What is tokenomics?
Tokenomics is a new term in the world of cryptocurrencies, which has been formed by the combination of two words “token & economy”. Tokenomics deals with all details related to a cryptocurrency such as its creation, distribution, burning or removal, and supply of a cryptocurrency.
Tokenomics generally involves all information as to the process of pricing (determining the value) and all things which affect the value.
Why is tokenomics important?
Because cryptocurrencies aren’t governed by any laws or regulations, tokenomics opens up an opportunity for people to get a clear view of the benefits of a token and its future. For example, by looking at a project’s tokenomics, people can get a good analysis of a cryptocurrency’s development and usage in its own network.
A practical tip before making ready tokenomics
An important fact that needs to be taken into account is that a precise business plan should be provided before working on the study of token economics.
Tokenomics makes predictions about the future of a cryptocurrency in the market. If this prediction doesn’t come with a thorough analysis and proper evaluation of the token/coin’s network and the market vision, it is highly probable to be incorrect. For instance, the estimated profit could be less than the real profit in the market due to the fact that the market isn’t desirably large or the liquidity isn’t strong enough.
The following are the aspects that tokenomics deal with:
Types and functions of the token (Utility, Security, Governance, Platform and Transactional tokens)
Utility token: It works as an integral part of an existing protocol and provides access to the services offered by the protocol.
Security token: It represents the ownership of an asset (physical or digital).
Governance token: It is basically used to fuel a voting system that is based on the blockchain.
Platform token: It supports dapps (decentralized applications) that are built on the blockchain.
Transactional token: It is used in payment for services and goods.
It includes use cases of the token and the anticipated mechanisms for distributing rewards to the participants. For example, stakeholders are willing to hold the token for a long time since they know there will be use cases and advantages of holding the token.
It describes the details of distribution over time. A schedule is designed which inform the investors of the release amounts in the future. For instance, if a token doesn’t have a limited and specified supply and unlimitedly distribute token every day, it will be highly improbable for the token to increase in value in the future, which is not interesting for investors.
It has to do with the fact that who is the decision-maker in the blockchain network. In the decentralized landscape, the one who holds more tokens than other participants in the network has more votes to make a decision on a specific issue.
Standard of measurement
To make a perfect tokenomics, it is highly important to scrutinize the metrics that have effects on the token’s value. Meanwhile, it is necessary to identify use cases of the token.
While working on the metrics, the following main information should be included:
Total Supply: The maximum number of cryptocurrencies or tokens that can exist or be issued. This total number includes tokens that are in circulation in the market and those which have not been minted or have been reserved for the future.
Circulating Supply: The number of tokens that are available in the public market and can be traded.
Price: the pricing of the token in different rounds of sale such as private sale and ICO.
Public sale: As its name suggests, a certain number of tokens are offered to the public for a period of time. These tokens are usually sold at a discount.
Private sale: It is available for some specific investors, meaning that there is no usually public announcement for this type of sale. Sometimes, blockchain companies invite some particular investors to invest in their projects, and in return for the investment, the company offers some advantages such as a considerable discount.
Market capitalization: The token price multiplied by the circulating supply.