The true role of tokenomics in a crypto project
Are you used to hearing about the "tokenomics" of a crypto project and wondering what it is or why it matters?
Today, it's your lucky day: you've stumbled upon the right article. So read on!
"Tokenomics," what is it?
A contraction of "token" and "economics," tokenomics is a key element of fundamental research on a crypto project. It defines the business model of a token. In other words, it describes the factors that influence the use and value of a token:
đ creation and distribution,
đ supply and demand,
đ incentive mechanisms,
đ programmed destruction of tokens, etc.
A well-designed business model is essential for the success of any crypto project. And before investing, it is necessary to evaluate its business model.
The business model at a glance
Like banking systems, blockchain projects design rules around their tokens to encourage or discourage certain actions from their users. Here, I use the word "token" in a broad sense, referring to both coins and tokens. I will return to their difference in a future post â so subscribe so you don't miss it!
Moreover, unlike fiat currencies, the rules of tokenomics are generally coded, thus transparent, predictable, and difficult to modify.
đ Example: The total supply of Bitcoin is pre-programmed never to exceed 21 million units. Its business model also includes the design of transaction fees, paid to miners for each validated block. Simple, transparent, and ingenious.
Key elements of a business model
Here are the main factors to examine:
Token supply
Supply and demand are the main drivers of price, including in cryptocurrencies.
The key indicators here are:
the maximum supply (the total number of tokens that will exist)
the circulating supply (those already in circulation)
Analysis of token distribution
Besides supply, distribution is crucial. Institutions and individuals do not behave the same way.
đ Knowing who holds what gives you insight into potential market behavior.
It is also important to check the unlocking schedule (vesting). If a large quantity of tokens is about to be released, it could create selling pressure on the market.
Token utility
Utility defines the real use cases of the token.
đ Example: BNB is used to:
pay transaction fees on the BNB Chain,
access discounts on trading fees,
support ecosystem projects.
The more real and demanded utility a token has, the more robust its model is.
Consideration of token burns
Some projects regularly destroy tokens to reduce supply. This is the case for BNB. This can contribute to a deflationary effect.
đ Less supply = upward pressure if demand remains stable.
Conversely, an inflationary token sees its supply constantly increasing.
Incentive mechanisms
Incentives encourage users to contribute to the security or growth of the project.
Examples:
The block reward for Bitcoin miners.
Staking in proof of stake (PoS) blockchains, where validators lock their tokens to secure the network.
A good incentive mechanism creates a sustainable and balanced economy.
In conclusion
If you want to get into cryptocurrency, it is essential to understand tokenomics. It is important to note that no single factor is a magic key. Your evaluation should be based on as many factors as possible and analyzed as a whole.
Ultimately, the business model of a token will have a major impact on how it is used, the ease with which a network can be built, and whether the use cases for the token will be popular.