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What Is Tokenomics And What Role It Plays in the World of Cryptocurrency?

Friday, February 18, 2022

Startup Jedi

We talk to startups and investors, you get the value.

Want to know what tokenomics is? In a nutshell, this is something that everyone willing to work with cryptocurrencies needs to know about. Check out our article with Founders Club insights for more detail. We talked about tokenomics as concisely as possible, yet making sure we are not missing out on anything important. And even though the topic is relatively new, it is definitely worth talking about!

What is tokenomics?

Tokenomics is the economy of cryptocurrencies. It describes fluctuations in supply and demand for different types of cryptocurrencies; studies the mechanisms by which this new market develops and describes the rules that determine the path of development of the tokens of each currency.

Tokenomics can be considered part of the economy — and just like the term "economy", the term "tokenomics" can have two meanings:

  • The science that studies the laws by which the world of cryptocurrencies operates.

  • The process of movement (growth, scaling, value) of different cryptocurrencies and the entire set of cryptocurrencies as a whole.

A little about the key element of tokenomics:

Token is a unit that performs the function of securities in the digital world. A token is a material expression of some value within a certain ecosystem.

In fact, tokens are an analogue of a currency in the physical world, but with an important difference: the issuance and cost of currencies are controlled by states, while cryptocurrency allows the issuance of tokens —  the currency of the digital world —  to any person or organization. This is where blockchain technology comes to the rescue.

Tokenomics is the key to the fundamental analysis of cryptocurrencies; it is a system of knowledge that helps decompose the chaotic movement of cryptocurrencies into a clear chain of causes and effects.

Tokenomics answers both the theoretical basic questions:

  • How do tokens interact with exchanges and individuals?

  • How many tokens can there be in the world in 5-10 years?

  • How is the release of cryptocurrencies regulated?

…and specific questions about certain currencies:

  • Why do we need this digital asset and what is its value?

  • How stable and reliable is this or that network?

  • How many more tokens can be issued and sold?

Therefore, tokenomics is very useful for those who are going to perform any operations with cryptocurrency: invest, trade or create — it allows you to assess how successful manipulations with these tokens will be.

Signs of good tokens

The prospects of a token are determined by the following factors:

  • usefulness in the overall ecosystem;

  • potential scaling;

  • presence on real exchanges and markets;

  • sufficient cost;

  • resistance to inflation.

How are tokens distributed?

Each project issuing tokens must take care of the possibility of distributing coins among potential users. Otherwise, the cryptocurrency network will not grow, and therefore, will not be able to become a full-fledged currency.

Cryptocurrency creators use different methods to distribute tokens:

  • Working with miners: they, acting as cryptocurrency validators, receive a reward in the form of newly created coins.

  • ICO (initial coin offering) is the sale of coins to users.

  • Distribution of coins as a reward for certain actions.

Each team managing a cryptocurrency project must develop the rules by which tokens will be created and distributed, as well as establish a control system. Each project competes for the volatility of its currency, ensuring that there are enough coins to secure supply.

Without clear rules and control, the network will attract speculators who will start selling and buying coins en masse, knocking down the rate.

Why is tokenomics important when investing in cryptocurrency?

Tokenomics matters for each of the parties involved in the circulation of cryptocurrency:

  • For crypto project teams, it helps develop the rules that determine how the cryptocurrency network will spread and grow.

  • Expert economists — to identify patterns in the operation of the cryptocurrency market.

  • Buyers of tokens — to know the principles that will help you make the right choice and ways not to make a mistake when buying coins.

Tokenomics in action

Bitcoin. The ecosystem of distribution of tokens in the oldest cryptocurrency is designed in such a way that the flow of tokens can enter the network through a reward for a block verified by a miner. Before a miner can access the coin reward, another 101 blocks must be confirmed.

Ethereum. Initially, as part of the distribution of cryptocurrency, about 7 million tokens were sold through an ICO in 2014. Now the token network is expanding in many ways.

Throne. Here, the cryptocurrency is managed through a decentralized decision-making system; the number of tokens added to the network is determined by automated mechanisms in order to ensure maximum stability of the currency.

What to expect from tokenomics in the future?

Now the cryptocurrency market is at an early stage of  development. Unlike the smooth and gradual development of the money exchange system, which is several millennia old, the cryptocurrency ecosystem is developing at a breakneck pace —  thanks to the Internet, blockchain and the ability to create your own currency for any person or organization. This process looks quite chaotic, and the laws of tokenomics are still being formed.

The future of digital currencies is still vague: some experts believe that cryptocurrency, together with blockchain technology, will be able to completely replace the existing monetary system, taking over its functions, while others are inclined to think that it will become part of the global economy.

In a broad sense, tokenomics helps to streamline this chaos in the cryptocurrency market, deducing from the current movement of various projects the rules by which everything will work.

In a narrow sense, tokenomics is a tool for investors, miners and creators of crypto projects, an opportunity for them to increase the chance of success in operations.

***

Tokenomics has a great future, and we will see it develop in the coming years. And you can not only watch, but also actively participate in the development of cryptocurrencies (of course, not forgetting about risk diversification —  the first rule of investors).

We hope that after reading this article you will be interested in taking the opportunity!

18 Feb 2022

 

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