Tokenomics

The increasing popularity of cryptocurrency as an investment has led to the discussion of “tokenomics” in the crypto world to refer to the economics of cryptocurrency projects. It explores the creation, management, and circulation of digital tokens within the blockchain network. 

It’s essential to understand this term, as tokenomics has a direct impact on the utility, value, and potential of digital assets, reshaping the future of decentralized finance (DeFi).  

Read on to learn about what is tokenomics in crypto and tokemonics examples to evaluate the crypto project’s and token’s potential success and determine whether it’s a good investment for you.

What is tokenomics in crypto?

With the advancement and development of the digital landscape, tokenomics serves as a key element in assessing the potential value, long-term viability, and overall success of crypto projects. It’s a combination of “token” and “economics”, describing the overall structure of crypto projects. In other words, tokenomics refers to the economic models governing the way tokens are created, distributed, and managed within the blockchain ecosystem (or crypto project). 

Tokenomics involves various factors, such as how tokens are issued and their utility to the incentives for token holders. So, the main questions the term “tokenomics” strives to answer are related to the way crypto tokens are used, what factors can impact their value over time, etc. 

Fiction news: Jennifer Lawrence made headlines after revealing she bought her latest luxury mansion with Bitcoin earnings.

Cryptocurrency tokenomics explained: key elements

Before explaining crypto tokenomics, let’s refer to the definition of the crypto token. 

It’s a digital currency operating on a blockchain network- a public ledger of transactions, offering decentralization, security, and transparency. (as we previously discussed in our article “What is Blockchain?”)

The crypto token issuers determine its tokenomics, designing the token’s main features and how it works. 

Here are the main elements of tokemonics in crypto:

Supply

Supply and demand are considered essential factors influencing the price of goods and services. This is true about cryptocurrencies as well. There are certain metrics used to measure the crypto token’s supply. 

• The first one is known as the maximum supply, referring to the maximum number of tokens that will ever be created (or exist) within a particular crypto project, for example, Bitcoin offers a maximum supply of 21 million coins, whereas BNB - 200 million. You should also be aware that not all tokens have a maximum supply, for instance, Stablecoins such as USDT and Binance USD. In other words, these cryptos are created based on the reserves that back the coins, and in theory, they may continue growing without limits.

On the one hand, when there is a fixed supply limit, it impacts the inflation, as well as the value of a digital token. It’s possible to control inflation more efficiently, when the token supply is limited, as new crypto tokens won’t be issued beyond the predetermined maximum supply. This leads to scarcity, which may increase the crypto token’s value because users know the exact number of tokens that will ever exist or be created. On the other hand, when the crypto token supply is unlimited, it may dilute the value of existing crypto tokens that are in circulation. 

• The second one is the circulating supply - the number of crypto tokens in circulation. That’s to say, it’s the portion of crypto tokens that are currently liquid but may be theoretically sold or purchased at the market.

Distribution

The distribution is another important component of tokenomics, describing the way crypto tokens are initially allocated and exactly how these tokens will be distributed to different stakeholders over time.

The majority of crypto projects are associated with the category of pre-mined tokens. This means the founding team issues crypto tokens and sells some portion of the supply to early investors, aimed at fundraising to be able to build the product. Among popular pre-mined tokens are Solana (SOL) and Binance coin (BNB). 

A properly structured issuance process is crucial, as it serves as a key to developing a sustainable foundation for the crypto project. 

To achieve long-term success and prevent extreme volatility, the following instruments are usually used to structure an efficient tokenomics:

Vesting

Usually, vesting schedules with certain lockup periods are used, aimed at early sell-off prevention and token price stabilization. This allows for gradual access to tokens over time. 

Staking

When a crypto token is staked, it’s removed from circulation, fostering scarcity and potentially impacting the price as well. With staked tokens, investors gain voting rights in certain systems, allowing committed stakeholders to have more impact on the crypto project’s direction. 

Airdrops

Crypto airdrops refer to sending coins or tokens (mostly for free) to various wallet addresses to promote the project’s visibility and awareness. It’s an effective way of distributing crypto tokens more naturally and avoiding any possible regulatory problems. 

Initial Coin Offerings (ICOs)

The Initial Coin Offering (ICO) refers to a fundraising mechanism used in the crypto industry, allowing those who are interested in the crypto project to acquire tokens issued by the company. In simple terms, it’s the first sale of crypto to the public, aimed at raising funds.

Mining

The process of verifying transactions and adding them to the blockchain network is known as mining. Miners use special software and hardware for adding cryptocurrency transactions to the blockchain network. They solve complex mathematical problems to verify these transactions and receive rewards in the form of newly minted tokens.

Utility

The token utility is the specific purpose (or use) of the token within its ecosystem. Crypto tokens may serve various purposes, from acting as a medium of exchange or storing a value to granting users access rights to particular features. 

In addition, a good token utility is in line with the crypto project’s goals, brings genuine value, and promotes user participation, while a bad token utility has a forced and speculative nature, lacking a clear function. 

Here are more details and examples to help you understand the difference:

Good token utility

1. Access rights

Tokens may grant users access rights to specific features (or services) within the platform. One of the examples is the Basic Attention Token (BAT), which enables advertisers to make a payment for the ad space, as well as user attention just within the Brave browser ecosystem. 

2. Governance

You can acquire voting rights with certain tokens and take part in the decision-making processes related to the platform, for example, MakerDAO's MKR token allows for voting on different proposals determining various policies concerning the platform.

