Kamran Asghar

Key Takeaways

Tokenomics refers to how a cryptocurrency’s economic model is designed. It describes the factors that impact a token’s use and value.

This can include things like the token’s creation, supply, distribution, key features, reward systems, and token burn schedules.

For crypto projects, well-designed tokenomics is critical to success. Assessing a project’s tokenomics before deciding to participate is common practice among investors and stakeholders.

Introduction 

Since Bitcoin kicked off the cryptocurrency revolution in 2009, the market has grown wildly, spawning thousands of tokens. One of the things that determines whether a crypto project thrives or fails is its tokenomics—that is, how its token’s economy is designed and managed. 

In other words, tokenomics brings together ideas from economics, game theory, and blockchain technology to set the rules for how tokens get made, spread around, and used.

Tokenomics at a Glance 

Tokenomics (a blend of the words “token” and “economics”) covers the economic factors that define how a cryptocurrency works. This includes how many tokens (or coins) exist, how they’re launched into the market, what they can be used for, and the incentives designed to motivate users and maintain the network’s health.

This is similar to how a central bank implements monetary policies to encourage or discourage spending, lending, saving, and the movement of money. But unlike traditional money controlled by central banks, most crypto tokens operate transparently using blockchain and smart contracts.

Key Elements of Tokenomics

Token supply

Max supply: This is the total number of tokens that will ever be created. For example, Bitcoin’s cap is 21 million coins. After the 2024 halving, Bitcoin’s mining reward lowered from 6.25 to 3.125 BTC per block, cutting the pace at which new coins enter circulation. Mining the last bitcoin is expected sometime around the year 2140.  

Circulating supply: How many tokens are currently out in the market, accessible to users and traders. The amount can go up or down based on minting new tokens, burning existing ones, or tokens locked away in vesting schedules.

Inflation vs. deflation: Some cryptos, like ether (ETH), don’t have a fixed limit but use mechanisms like burning fees to manage token issuance and keep inflation in check. Others, like BNB, intentionally burn tokens regularly to reduce supply and potentially push prices upward.

Token utility

Token utility refers to the use cases designed for a token and the different roles it can play inside its network. These often include:

Buying services on a network or paying gas fees, such as how ETH works on Ethereum and BNB on the BNB Chain.

Voting on how the network should evolve, like governance tokens that give holders a say in protocol decisions.

Locking tokens (staking) to help validate transactions and earn rewards (typical of Proof of Stake networks).

Representing ownership or shares of real-world assets, such as security tokens tied to stocks or real estate.

Knowing a token’s utility offers clues about how much demand it might have and how it could grow.

Token distribution

Aside from supply and demand, it’s important to look at distribution. How tokens get spread out when a project launches can impact how decentralized and stable it will be in the medium and long term.

There are two main types of token distribution:  

Fair launch: No private pre-sales or early allocations; tokens are made available to everyone at the same time. Bitcoin and Dogecoin were launched this way. This method helps ensure fairness and decentralization.

Pre-mining or pre-sale: Some tokens are set aside for founders, investors, or institutions before the public launch, as seen with many altcoins. While this helps fund development early on, it can concentrate ownership and increase the risk of large holders affecting the market.

Generally, you want to pay attention to how evenly a token is distributed. A few large organizations holding an outsized portion of a token are typically considered riskier.

You should also look at a token’s lock-up and release schedule to see if a large number of tokens will be placed into circulation, which often puts downward pressure on the token’s value.

Incentive structures

Good incentives are what keep networks secure and participants motivated. For example:

Bitcoin’s Proof of Work model rewards miners with both newly minted coins and transaction fees, encouraging them to keep processing blocks even as rewards shrink over time.

Proof of Stake lets validators lock tokens to earn the right to confirm transactions and get paid; if they cheat, they lose their stake, encouraging honest behavior.

Both models are designed to reward honest participants, which helps maintain the network healthy and secure.

In addition, there are DeFi platforms that offer interest or token rewards to users who lend, provide liquidity, or contribute to the project’s growth.

The Evolution of Tokenomics

Since Bitcoin’s simple but groundbreaking design, tokenomics has become far more diverse and complex. Early models focused on simple emission schedules and rewards. Today, projects experiment with dynamic supply policies, custom governance models, algorithmic stablecoins, NFTs, and tokenized real-world assets. Some may succeed; many will fail. And Bitcoin remains the most reliable and trusted model.

Tokenomics vs. Cryptoeconomics

Tokenomics and cryptoeconomics are related concepts, but not exactly the same. Tokenomics refers to the economic framework of a particular token or cryptocurrency, covering the aspects we discussed above: supply, allocation, utility, etc. 

In contrast, cryptoeconomics takes a wider approach by examining how blockchain networks use economic incentives and system design to maintain security, encourage decentralization, and support network operations.

Closing Thoughts

Tokenomics is a fundamental concept to understand if you want to get into crypto. It’s a term capturing the major factors affecting the value of a token or coin. 

By looking at supply dynamics, use cases, distribution, and incentive models, you can better judge whether a project is likely to succeed or not. No one factor tells the whole story, but having solid tokenomics is an important first step toward long-term success and network growth.

Further Reading

Game Theory and Cryptocurrencies

Bitcoin Halving Date: What Happens to Your Bitcoin After the Halving?

What Are Real World Assets (RWA) in DeFi and Crypto?

