What Is Tokenomics?
Tokenomics, short for ‘token economics’ is an umbrella term used by cryptocurrency enthusiasts to describe how a token is used inside the project ecosystem, or how the token will follow a monetary policy as the project grows over time. As a result, the word tokenomics encompasses a wide range of activities and notions, some of which are hard-coded into the protocol of a blockchain and others that are more speculative in nature.
Tokenomics covers every important aspect of a digital token. The three main roles of tokenomics are as follows:
Fundraising
The tokenomics of a project determine how many funds it would raise when it is launched for the general public, the type of currency used for funding, and the schedule of distribution of tokens to the initial investors. This is also where an understanding of Initial Coin Offerings (ICOs) becomes important, where a project provides its initial tokens on specific criteria to a set number of investors to gain early capital at lower rates.
Determining the Level of Governance of Holders
Governance comes under the tokenomics section, as the holders of the project tokens on the blockchain have voting powers which they can use to voice their opinions about the digital token project. Important decisions can be made by token holders, such as project features, direction, and token economy changes, among other things. All of these decisions are outlined in the tokenomics section of a project.
Ownership of the Digital Asset
Digital assets are used to signify the ownership of a crypto project. It is a common practice for many crypto projects to announce the allocation of their token supply in their official whitepaper.
Tokenomics allow holders and potential investors to understand the distribution standards of a token and judge the potential of an increase in the token’s price in the long run.
The main difference between a traditional economy and tokenomics is that the latter is designed for the world of decentralized cryptocurrencies, while conventional economics is built on multiple events of history and human behavior of a particular country. While many centralized institutions control the traditional economy, tokenomics gives the power back to the people, as they decide how a cryptocurrency project should be governed.
A major example of tokenomics is Bitcoin (BTC). The world's largest cryptocurrency is designed to mint only 21 million bitcoins in total. After regular intervals, miners are rewarded for their efforts accordingly. However, the number of rewarded Bitcoins has significantly reduced over the years, and this is exactly where tokenomics come into play, as they are designed to create scarcity and promote the price appreciation of a digital currency.
Tokenomics should be considered when investing in any cryptocurrency as they control the demand and supply of a token, which directly impacts the price. Here is a complete guide to understanding Tokenomics in detail: What Is Tokenomics?
