The term “tokenomics” consists of two words: token and economy. It is the name of the science involved in studying and designing economic systems based on blockchain technology.
Harvard psychologist B.F. Skinner was the first to put forward the idea in 1972. He believed a token economic model could control behavior. Giving some unit of recognizable value would incentivize positive actions and vice versa.
Now the object of tokenomics is the work of cryptocurrencies, starting from token creation through management, and sometimes removal from a network.
What are the aspects tokenomics examines?
Tokenomics intends to answer the following questions:
- What is the main purpose of the token?
- How does it function?
- What are the token’s use cases?
- How is it governed and distributed?
The knowledge of tokenomics helps to evaluate the merits of a particular project.
A newly developed token will have success only if the team standing behind it exploits tokenomics rules. At its fundamental level tokenomics studies a cryptocurrency’s token metrics, such as total supply and the way tokens are distributed.
For any platform, various metrics influence the crypto asset value. The goal of tokenomics is to study all kinds of these metrics. The key to long-term project success is the right use of the metrics. Among these metrics are:
- Hard cap: the total sum of tokens or fiat currency necessary to launch a token project completely
- Soft cap: the total sum of tokens or fiat currency needed to start functioning with a minimum viable product (MVP)
- Total token supply: Limited number of tokens that a project can ever issue
- Flowing supply: the number of tokens that have been released and are presently reachable on the market.
- Identification of token price: This is the process of calculation to define the price of a single token.
What is a token and how does it work?
Crypto tokens are programmable digital units of value that run on a distributed ledger protocol such as a blockchain. One specialty of tokens is that they don’t have their own blockchain but operate on an existing blockchain, which can be public or private. Tokens can only be reached with the private key for the address holding them and can only be authorized via this private key.
Tokenization allows converting any asset into a digital token.
Tokens are mainly built, distributed, and traded via the standard initial coin offering (ICO) process which involves crowd raising. They may express fungible (with equal rates) or infungible units (each unique is special) of value through money, coins, points, digital items, or symbols of real-world physical items and rights.
The main purpose of tokens is to exchange value and develop similar to money in the traditional economic system. So, tokens have a functional value depending on their use in the particular network. They also have a speculative value connected with the impact of token trading on the exchange of cryptocurrencies. It is usually based on a purely technical analysis of price valuations.
In the centralized financial system, financial authorities are the ones who determine the values of currencies. In tokenomy, anyone can define a form of value by creating a token on a blockchain. Tokens represent any form of valued resource within a P2P network. There is a wide range of tokens: energy tokens, food tokens, transport, social, and much more).
Types of tokens
Token classification can be done on a different basis, taking into account its purposes, utility, legal status, underlying value, or technical layer. At any rate, one token can fall into several classes at the same time. For instance, Ether is considered as a native, hybrid token as well as cryptocurrency.
Below are the introductions of some classes based on their purpose:
User tokens or app coins are utility tokens. One of their use cases is to raise funds in an Initial Coin Offering or Initial Public offering. Afterward, they can be purchased for a good or service. Most utility tokens are built on Ethereum’s ERC20 standard. These are the most popular types of tokens.
This category appeared due to regulatory issues. Security tokens generally represent a share in the company which created them. They are minted or issued.
As a whole, a security token is an investment contract that indicates legal ownership of a physical or digital asset like real estate, exchange-traded fund, and others.
These types of tokens are regulated by the government.
A dividend is the distribution of some of a company’s earnings to a group of its shareholders, which is determined by the board of directors. Dividend tokens offer to earn passive income through the investment in a project as the value appreciates or by mining or getting regular dividends from the issuer.
These tokens give their holders an ownership share in the issuer’s capital, pretty much as stocks do. They are an alternative for startups, which can allow investors to take part in the control of the blockchain and voting rights. So, investors are involved in the progress of the blockchain network. They get rewards depending on the company’s performance. Equity tokens are mutually interchangeable.
Developers create these tokens to allow token holders to vote on a protocol’s decisions, thus impacting its development. The community can change even the whole governance system.
One well-known example of a governance token is Maker. This token allows its holders to vote on decisions on the DeFi protocol that the stablecoin DAI runs on.
Here are mentioned only a few categories. Actually, there is a much wider range of token classes with more innovations yet to come.
Good knowledge of tokenomics is the key to the success of any project in the crypto industry.
Once a token it is created, there are no ways of changing its structure. The creation of a token decides the future of the whole project, so it’s crucial for individuals and companies to cooperate with the experts in this field before launching a token!