Tokenomics is a combination of the word’s “token” and “economics’. Although there is no official definition of the term, it became popular in 2017 and involves the science of the token economy and how we assess a token’s worth. Basically, anything that influences cryptocurrency value is considered a part of tokenomics.
What is a Token?
A token is something that acts as a tangible representation of something within its particular ecosystem. In the crypto world, a token can represent value, a stake or a vote.
Why is Tokenomics Necessary?
Tokenomics are key to fundamental analysists in the crypto-verse.
It is difficult to apply a single method for valuation because there is such a variety of tokens in circulation (with new ones being created all the time!). Additionally; because blockchain is still in its natant stages, it’s not as if we could analyse past behaviour of tokens. Many unquantifiable determining factors (such as speculation) further reinforce the complexity of token valuation.
This is why tokenomics came about to help you try and understand the worth of a given project. Once you have a good understanding of a particular token, you can more accurately assess the potential value it has before you invest in it.
What Does Tokenomics Look At?
We can break down the concept of tokenomics into two parts: macrotokenomics and microtokenomics.
Macrotokenomics are the collective properties of the network and relate to the relationship with the broader blockchain economy, including interactions with third parties such as exchanges or governance.
Microtokenomics are individual properties of the network and look at variables that drive function changes of different parts within the blockchain.
Tokenomics looks at the following areas:
- Token Purpose – What action does the token perform? Is it just a way to speed up the
fundraising process for a project, or does it have a global, long-term purpose? - Token Functionality– Is the token scalable, is there a market for it, can it be traded on
an exchange? - Token Value & Stability – Value is unpredictable; external growth and volatility
because of the liquidity on exchanges, for example, can fluctuate the value of an asset.
Projects can improve the stability of a token by ensuring there are enough coins to meet
the levels of supply. - Token distribution – Tokens need to be somehow distributed out to the users; this is achieved in several ways, by rewards, Initial Coin Offering, airdrops or lockdrops. Several factors need to be taken into account including the amount to release and when to release.
What Does a Good Token Look Like?
Tokenomics provides a way to assess how a token will be used and possibly provide insights into the potential success of a particular cryptocurrency. The factors that underpin the makings of a well-developed token are the following:
- Useful within the ecosystem
- Resistant to inflation
- Has the potential and ability to scale
- High in value
- Present on exchanges
