What are tokenomics in Blockchain?
Hello Developers 👋,
If you are a crypto enthusiast you might have heard of the term tokenomics. In this article, we will be discussing tokenomics in blockchain as mostly all projects based on a blockchain needs to take care of tokenomics to become successful project.
What is Tokenomics?
Before understanding the tokenomics around blockchain first let’s understand what a token is. A token is nothing but a digital asset built on an existing blockchain that can be used for different purposes on blockchain like for utility, governance, security, etc. we will take look at it later in this article.
Now we know what is token, let’s see what tokenomics is. The word “Tokenomics” is derived from Token and Economics, which means the study of principles and mechanisms of how crypto or tokens are managed and organized in a project. In the blockchain, Tokenomics is also referred to as crypto-economics.
Why Tokenomics is important?
Blockchain-based projects need to have strategic tokenomics built around the project as it determines the success of a project. Tokenomics is one of the aspects of the project that will impact supply and demand.
The primary Supply metrics are:
Circulating supply is nothing but the total number of cryptocurrencies available in the market to trade for ordinary people like us. The circulating supply keeps fluctuating in the market. Also multiplying the circulating supply with the current market price of that crypto coin you will get the market capitalization of that token.
Maximum supply is like hard capping to the token, it is the number of tokens that can ever exist in the crypto market for a particular cryptocurrency. Only deflationary coins have max supply and inflationary coins do not as they have no limit to token generation.
Total supply is the number of tokens that are in circulation and out of circulation but it does not include the burned or destroyed tokens.
Types of Tokens
In the crypto market, lots of tokens exist but all of them are not the same. Here are some primary major types of cryptos used in the crypto market.
1. Cryptocurrencies or Payment Tokens
Cryptocurrencies are also referred to as payment tokens as they act as a medium of exchange for payment purposes similar to fiat currencies. One example of a payment token is Bitcoin(BTC), though bitcoin is not as much used in daily life payments due to its slow speed of transactions. Gradually people are adopting cryptocurrencies for payments in daily life for the exchange of goods and services as the speed of transaction is tackled using the lightning network in bitcoin.
2. Governance Tokens
Governance tokens are tokens that are issued to the holders which give the right to vote for changes in smart contracts of the protocol or the project. Governance tokens are important for defi projects to maintain the decentralization factor of the project. One of the popular governance tokens is the Maker Price Today(MKR) token of the MakerDao protocol which allows holders of the MakerDao to vote for proposed changes in the protocol.
3. Security Tokens
Security tokens give the ownership of the platform to the investors and derive the value of the token from physical assets that can be traded. Security tokens are like equity shares but tradable on the crypto market.
4. Utility Tokens
Utility tokens are backed by the project which allows token holders to use the services provided by the project. Sometimes utility tokens also can be used as governance tokens as they also allow token holders to vote. Ethereum has Ether as its native token which acts as a utility token for Ethereum projects, you can pay gas fees using ethers on the ethereum mainnet.
5. Privacy Tokens
For standard cryptos, we can see the transactions happening on the blockchain explorer as it is transparent to the public. But in the case of privacy coins or tokens are privacy-enhanced from their blockchain so that nobody will come to know who did what transaction, it remains hidden for everyone. One of the well-known privacy coins is monero.
6. Non-Fungible Tokens
Non-Fungible tokens are very famous as the hype of NFTs in the crypto market is very high for multiple reasons. NFTs are tokens that can not be replaced like other tokens. Every NFT is a unique asset and that’s why it holds some value in it. NFTs also certify the proof of ownership as it is unique and associates itself with the id that is held by the address who owns that NFT. For example, a piece of art like Monalisa’s painting can be digitally minted as NFT.
7. Wrapped Tokens
Since the two different blockchains can not communicate by default, it is difficult for users to transfer assets from one blockchain to the other blockchain. Wrapped tokens solve this problem by wrapping the tokens on one chain in a 1:1 ratio and locking the tokens on one chain and providing the wrapped tokens on the other chain. Wrapped tokens are like stablecoins, as stablecoins maintain the 1:1 ratio to the fiat currencies, wrapped tokens maintain the 1:1 ratio with the assets on the main chain. One of the classic examples of the wrapped token is wBTC which is the tokenized version of BTC.
Token Economic Models
Where the quantity of tokens is hard capped, or the number of tokens that can exist is limited, for example, Bitcoin (BTC) is categorized, as a deflationary model.
Where the amount of tokens is not hard-capped, or the number of tokens that can exist is infinite(No hard-cap) such as Ethereum (ETH) is categorized as an inflationary model.
When two distinct tokens, such as Theta Network (THETA) and Theta Fuel, are utilized on a single chain (TFUEL), one for governing the protocol and the other for utilizing services on the protocol.
Where the token is backed by an asset like Gold or fiat currency.
Whitepaper: A whitepaper is a document that describes a project’s goals and operations. A cryptocurrency’s whitepaper serves as a manual for its technology, features, and objectives. It’s goal is to present the project to a fresh group of potential users and sponsors.
Lightpaper: A light paper is a piece of writing that outlines the design of an application. This kind of documentation must be simple to read and comprehend for non-technical group members as it also serves as general guidelines for developers.
Yellowpaper: A yellow paper is defined broadly as work that hasn’t yet been officially acknowledged; it explains the technology or study that is being examined.
Tokenomics is one of the important pillars to be considered for building a successful project around blockchain technology. Tokenomics of the project gives an overview idea about how the project is strategizing its roadmap to proceed and how the fundamental working of the project is being built by developers and the community. So always consider looking at the tokenomics of the project while analyzing the project.
I hope you enjoyed reading this article and learned the basics of crypto tokenomics.
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