Latest news about Bitcoin and all cryptocurrencies. Your daily crypto news habit.
By Emmanuel Sunday
Tokenomics is coined from these two words "Token" and "Economics," it refers to the factors that surround the existence of a token. These factors will either encourage people to accept the token or cause them to ignore it. The introduction of any new token comes with the tokenomics that govern that asset. Usually, before the release of the asset, the tokenomics is drafted in a white paper. This white paper is a sizable document that explains what the presented cryptocurrency will do and how it and any fundamental technology it has will work.Â
If any project ever piques your interest, new or old, the next step is to study its tokenomics. If you ever think the value of an NFT will appreciate, a stablecoin will remain stable, or a DAO is worth joining, the first thing you need to do is to justify that thought by understanding the tokenomics of the particular project.
Before launching a project, the team will make it a duty to thoroughly examine the tokenomics of their native cryptocurrency. Failure to do this will make the project overlooked by quality investors and the success will be questioned. Any project with well-designed tokenomics is more likely to see more days than a project that hasn't built a secured ecosystem around its token.
This is why the theory of tokenomics cannot be underrated. About DAOs, if they're built the right way, they'll gradually translate into higher demand and attract a strong influx of members to invest with the DAO's token. As a result, prices will be boosted.
What is a token?
Several definitions of this term will smile at you as you find your way around every blockchain-centered project on the net. A lot of people (especially newbies in the Defi space) use it interchangeably with a coin thinking it has the same meaning but well, they are not the same. And for clarity's sake, we'll have to dissect them because this is confusing for some people.
Using an analogy from an everyday scenario, let's say you want to start a new business in a new town. Among your prioritized needs is housing. You need an address where your business operations can be done. And for simplicity's sake, you are to pick one of two options; to either rent or build.
If you want to quickly get things started, your best option is renting. You use what another person has built and provided you can afford the rent, you can run your business in that particular building. Of course, you'll have to follow their rules and regulations as well. That is what you would call a Token in the Defi world. Tokens are crypto assets running on an already existing blockchain. You simply use a blockchain created by another project and pay fees for it.
The other option as already mentioned is to build. That means you'll need enough resources, materials, and human capital to erect the structure, and this would take time and cost more money as different elements have to be put in place. When you get all this done, you own your house and you get to set your own rules and rent out vacant rooms for a fee. Of course, you'll still pay utility bills like power, water, and others, which we can liken to gas fees on your blockchain. The execution of gas fees puts misuse of resources in check and makes abuse expensive since gas fees have to be paid for transactions to continue. That is what you'd call a coin. Coins are crypto assets running on their blockchain.
How Are Tokens Used?
Tokens in the DeFi space do have more than one use case and regularly, new use cases are created. But we'll be digging into the 5 most important ways in which they can be used.
-
OwnershipÂ
A token can signify your ownership and can be used to grant access to a DAO— think of it as stocks in a company. Token holders are given voting rights to influence the future rules and decisions made toward improving a project. Simply put, the more tokens you own, the more influence you have in the governing affairs of the DAO.
-
UtilityÂ
All DeFi projects have special use cases. Utility tokens represent access to a product or service and are used to remunerate miners or minters of tokens. The Ethereum gas fee is a good example.
-
Value ExchangeÂ
The value accrued by a DeFi project can be exchanged, and tokens are used internally and externally to carry out this feat. These protocols grant tokens that perform several functions but can also be traded and held like any other cryptocurrency.
-
Benefits DistributionÂ
The importance of tokens in equally distributing the value of a project as it appreciates cannot be overstated. They are the standard mechanism that allows owners of a token to share in the upside of a protocol.
What is tokenomics?
Delving fully, tokenomics is classified as the study of choice under scarcity specific to DeFi projects and the art of token economy. It is an essential analytical practice in building and understanding the potential value of active DeFi projects like DAOs by considering all aspects of a token’s creation and management including its supply, allocation, and distribution. As the law of supply and demand is fixed, tokenomics' impact on the value of every type of token-based project is largely significant. It has proven to be the best way to determine the merits of a project.