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Breaking:

New Bitcoin Token Overtakes WBTC on Avalanche

Fed Hints At Pause After Another 25bps Hike

Tether To Continue Buying Bitcoin With Profits

USDT Issuer Held $1.5B Of BTC As Of March 31

By: Owen Fernau 23 hours ago

Tether To Continue Buying Bitcoin With Profits

After its latest attestation report revealed that it was holding Bitcoin in the portfolio backing crypto’s largest stablecoin, USDT, Tether is doubling down.

The company said on May 17 that it would direct up to 15% of its operating profits towards purchasing Bitcoin.

“Tether’s decision to hold Bitcoin is in line with our strategic approach to diversifying our reserves and ensuring their stability,” Paolo Ardoino, the CTO of Tether, told The Defiant. “I would like to emphasize that Tether has no plans to sell its Bitcoin holdings.”

He added that Tether’s excess reserves exceed its Bitcoin holdings, which positions the company well in terms of stable growth.

Tether already owned $1.5B worth of Bitcoin as of March 31, equivalent to roughly 52,600 tokens. If consolidated into one wallet, that would make the company the world’s thirteenth-largest holder of Bitcoin, according to BitInfoCharts.

A major caveat of that ranking is that a single entity can control multiple Bitcoin addresses, making it difficult to determine how much of the digital asset anyone really holds.

Ardoino clarified to The Defiant that Tether had been holding a “significant” amount of BTC in many previous quarters and didn’t acquire the entirety of its stash in Q1 2023 as some on social media suggested.

Sam Kazemian, the founder of Frax Finance, thinks Tether is making a good move by continuing to acquire BTC.

“I think it's extremely smart for stablecoin issuers to put some of their profits (not collateral) into digital assets,” he told The Defiant over Telegram. He added that Frax accumulates ETH, but might buy BTC as well if holders of the project's FXS token vote to do so.

Trillion Dollar Opportunity

Kazemian believes that stablecoins are a huge opportunity in the crypto space. “I think the top stablecoin issuers will be the next Apple, Amazon, and Google of this generation,” he said. In line with Kazemian’s prediction, Tether said in a May 15 post that its Q1 profits exceeded those of established companies like Netflix, Starbucks, and PayPal.

Tether has been enjoying increased profits because interest rates have been rising since March 2022. The company owned just over $53B in U.S. treasury bills as of March 31, a record high. Higher rates have meant that Tether is raking in profits from its fixed-income holdings.

Kazemian sees stablecoin issuers as being win-win businesses if they’re able to reach scale. “If the economy is doing well and rates are low, their investments and their tokens increase in value,” he said. “If the economy is in a recession and rates are very high, they simply get paid by the U.S. government.”

To be sure, Tether has more than its share of detractors — the company isn’t registered with the SEC, John Reed Stark, a well-known cybersecurity expert and lawyer, highlighted on Twitter. This means that the company doesn’t have to adhere to the strict US reporting standards. As such, the reports about Tether’s BTC holdings, as well as assets and liabilities, don’t constitute a full-fledged audit, Stark said.

Despite its increasing dominance, Tether has been embroiled in various legal battles over the years – in 2021, the Commodity Futures Trading Commission ordered Tether to pay $41M for misrepresenting the status of the reserves backing USDT. The Wall Street Journal also reported on the companies behind Tether using falsified documents and shell c

ompanies to gain access to bank accounts.

Early morning gains for the crypto were quickly erased in Thursday afternoon trading.

Bitcoin (BTC) tumbled back below $27,000, reversing its advance from a day ago as investors continued to weigh the ongoing debt ceiling talks in Washington, D.C. and the latest regulatory moves.

The largest cryptocurrency by market capitalization was recently trading at around $26,700, down 2.1% over the last 24 hours, according to CoinDesk data. BTC had challenged $27,500 Thursday morning, but a quick pullback early in the afternoon took the price down to nearly $26,400.

“Bitcoin is hovering near its recent lows as investors await regulatory clarity and whether Wall Street believes any use-case arguments will be made anytime soon,” Edward Moya, senior market analyst for foreign exchange market maker Oanda, wrote in a Thursday note. “This frustrating trading range has turned off many investors and if the crypto fundamentals don’t improve anytime soon, downward pressure could resume,” he continued.

Over $20 million of BTC futures were liquidated in the past four hours, with 87% of them being long positions, or bets on higher prices.

Ether (ETH), the second-largest cryptocurrency by market capitalization, followed a similar trend, down 1.6% to change hands at around $1,795 on Thursday afternoon.

which measures the overall crypto market performance, was down 2.2% on Thursday.

Equity markets closed higher Thursday afternoon, with a late rally pulling the Nasdaq higher by 1.5% the S&P 500 by 0.95%, and the Dow Jones Industrial Average by 0.35%.

“The Nasdaq and other tech-focused investments have played a little bit of catch-up” this year, he added. “At the same time, we're seeing bitcoin consolidating around [near] between $27,000 to $30,000 level.”

While some analysts argued that the debt ceiling debate could boost “safe-haven” assets such as gold and bitcoin, Tapscott said he’s not convinced that BTC’s price will go up in the event of a government default.

Bitcoin’s 2024 halving cycle

While the market wavers during these debt ceiling talks, Ninepoint Partners' Tapscott suggested that investors will soon be pivoting their attention toward BTC’s 2024 halving cycle that “typically precedes a bull market in crypto.”

Messari Research Analyst Sami Kassab told CoinDesk in an email that when examining price charts from the last three halvings – 2012, 2016, and 2020 – “it becomes apparent that bitcoin has consistently entered a bull market within 12-18 months prior to each halving event.”

#Binance #BTC #crypto2023 #bullmarket