Tokenomics：Everything You Should Know About It
[TL; DR]
Tokenomics is the combination of two words; token and economics.
It is the studying of crypto tokens.
Tokenomics encompass the studying of all attributes and metrics that makes a crypto token desirable to investors.
Tokenomics helps you decipher which digital assets best suit your interest and investment plan.
The tokenomics of all blockchain protocols are compiled in a white paper and made available to potential investors.
All the essential details and features, such as the token's smart code and operation mechanism, are contained in the tokenomics.
The developers and stakeholders of the blockchain protocol decide the tokenomics of the project at the protocol level and reach a consensus before launching the project.
The variables of each project tokenomics differ, and some of these variables include mining & staking, token burns, amount of supply, etc.
It is essential to lay your hand on the tokenomics of a digital asset and seek expert advice before investing.
Keywords: Tokenomics, cryptocurrency, protocols, token, digital assets, investors, blockchain.
[Full Article]
The blockchain network and cryptocurrency ecosystem reek of numerous protocols and digital assets. Blockchain developers and giants in the ecosystem have several reasons for launching a blockchain protocol; you should conduct proper checks before investing.
Most times, as an investor, you are confused as to which of the digital assets are worth your investment and interest. How do you then decide which cryptocurrencies are worth investing in and align with your interest?
One of the essential criteria or metrics to consider before investing in a cryptocurrency is the tokenomics of such a digital asset.
In this article, we shall identify everything you need to know about the tokenomics of cryptocurrency and how to evaluate the investment prospect of digital assets using tokenomics.
What Is Tokenomics?
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The word “Tokenomics” is a fusion of two separate words, “token” and “economics.” It simply means the economics or study of crypto tokens.
In a broad explanation, tokenomics refers to the entire features of a crypto token. The attributes and qualities make a crypto token desirable and appealing to investors.
There are hundreds of decentralized protocols leveraging the blockchain network, and they all look promising; how do you know the ones with tokens worth your investment?
Tokenomics enables you to identify which digital assets on the blockchain network can be traded, swapped, or exchanged with another token or fiat. It further shows the cryptocurrencies that give incentives and are beneficial to their holders and investors.
The tokenomics of all cryptocurrencies or blockchain protocols is always spelled out and made available to all potential investors in the project’s whitepaper. The whitepaper detailing the tokenomics will analyze the token’s objective, allocation policy, functionality, and other essential details.
Tokenomics is primarily designed as a catch-all for elements that make a token value to investors. It is designed to attract investors and show the incentives you stand to benefit when you buy and hold tokens of such a project.
The tokenomics of a project shows the potential investors that the developers of such a cryptocurrency have built a robust ecosystem for a cryptocurrency. A well-built cryptocurrency will directly infer that with time, the demand for such digital assets will multiply, and your investment will yield a multiplied return.
Having identified the definition of tokenomics and why investors must consider it, we shall move to the variables you should consider in a cryptocurrency's tokenomics.
The Variables Of Tokenomics
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The tokenomics of any cryptocurrency is decided and agreed upon at the protocol level. The founding developers and stakeholders must fashion the tokenomics variables into the computer code or smart contract that runs these cryptocurrencies. What variables make the tokenomics of a digital asset differ from another?
They are;
Mining And Staking
There are cryptocurrencies whose core incentive is mining, and these digital assets deploy mining to validate digital assets and create new blocks.
Cryptocurrencies that use mining and staking arrange that miners are rewarded with new tokens because they devote their computing energy to adding new blocks to the blockchain. Staking is designed to reward those in similar roles as miners, but a certain amount of the coins is locked away in the smart contract.
The mining and staking arrangement seems interesting and promising for potential investors. However, it is based on the investors’ interest; should the investor disagree with such an arrangement, he will steer clear of digital assets that use it in their tokenomics. Tezos and Ethereum 2.0 use the staking and mining mechanism.
Token Burns
Some cryptocurrencies or blockchain protocols burn some amount of their tokens. Crypto burning is to permanently remove a certain amount from circulation and reduce the supply/ availability of such tokens in circulation.
The law of supply and demand asserts that the reduction in the supply of a token will increase the demand for it and push up the price value. This is a compelling variable that will keep the investor assured that the burning will increase the price value of their investment. Ethereum engages in crypto burning.
Limited And Unlimited Supplies
The tokenomics of a digital asset will state the maximum supply of a token. It will state whether a token has a maximum supply and that new ones can not be mined or created when it reaches that amount. It will also state whether the supply of a token is unlimited and will keep producing new blocks when it exhausts the available ones.
Bitcoin tokenomics states that it can not mine more than a 21million coins, and it is expected that by the year 2140, the last set of Bitcoins will be mined.
Conclusion
Tokenomics is essential to every player in the cryptocurrency and blockchain ecosystem. Before the public launch and release of a blockchain protocol, the tokenomics will be documented to outline what the digital asset will do, the idea behind its launch, and its underlying technology.
It is therefore essential to study tokenomics and consider the variables before investing. Other variables contained in tokenomics that you should consider include token allocation, vesting periods, yields, etc.
The tokenomics are often designed to woo investors and tailored towards all interests. Before making investments, you should consult experts and industry players to guide you on technical areas and variables contained in tokenomics.
Author: Valentine. A, Gate.io Researcher
This article represents only the researcher's views and does not constitute investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted, provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
