What are Tokenomics?

Tokenomics, or portmanteau of ‘token economics’, is the science of token economy. It’s used as an umbrella term to describe all aspects related to digital tokens, from their use in blockchain project ecosystems to their role in monetary policies and blockchain protocols.

Unlike the traditional economy, tokenomics concern solely the economy of decentralized assets – cryptocurrencies. There is no single centralized system of tokenomics. Project developers allow the users to determine how the different crypto projects should be governed. This differs significantly from the control and regulations that apply to the traditional economy.

Bitcoin (BTC), the first cryptocurrency in the world, set the precedent for some of the tokenomics standards. For example, the max supply of BTC is capped at 21 million, and miners receive rewards as they continuously produce new coins. Due to the process of halving, the amount of cryptocurrency, that miners receive as rewards, regularly decreases.

This process is an example of digital scarcity, a process created by tokenomics to progressively increase the value of the cryptocurrency.

Investors are highly recommended to take tokenomics into consideration before making crypto investments since the price of the tokens is directly affected by the supply and demand.

There are three main roles of tokenomics – fundraising, governance, and ownership.

Fundraising

Predictions of how much financial support a new crypto project can raise via fundraisers upon launch is an integral part of tokenomics. Using tokenomics, developers can determine what type of cryptocurrency may be the most advantageous to fund the project and what the optimal distribution schedule is.

Tokenomics is important in understanding fundraising methods like initial coin offerings (ICOs). During ICO campaigns, developers distribute the initial tokens to investors based on specific criteria to get a headstart on gaining positive capital at lower rates.

Governance

Governance describes the mechanism used by decentralized autonomous organizations (DAOs). Members of a DAO receive governance tokens which they can use to vote on any changes to the blockchain protocol, submit their own suggestions, and otherwise participate in the governance process.

Ownership

Users demonstrate their ownership of crypto projects by holding specific digital assets. Developers can outline the process of token distribution in the whitepaper before enacting it during the initial coin offering and throughout the lifespan of the token.

Tokenomics established the standards of token distribution. Investors and token holders can rely on the principles of tokenomics to analyze the potential price changes of the token based on market trends.