What is tokenomics?

What is tokenomics?

by Weld Money admin
01.08.2022
·
min read

Every investor, crypto enthusiast, or any crypto bro has at least once seen the term tokenomics. Let’s together get things a bit clearer and discuss what is indeed tokenomics and what are key features of it.

The term “tokenomics” consists of two words – “token” and “economy”. Essentially, tokenomics is based on the general principles of supply and demand for tokens. With a deeper dive into the topic, we can talk about other key parameters of the token – its functions, purpose, and distribution.

A little about the key parameters

  • Usually, all tokenomics principles of a particular project are fixed in the whitepaper.
  • The total amount of tokens is the maximum number issued within one project. Ethereum (ETH) does not have a maximum number of tokens, but Bitcoin (BTC) circulation is limited to 21 million, which is expected to be mined in 2120.
  • The number of tokens in circulation is the total number of tokens issued to date.
  • Market capitalization is the value of one token multiplied by its number in circulation.
  • Fully diluted market capitalization is the product of the price of tokens by all of their number that has ever existed.

Distribution of tokens

Each project decides how to put the tokens into circulation. 

For example, some projects distribute their tokens as a reward to miners and validators. Others open the sale of tokens during the ICO – the initial coin offering. Some ecosystems run test programs for their project to monitor and, if necessary, improve the performance of their network. As a result, users participating in testing receive project assets as a reward. Another way to distribute tokens is to reward users who have “frozen” their assets.

Monetary Models

Inflationary

The inflationary model of tokens releases more and more batches of tokens without any restrictions. Such a model resembles the scheme used, for example, for the United State dollar (USD). As long as dollars continue to be issued, consumers have reduced purchasing power, and because of this, the token’s value may decrease.

Deflationary

Here the project itself sets a limit on the creation of tokens. Bitcoin, for example, uses a deflationary model as it is capped at 21 million tokens. Every four years, the BTC mining rate decreases (a phenomenon known as “halving”). The limited supply naturally supports the token’s demand, hindering inflation’s growth.

Double-token model

In this case, there are two separate tokens on the blockchain. When a project uses one token as a financial value, the second one is used to achieve the project’s goals. This usually separates the economic component of the project from its services. An example of such a model is MakerDAO. In the MakerDAO ecosystem, the Maker Token (MKR) functions as a governance token, while DAI is a stablecoin pegged to the US dollar.

Asset-backed

Such tokens are pegged to other assets and valued based on their exchange rate, usually the dollar exchange rate. These are, for example, BUSD, USDT and USDC.

Fighting inflation

One of the most widespread anti-inflation events is token burning. Some blockchains or protocols “burn” tokens – permanently remove them from circulation to reduce the number of coins in circulation. According to the laws of supply and demand, a reduction in the supply of a token should help support its price as the remaining tokens in circulation become increasingly scarce (a deflationary model). 

For instance, in August 2021, Ethereum began burning some of the tokens sent as transaction fees instead of handing them over to miners. Thus over $5.7 billion in ETH was burnt.

Weld Money native token WELD has a deflationary model. We have spoken about it in more detail here and here.

Weld Money admin
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