For a crypto project to survive, it must consider several factors. One of the most important things is to invest in advertising and marketing—which often involves getting your name out there via bounties, airdrops, community programs, influencer marketing, and more.
Another thing that crypto projects have to consider is having the necessary funding to build the architecture underlying their platform. Usually, this means hiring employees who are needed for that purpose. Crypto projects also tend to host different fundraising rounds to achieve this goal.
Crypto projects must consider assembling the best development team to design the architecture of their platform. Headhunting is a significant aspect of this process, as it helps find talented people who can work on the project.
The whitepaper is another crucial part of a crypto project as it communicates to outsiders the potential features of the platform. To learn more about a project, potential investors typically examine the content of a whitepaper.
When scanning through a whitepaper, a section that goes under scrutiny is tokenomics—the economics behind the token. Tokenomics can make or mar a project, so teams must pay close attention to this section when writing theirs.
This article examines the concept of tokenomics as well as its core elements.
TL:DR,
- Tokenomics is an important aspect of a cryptocurrency project, and it includes all the elements that define the economics of a token.
- Strong tokens all share the presence of utility as a common characteristic. A project’s tokenomics must include an outline of the token’s use cases within and outside its ecosystem.
- When designing excellent tokenomics, the team should incorporate systems that outline measures taken by the project to control the inflation rate.
- The token supply influences the token’s value, and it can be categorized into; maximum supply and circulating supply.
- The token burn rate should be specified in a project’s tokenomics. Some crypto projects have burn rates, meaning that some tokens are removed from circulation after a certain period to limit supply and boost market value.
- The tokenomics of a cryptocurrency project should clearly define the incentives for participation.
- When designing tokenomics, a project should consider and specify the system it will use to distribute its tokens, such as the pre-mining launch and fair launch.
What is Tokenomics?
Tokenomics is an important aspect of any cryptocurrency project. It includes all the elements that define the economics of a token. This aspect, in particular, plays a significant role in attracting outsiders to a crypto project.
Tokenomics includes features such as the token’s utility, the token’s goal, the token’s supply, the burn rate, the emissions schedule, and so on.
A well-designed tokenomics must consider ways to ensure that the project stands the test of time and rewards loyal members of the community, such as validators. A common feature of good tokenomics is rewarding early investors, which encourages more people to hold and use the token.
Second, good tokenomics should have great utility, meaning it should have some use cases in the ecosystem.
Third, when designing great tokenomics, the team should incorporate a system to keep the inflation rate under control. Scarcity is a key feature of cryptocurrencies with strong tokenomics.
Crypto projects tend to create their tokenomics to motivate or dissuade some actions by community members. Typically, a project’s tokenomics is incorporated into the architecture code, making it automated and transparent.
Tokenomics usually states the total supply of a token. In the case of Bitcoin, it is 21 million coins and 720 million tokens for AVAX. Another aspect of tokenomics is the reward system for miners or validators who verify transactions and safeguard the network, depending on the blockchain’s consensus mechanism.
Will the reward given to validators or miners remain constant in perpetuity, or is a system built into the architecture to reduce it gradually?
Clear explanations of reward systems should also be included in a project’s tokenomics. For instance, Bitcoin requires that the reward be halved every 210,000 blocks, progressively reducing the reward amount. The amount of BTC rewards distributed to miners will continue to decrease.
Apart from mining or validating transactions, another element that tokenomics should consider is transaction (gas) fees. Usually, transaction fees are paid by those who utilize a project’s features. Developers pay transaction fees for specific transactions, such as deploying a smart contract on Ethereum. In a scalable network, transaction costs tend to be affordable. In the case of Ethereum 1.0, which faces congestion, the transaction fees are higher.
What are the Core Aspects of Tokenomics?
Token Utility
Strong tokens have a common element, which is the presence of utility. A token must have utility or use cases inside and outside its ecosystem. Bitcoin was created as a means to facilitate seamless money transfers. Ethereum is the home of smart contracts and decentralized apps, and these utilities confer value on Ether, the native token.
There are different types of cryptocurrencies. The first type is the metaverse token. This type of token is used to purchase virtual assets like land, avatars, and much more. Their use cases are based on the metaverse.
Second, a cryptocurrency’s utility may be linked to governance purposes. In this case, the token is used to vote on proposed changes and submit proposals.
Third, a token may be a stablecoin, meaning its value is pegged to a fiat currency. Stablecoins are used as a hedge against the high volatility of the crypto markets.
Fourth, it may be a DeFi token, which acts as the key to unlocking access to financial services such as loans, exchanges, trading, farming, and much more without the need for intermediaries. While developing the tokenomics of a project, it is essential to pay attention to its use cases.
Token Supply
This list wouldn’t be complete without mention of the token supply.
Every currency, whether fiat or digital, must consider supply and demand.
According to fundamental economics, a high supply level will inevitably have a negative impact on an item’s price and, in this case, the price of a token.
This calls for careful monitoring of the token supply to prevent market saturation and a subsequent decline in value.
There are two main categories of token supply: circulating supply and maximum supply.
The quantity of tokens currently in circulation is indicated by the term “circulating supply.”
This number is based on the number of tokens minted during mining or token validation, the token burn rate, or another method of locking the token for a specific duration.
The maximum supply, which discloses the total number of tokens in existence, is the second factor. Some cryptocurrencies have a maximum supply, like 21 million for Bitcoin. Some coins, like Ether (ETH), do not have a maximum supply amount built into their architecture.
Burn rate
Some cryptocurrency projects have burn rates, meaning some tokens are removed from circulation after a specific period. In this case, the native token of the project is purchased from the open market and burnt. Burning means the tokens are sent to an address that can’t be used or accessed by anyone.
By incorporating this feature into their tokenomics, projects limit the supply of their tokens, increasing their scarcity and likely increasing their market value.
Token distribution
A project should consider the system it will use to distribute its tokens, such as the pre-mining launch and fair launch. In a pre-mining launch, a percentage of tokens are minted or created and made available only to a select few, not the public. In a fair launch, the tokens are publicly released and available for purchase by anyone, as there are no private allocations.
Incentive system
Tokenomics must clearly define reward systems for investors and community members to increase community participation. Investors often search for incentives before choosing to participate in a crypto project. The incentives provided must be sufficient to keep them involved in the project for an extended period. Validators and miners, for example, are rewarded with new tokens and transaction fees for verifying transactions and creating new blocks.
Vesting schedule
A cryptocurrency project may choose to allocate a portion of its tokens to its development team, advisory team, and so on. Tokenomics can include a vesting schedule to prevent tokens from being accessed all at once, resulting in the tokens flooding the market. The vesting schedule reveals how long the tokens will be locked and what percentage can be accessed after a certain period.
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