ZoneBitcoin EditorialWhen we break down the English word "tokenomic", we have the consecrated expression oftoken economy. The expression was first used in 1972 by psychologist BF Skinner, well before the creation of the first cryptocurrency. Today, tokenomics refers to the economics of cryptocurrencies. Just like economic science, we find all the essential components that make up the economy of an economy, such as its creation, its management and the amount of tokens distributed, among others.
It is important to know that the term “tokenomics” refers to two slightly different definitions:
- The first definition of Tokenomics would be the broadest, the one which refers to the science which studies the internal functioning of cryptocurrencies (how and why they are created, the organization of the token, the type of blockchain on which they are based, etc.). So much for the definition in the broad sense.
- In parallel with this definition, we find the term tokenomics to refer more precisely to the economics of a token (there, we will talk more about its usefulness, the issuance of issued tokens, etc.).
Otherwise, sometimes, we speak in common language of tokenomics to designate the entire economic system of cryptocurrencies and make the distinction'economic therefore of the classical economic system.
It's an essential word and even an expression in the crypto world, and particularly when we talk about investment.
The token economy
In classical economics, economists have precise indicators to measure the issuance of currencies.
It is with these rather complex indicators that we know under the names of M1 for example (there are several) that we can judge and estimate the money supply. With the M1, economists can know what measure of market liquidity in some way and have access to other important data.
Without going into detail, what we must remember here is the idea that economists have precise indicators to measure the state of a currency at a given moment. This is particularly important and taken into account when governments decide to issue additional currency. The creation of additional money is very often correlated with the phenomenon of inflation, for example.
However, in the world of cryptocurrencies, it is somewhat different. The issuance of new tokens is always defined in advance and follows very precise schedules. We can in fact predict and estimate the number of new tokens that will be issued and we even know the date with precision.
Moreover, during an ICO, even before the project is actually launched on the market, the developers think about the token issuance with precision.
The key elements of tokenomics
The more we advance in time, the more tokenomics covers more indicators that are more difficult to measure.
However, here are the most used tokenomics indicators:
👉 Issuance of tokens: This is the process by which new tokens are created and introduced into the system. This emission can be carried out in different ways, including mining (proof-of-work), forging (proof-of-stake), smart contracts, or other mechanisms specific to each project.
👉 Total Supply: This is the maximum quantity of tokens that will be issued. This is different from the circulating supply. This refers to tokens that have already been issued and are in circulation.
👉 Circulating Supply : This is the number of tokens actually in circulation and available on the market. Sometimes some tokens are locked or held by the project team, and they are not included in the circulating supply.
👉 Distribution of tokens: The amount of tokens that are returned as a percentage to the ecosystem as a whole. We can also include the initial distribution which indicates how the tokens were distributed at the launch of the project. This may include public sales (Initial Coin Offerings (ICOs), private sales, airdrops, or other mechanisms. We can know the tokens that will be paid to network validators such as miners or delegators in the case of staking. We then know the number of tokens distributed for each block created. We also know the transaction fees that will be paid by users.
👉 Token Burn: This involves permanently removing tokens from circulation by sending them to an address without the possibility of accessing them later. This practice can be used to reduce the total supply of tokens, thereby increasing their scarcity and potentially their value.
—> Read the article: Why do we “burn” tokens?
You should know that there are other elements and metrics such as governance models for example. Moreover, they are not to be confused with the economic models of cryptocurrencies. Even if tokenomics tells us the chosen economic model, they are not the only elements to consider.
Tokenomics and the economic models of cryptocurrencies
This is the heart of tokenomics. This is the economic model chosen by the founding team.
The deflationary model like Bitcoin
Thus, the investor knows how many tokens will be created at a given time, and can also know the total number of tokens that will be issued. A bit like bitcoin where it was planned from the start, in the program itself that there would be no more than 21 million bitcoins. And not one more. We also know that mining will end in 2140 for example and that all of us who read this article will not have the chance to know at what price bitcoin will be exchanged.
However, the cryptocurrencies that appeared with bitcoin have chosen another cap amount. And this varies from one cryptocurrency to another. Some cryptocurrencies, such as dogecoin, for example, have preferred almost infinite token emissions. Others have also chosen limited token emissions but with very large amounts as is the case with TRON, for example.
The inflationary model like Ethereum
It's also a bit similar with Ethereum, for example, where there is no strict emission limit on Ether. That said, this may change with the future version of Ethereum.
Better yet, there is also a mechanism that is increasingly used called "burn". In French, we say burn for a token. This is particularly useful for maintaining the price of a cryptocurrency by voluntarily playing on supply and demand. When we say burn, because we are talking about digital currencies, tell yourself that an amount of tokens is sent to wallets whose address is unknown, and this, regularly during given intervals.
This is done to ensure the stability of the currency. Basically, it's still the natural market for law and demand because, in the end, it is the market which will determine the value of a crypto.
Can tokenomics help us determine the value of a cryptocurrency?
As we have just seen, creating a cryptocurrency is in fact both creating a concrete business but also creating a micro-economy. We then think with tokenomics about the place of the token in this ecosystem and we also try to understand the economic mechanisms on which it is based and in which it evolves.
This can therefore be extremely useful for an investor in particular. By force, we could recognize a well-constructed project, with a stable and prosperous economy and conversely, we could also see projects that will not hold up in the long term, based on concrete examples.
Thus, we then have in tokenomics, models, structures according to the chosen choices of certain cryptocurrencies. Over time, we can then have a certain map of the micro-economies in question. We can also see the consequences of this or that distribution of tokens, of such and such consequences of accumulated burn, etc.
We are in the process of writing this economy, so, for the moment, we can say that we are just collecting the data. Soon perhaps we will be able to draw generalities and more detailed concepts, for example.
Tokenomics, a new economy that is being written every day
Tokenomics science will include ever denser chapters, bringing together the philosophies of certain projects and the economic systems used (the chosen consensuses, etc.).
This will allow developers to create more reliable projects, with economical systems that have been approved and which prove to be more functional than others. In other words, it allows us to anticipate the future results of a project.
Anticipation is the ultimate advantage you can have whether in cryptocurrencies or in business in general, right?
This will allow us to have, just like other sciences, pre-established models, which work and those which do not work (here, too, this is obviously very useful).
The economics of tokens is a young science and we are currently in the midst of experimentation. This is certainly also what makes this discipline so interesting!
See also:
- How to do a good crypto fundamental analysis (FA)?
- Should we consider the FDV (Fully Diluted Valuation)?
- Understand how to read the “market capitalization” of a crypto
