What is tokenomics. What basic elements the economic model of cryptoprojects includes
Before making investment decisions, you should consider many different factors that can affect the value of a cryptocurrency asset. A fundamental element of almost any cryptocurrency is tokenomics, a term that refers to the economic model of the project.
What is tokenomics
Tokenomics (token and economics) is an economic model of a token that takes into account the interests of project participants, including the team, investors and users, as well as the mechanisms and schedule of coin distribution.
Tokenomics can be compared to the economy of a state or enterprise, where tokens act instead of money and resources. Skillful use of existing resources and planning to create demand for cryptoassets in the future plays one of the key roles in the viability of the project. And inefficient decisions regarding the economic model of the project can ruin even the most advanced platforms.
Tokenomics is a general concept that combines many different elements, which include the mechanisms of cryptocurrency issuance and their utilization or utilitarianism, the distribution of cryptoasset among project participants.
Tokenomics is usually laid down by the project developers before the token is launched. And the blockchain technology underlying almost every crypto project allows any willing market participant to check the economic model of the project online and at any time. This is different from the economics of a conventional enterprise, where an outside observer has no way to assess the inner workings of an organization in this way.
Issuance
One of the main elements of tokenomics includes the issuance of cryptocurrency. It determines how much, when, for whom, and how cryptocurrency is created or withdrawn from circulation.
For example, bitcoin has a strict limit on the maximum number of coins - 21 million BTC - and the rate of issuance is programmed to gradually decrease every four years. And the creation of new BTC coins is available only through mining on specialized devices. There are also no bitcoin sales and early investors to whom coins were sold before launch, nor is there a development team that is allocated a portion of the coins from the total BTC supply.
Ethereum, on the other hand, sold ETH before launch as part of a fundraising effort to develop the blockchain. Unlike bitcoin, ETH has no limit on the number of coins in circulation, but has a built-in ETH burn mechanism that permanently removes some coins from circulation. Ethereum's economic model also requires blockchain cryptoassets to create new coins - this type of issuance is called staking.
The mechanism of issuance is important to evaluate in the aggregate. Even limited issuance, as in the case of bitcoin, without demand for the cryptoasset will play no role. So, for example, even if an asset is limited to a supply of 1,000 units of cryptocurrency, the price of the asset needs demand to rise, i.e. users buying it on the open market and using it for some purpose. Conversely, even those cryptocurrencies that do not have a strict issuance limit can grow in price due to high demand that exceeds supply.
Uses and motivations
The next equally important element in tokenomics is the utilization options of the crypto asset. In the case of bitcoin and Ethereum, their utility is that both BTC and ETH are used to pay all transaction fees on the network.
They also serve as a reward for the network node operators who are responsible for performing all transactions on the network. With the development of the crypto economy, these assets have also been used to pay for various goods and services and as an investment tool, which is also an element of utility.
In addition to the applied use of tokens, projects offer various bonus systems for their users or even the opportunity to participate in the management of the project.
For example, token holders of the Optimism blockchain network (OP) can participate in voting on the development of the platform and put forward their management initiatives. And as an incentive, the OP team distributed 19 million tokens, or about $25 million, for voting activity.
Distribution
The next data to consider when researching crypto projects includes the distribution of assets among investors and other project participants. In recent years, almost all major crypto projects have been launched thanks to raising capital through fundraising in the early stages of development even before the release of their own cryptocurrency.
Thus, at the time of cryptocurrency creation, the project distributes a significant portion of it to early investors, development advisors, team members, and other participants. Since the intentions of these groups can be quite different, potential sales of their assets can put pressure on the price.
In this way, the ownership by any of the participants of large amounts of the project's crypto assets carries significant risks to the price. As an example, the trend is low float, high FDV, which means low circulating supply with high fully diluted value.
Practically, this looks like, for example, issuing 10% of tokens at the start of trading and unlocking the other 90% over the next few years. In this case, due to the small volume of tokens at the start, it is easier to keep the price of the asset at a conditionally high level. If a token was able to reach $1 billion capitalization at 10% of the supply, the next unlocked 10% of the total supply will automatically increase the capitalization to $2 billion.
But the market may not be able to withstand the sale of such a volume of new tokens, and the price will go down. As Ari Paul, founder of the investment company BlockTower, pointed out, the market needs a huge amount of new money every day to keep prices stable.
Qualitatively thought out tokenomics does not guarantee the growth of the asset price, but it increases the probability of success of the cryptoproject. After all, the project's robust economic correlations can lead to high demand for the crypto asset in the long run. These core elements of tokenomics are important to consider along with a host of other metrics and characteristics of crypto projects.