If token-based projects can profitably wield tokenomic principles to scale a group of communities, the chances of those tokens reaching maximum success are high. This owes to the fact that it fully encompasses the most important aspects of a token's growth in value— the total supply of tokens and how they are distributed. In exploring tokenomics, both token issuers and members of the communities should be adept with the structure. Tokenomics terms provide key indicators of success for a project and crucial info for any member.
Simply put, what tokenomics uses to define token economies are:Â
- The motives that determine how the token will be distributed;
- The use case of the tokens that influence its demand.Â
Supply and demand have proven to have a strong impact on price increase or decrease over time, and if projects get it right with incentivization, there'll be a remarkable surge in value.
What Tokenomics should look like in DAO 2.0
These fundamental piers of tokenomics make up every token in DAO 2.0 and should be thoroughly analyzed by prospective members before deeper dives are made into their economics. If any design flaws are picked up on any of these piers, it signifies that the foundation isn’t as solid and the DAO structure may encounter problems and face turbulence in the future.
Allocation and Distribution
Every tokenomic analysis should begin with the allocation and distribution of tokens. The distribution is the percentage of the total supply that each member's wallet holds. Think along the lines of: are they pre-mined, or is the launch fair?
If it is a pre-mined token launch, the investors, developers, and members of the DAO are granted tokens before the offering goes public. There’s nothing particularly bad about pre-mined projects. We can say it has now become a common practice and many successful projects have had pre-mined launches. However, it is consequential that investors avoid tokens where a huge percentage of the supply is hoarded by one or a specific bunch of wallets as the project has become centralized. Things could go wrong and these whales may incur a bad reputation for the token.
If the launch is fair, there'll be no early access to tokens and there are no secretive allocations before the token's launch. This is an excellent distribution design and an indicator that the project is on solid footing as no persons get to hold a larger amount of the token. This ensures that it’s distributed fairly among many individuals. A good means of checking the distribution of a token is by studying their whitepaper for the token allocation chart and reading the distribution among wallets on any blockchain explorers.
Token Supply
As I've previously mentioned, the law of supply is fixed, so when evaluating the potential value of a token, these types of supply should be considered.
-
Circulating SupplyÂ
This is the compound number of tokens in the market less than those that have been burned.
-
Maximum SupplyÂ
This refers to the highest number of tokens that can ever be mined or minted by a DAO. In NFTs, every token is unique. Crypto tokens like BTC have a maximum number, but others such as ETH do not.
-
Total supplyÂ
The number of tokens that have been given, including burned & locked-up tokens, is the total supply of the token.
Before buying a DAO's token, you should compare the total and max supply to the circulating supply. If the circulating supply is lower than the total and max supply, the value of each new token that gets into circulation is likely dissolved. This can be thought of as token inflation, where each token becomes less scarce as new ones enter the market. If the circulating supply and max supply have close proportions, this is a good pointer, but just the second factor to be put into consideration.
Market Capitalization
The market capitalization or Market Cap is the total of all invested funds. The fully dissolved market cap, if the maximum available number of tokens was in circulation is a key indicator of a token's value. Say a token has a high market cap and a low circulating supply, there'll likely be an increase in value over time.
Monetary Policy
A monetary policy tells whether a token is inflationary or deflationary and at what cost. High inflation can cause the asset price to depreciate over time, and a low inflation rate can lead to a healthy and productive ecosystem. By offering rewards in yield farming and by selling off the DAOs treasury assets, there can be resulting inflation of tokens. These actions aren’t harmful when minimal and should be monitored as a case of overuse may be.
Note that there is an existing synergy between the interactions of these fundamental piers in determining how well-designed the tokenomics are. Having an opinion about a token from just one of these piers does not complement the big picture and is not ideal in any decision-making process involving tokens.
Author Bio
My name is Emmanuel Sunday. I am an independent journalist and content strategist who takes full advantage of crux journalistic and marketing theories to tell unique stories. While I've covered stories across Finance, Marketing, Tech, and Gaming, I like to think I speak fluent Crypto. Here's my Twitter handle: @jamesabuchi2000
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.