Tokenomics -3 W’s of a Good Token Economy
The dawn of 2021 witnessed a rise in Blockchain and DeFi Development. With a wide array of Cryptocurrencies being crafted, Tokenomics is becoming popular to define the math and incentives governing crypto assets.
What is Tokenomics?
The term Tokenomics is a portmanteau of two words “Token & Economics”. It refers to a token’s quality and anything that can impact the value of the token. Tokenomics involves everything from the asset working to the psychological or behavioral forces affecting its value for the long term.
Tokenomics is a crucial aspect of the Crypto ecosystem enabling projects to prevent bad actors, create trust and construct a strong system.
Why is Tokenomics Important?
Tokenomics helps projects create micro-economies, enabling them to decode how tokens ought to work within the ecosystem to become self-sustaining.
Tokenomics enables teams to design adapt to a prevailing model or design a new model that matches the project’s aims.
Tokenomics has integrated the incentive structure into the crypto tokens.
Tokenomics helps to calculate the value of the token deriving improved decision-making for investors.
Which are the Key Metrics of a Good Tokenomics?
Distribution and Allocation of Tokens
The distribution of a token is one of the primary factors to decide the Crypto token’s worth. The allocation and distribution of a token is decided by the executive team during the initial stages of launch. The tokens can be created in two ways which are, pre-mining and Fair Launch.
Fair Launch depicts Cryptocurrencies are mined, owned, earned, and governed by the community from the outset. Pre-mining refers to creating a portion of coins and distributing them before it is launched publicly.
Teams working on tokens can also receive awards for their work enabling investors to get insight into the valuation of the project based on the money raised at the early stage.
When it comes to Crypto Tokenomics, the supply of a token becomes an important parameter here. Token Supply has 3 types- circulating supply, total supply, and max supply. Circulating supply depicts the number of Cryptocurrency tokens issued publicly and are in circulation. Total Supply refers to the number of tokens that exist currently, subtracting all the tokens burned. The max supply is defined as the maximum number of tokens that can ever be created.
The market capitalization of a token depicts the entire volume of funds invested in the Cryptocurrency Development projects so far. Market Capitalization also termed market cap is a metric that determines the popularity of the token. The market capitalization is calculated by multiplying the circulating supply with the current market price of a token. Being a good indicator of the token value, the market cap also enables checking the fully diluted market cap of a project. It is a theoretical market cap for the max supply of a token that is already in circulation. This scroll down to a better idea of token value calculations post token development.
The lower the circulating supply and the higher the token’s market cap, the token will have more value in the future.
The Token Model
It is crucial to understand if the token is inflationary or deflationary. An inflationary token is similar to fiats where there is no max supply and is created as the goes on. A deflationary token model is defined to be the opposite of inflationary token development since deflationary tokens have a max supply the token is capped at.
Most of the proof-of-stake tokens like ETH are inflationary to reward the validators and delegators across the network. There are a few Crypto tokens having a dual token model, where one token can be used for funding within the system while the other is a utility token.
Tokenomics identifies the importance of studying the consequences of price stability. Cryptocurrencies are volatile and this might not always fall in the favor of the investors. These fluctuations might cause networks to be restricted and so the investor should ensure the project can fight these variations.
To stabilize the token price, make sure there are an adequate number of tokens to match the supply levels. Tokenomics enables developers to stabilize the prices through equilibrium.
Combining the two words “Token & Economics”, Tokenomics depicts the token’s value and the factors that impact the value of the token. Hopefully, the above article has enlightened your knowledge on Tokenomics, its importance, and the key factors of a good Tokenomics.
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