What is Tokenomics?
Tokenomics is a prominent term that has recently developed in the decentralized finance ecosystem. Most organizations seem not to be left out of the bandwagon, as they invest heavily in this community. Even the most prolific small-scale investors want to grab a portion of the so-called crypto projects.
This digital asset field developed after the rise of the DeFi kingdom to answer questions relating to over 20,000 virtual assets extending towards vast solutions in the improvement and opening of new markets of the cryptocurrency society. In this article, we will look at the actual definition of tokenomics, where it is used in crypto and NFT projects, and some of its examples.
What is Tokenomics?
Tokenomics is a mixture of two words, token and economics, which refers to a crypto project’s supply and demand features. In layman’s language, the given denomination explains the practical applicability of a token in economics. The term covers all the aspects of cryptocurrency generation, management, and at times the evocation of the network. It also takes accountability for the attributes, issuance, distribution, and other characteristics.
Let’s look at a crypto token; in a nutshell, it is a minor branch of virtual currency created by cryptocurrency projects on top of an existing blockchain network. Similar to any time of currency (fiat or virtual), digital tokens hold a pegged value and are often considered to be exchangeable. Concerning Economics, it helps find how token economics is distinct from traditional economics.
Cryptocurrency projects have algorithmically and pre-determined issuance schedules for the tokens. Predicting the number of circulating coins at a specific time is more accessible. There is also the consideration of the distribution of coins among different stakeholders in advance to avoid implications in the ecosystem. Altering the issuance distribution plan and issuance schedule can be possible; however, the process is regarded as hard to implement.
Tokenomics is considered an essential concept to consider while making decisions in investments. This is because the ability of upcoming projects to purchase and hold tokens for an extended period will likely prosper more than the one that hasn’t constructed environs around its tokens. Platforms that are well created regularly make higher demands over time as new investors flock to the project, boosting prices.
Types of Tokens
There are different unique types of tokens; here are some to look at:
Security Tokens
These are the representations of the actual universe securities that are an investor’s contractional relationship, having an organization majorly based as a creditor or a shareholder. In this case, the security token confirms and is tied to the actual world asset based on the value. For example, when a security token represents $1 million of an estate, the Token is pegged at a value identical to the asset (estate). It can be sold at that price, no matter the market price.
Security tokens have had massive battles between vast crypto projects and the Security and Exchange Commission(SEC). The problem is the system withholding these projects’ nature from being switched. For instance, the SEC charged Ripple for taunting XRP without registration as a security token.
Governance Tokens
Governance Tokens permit users of specific blockchain protocols to vote for future development. The governance project confers power or voting rights to the user as they can make changes to the protocol. In the very end, it makes the Token to become a success. The fungible and Non-fungible tokens also fall under this category.
Utility Tokens
These tokens are utilized to access services of a particular application in a blockchain ecosystem—utility tokens reward node operators for validating or staking transactions and securing contracts and data. A good example is a LINK.
Platform Tokens
These are tokens that permit participants to access services on specific platforms. Platform tokens have similar features to utility tokens. The distinction exists where utility tokens are seen as flexible and are utilized to access services along the operating protocol.
Where is Tokenomics Used in Various Crypto and NFT projects?
Tokenomics is applied in crypto and NFT projects with some effective utility in vast areas. These tokens are used as airdrops. This is a promotional aspect that a virtual-based startup performs to boost the digital currency. The aim is to create awareness concerning blockchain-based projects and acquire people to trade them when they are listed on digital exchanges, an ICO (Initial Coin Offering).
Additionally, it is used in staking. Crypto projects can trap token Participants into holding on to their tokens for some time. This is done by permitting them to acquire staking rewards in helping to secure a crypto network. This process can be utilized in cryptocurrency and Non Fungible Tokens allocations because it is the distribution of the particular tokens that can be earned, purchased, or kept aside for a specific participant, group, or team. Users are encouraged to continue partaking in building activities.
Now and then, the crypto and NFT market acquire inflationary stations or periods; this is where tokenomics comes in with Token burn ideology. The idea is to burn out some additional tokens from the ecosystem to maintain an equilibrium of circulation, helping the token price develop over time.
Non Fungible ad crypto omics can also help in the liquidity or yield farming pools. Yield farming is the process that enables token holders to lock their tokens for rewards. The process is considered to reduce the supply of excessive tokens in the digital society, maintaining a steady supply and demand and avoiding inflation and deflation.
Examples
Bitcoin
Bitcoin was produced by a mining process where individuals utilize their computers in transaction verifications and are awarded bitcoins in return. At the moment, the digital currency circulation is 19,164,612.5. The tokenomic programmability of bitcoin is known as halving. A program that is created to issue scarcity hence increasing the demand, skyrocketing the crypto market
Ethereum
Ethereum‘s tokenomics is a little bit different from that of bitcoin. Their circulation is moderated because the original tokens were pre-mined and introduced during the launch. Therefore, via the proof of stake(POS), validators acquire tokens as they mine (2 each) each ETH token. Those using node computers to validate via another blockchain (uncle block) are given 1.75 tokens as a reward.
Dogecoin
Dogecoin contains issuance that is merely less than that of Bitcoin and Ethereum. The token supply is considered unlimited. During the 2021 period, the digital currency coin supply was estimated to be 131.13 billion.
Tokenomics is a concept that various investors should [partake in learning about the cryptocurrency ecosystem. The term has played a vital role in the decentralized finance ecosystem, bringing stability to the digital universe. The process can also be utilized in traditional financial systems to maintain a steady flow of the government. In some cases, tokens that are kept tp wallets and cannot be retransferred bring an imbalance to the supply and demand, as the supply will be less; hence high demand causes a flight in prices.