers quickly remove some of them from circulation. The remaining tokens become more rare, and their price will increase.
- Emission (limited and unlimited)
Tokenomics studies the maximum amount of coins that can be issued. For example, long ago it was determined that only 21 million BTC and not a coin more could be issued in the world. It should happen by the year 2140.
Of course, this does not mean that in 2140 the cryptocurrency will cease to exist. There are already more than a few hundred alternatives to Bitcoin. For instance, Ethereum and Solana do not have a maximum amount of coins.
Final thoughts
Who develops tokenomics models? Most often tokenomics are embedded into the protocol of a new project. So usually it is developed even before a new cryptocurrency enters the market. All the intricacies of the economic policy and ecosystem of the new crypto are displayed in a special whitepaper.
Tokenomics is an important part of research. It reveals the intentions of the company that is launching a new crypto. This is their plans for the future, their strategy. The study of tokenomics will help you navigate the crypto space, it is indispensable when analyzing a new project. However, that can be changed — there are no sanctions for violation of the projects’ whitepaper by the developers themselves. The project team is not obliged to follow the tokenomics settings. But if you can’t decide whether to invest in a crypto asset or not, studying its tokenomics will resolve this issue.
If you want to learn more interesting facts about crypto then check out our blog! You might like our articles “Ethereum Might Get Overloaded” and “What Is Formal Verification”.