3. Staking

In some systems, tokens are staked for transaction validation and new block creation on the blockchain, increasing the security of the network, for instance, Cardano’s ADA token. 

4. Fee reduction

With tokens, like Binance’s BNB, you can pay trading fees at a lower rate. 

Bad token utility

1. Forced token usage

There are crypto projects requiring token usage to access certain services or features that inherently don’t require a token. This happens, for instance, when a platform makes users utilize their own tokens without providing any added value.

2. Unnecessary utility

When a crypto token’s utility is completely overlapping with another one within the same ecosystem, but there is no clear purpose. This creates confusion among users.

3. Overcomplex utility

The user-friendly nature of tokens is a priority. When a crypto token’s use case is too complicated and makes users take multiple actions, it can have a negative impact on adoption rates.

Incentives 

The incentive mechanism is pivotal for Tokenomics and acts as a driving force to motivate more participants to engage in desired behaviors within the ecosystem. Such mechanisms typically use a mix of principles related to psychology, economics, and game theory to offer rewards to those users who contribute to the further growth and prosperity of the network. 

Staking is a popular example of an incentive mechanism, allowing users to lock up a certain amount of crypto tokens as collateral to take part in the processes connected with the validation and decision-making within the network. In return, they receive rewards and this promotes long-term commitment and strengthens the security of the network. 

Among other methods are: a) offering rewards to miners or transaction validators for securing the blockchain network and b) allowing crypto holders to create extra tokens through providing liquidity to DeFI protocols (it’s known as yield farming). So, yield farmers can use different borrowing and lending strategies to increase their returns on their crypto holdings. 

Tokemonics examples

Blockchain-based crypto tokens have transformed the way both individuals and businesses conduct fundraising activities for their crypto projects and how they build online communities. Dive into several tonemonics examples:

Ethereum (ETH)

  Source: Quadency

Token distribution

The 2nd largest crypto by market capitalization- Ether (ETH), was pre-mined for early insiders and finally, in 2014 it was sold to an international audience via the initial coin offering. 

Token utility

ETH is a crypto that mainly acts as a means for paying transaction fees to move digital assets on the network of the Ethereum. 

Supply

ETH has no maximum supply, as the supply of the token is designed to constantly increase at a controlled pace. New crypto tokens come into circulation with the expansion of the network. 

Moreover, Ethereum developers have been focusing on the deflationary ETH supply recently, as a new transaction fee-burning mechanism was introduced aimed at controlling inflation. The goal is the creation of an environment where the portion of ETH that is burned is larger than the newly created coins.

Uniswap (UNI)

Source: Uniswap

Token distribution

Uniswap issued its token, known as UNI in 2020. Airdrop was used to distribute a significant amount of tokens to early adopters, whereas another allocation was focused on the liquidity mining programs for alluring more users.

Token utility

UNI mainly acts as a governance token, enabling the users to impact the protocol’s development process and receive rewards from trading fees. UNI holders have the opportunity to participate in decision-making by making proposals, as well as voting on essential changes related to the protocol.  

Token supply

The Blockworks research reveals that the total supply of UNI tokens is 1 billion. These tokens were minted at genesis and were accessible over the course of four years.

Vone (VONE token) 

Vone is a Web3 communication platform that reshapes and enhances digital interactions by leveraging blockchain technology to provide complete anonymity and increased data security. 

VONE token is the platform’s native token, used for different in-app transactions. Furthermore, users acquire unique Vone numbers that serve as their decentralized and authentic identities. Also, they can rely on the integrated AI assistant (ANI) to help them deal with their daily tasks and boost their productivity. 

The VONE token’s economic design is based on transparency and innovation, offering a secure and beneficial experience for all the participants.

Source: Vone’s whitepaper

Token distribution

Vone is conducting the ICO of VONE tokens to offer benefits and exclusive opportunities for early investors, who can buy VONE tokens using the following cryptos: BNB, BUSD, USDT, as well as ETH and GLMR. 

During the first phase of the ICO, the token price will be  $0.22, in the 2nd phase-$0.24, and in the 3rd phase-$0.28. The linear vesting period for all the phases will be 24 months, ensuring stability when it comes to the VONE token’s release and preventing any possible market saturation. This promotes a healthy ecosystem for all the participants. 

Furthermore, VONE token’s liquidity pool is constantly boosted by 10% of each Vone Number sale, providing growing liquidity, stability, and long-term value for investors. 

Token utility 

VONE token refers to a cryptocurrency built on the Binance Smart Chain network. It powers the Vone ecosystem and has comprehensive utility, enhancing user engagement, driving value and demand.

With VONE tokens, users can buy/sell products and services within the platform’s ecosystem by initiating instant peer-to-peer transfers. These tokens aren’t just digital assets, but form an integral part of the Vone app, allowing users to access premium features, such as buying unique blockchain identities.

Token supply and security

The total supply of VONE tokens is one hundred million. Vone prioritizes the security of VONE tokens, by basing the platform on blockchain technology to ensure increased security and privacy, which is essential to safeguard VONE tokens and secure a wide variety of features within the Vone app. 

Wrapping up

We hope you already have a clear idea of “What is tokenomics in crypto?” and can make an informed evaluation of the crypto token’s potential value, adoption, and future prospects. You need to consider various factors, ranging from the design and distribution of tokens to their utility and governance mechanisms.