What is tokenomics?
Money is so important that without it, our daily lives will prove so difficult, and this has made many people and financial institutions study the behavioral patterns of money and different currencies. This is used in the stock market or equity market, but this is centralized. Then came the age of blockchain technology, decentralized systems, and digital currency, which also needed to be studied, hence the birth of tokenomics.
Tokenomics is coined from the word "token," which is a programmable unit of value or currency in a blockchain project. While "economics" is the field of study focused on wealth production, consumption, and transfer, combining these two terms we have "Tokenomics," which is a general term for the characteristics that provide a certain cryptocurrency value and appeal to investors and stakeholders. For a successful investment decision, tokenomics is important.
A fact of tokenomics is that an ecosystem that has been built around a project's token has a higher chance of surviving and succeeding than one that hasn't, as well as having intelligent and well-designed incentives for token holders to acquire and hold tokens for the long term.
How tokennomics works
Describing the tokens' purpose, utilities, and significant drivers of their demand is the major goal of tokenomics. Developers experiment with a range of different variables to affect different aspects of tokenomics, such as;
The supply
One of the major basis in tokenomic is the coin supply. There is the "circulating supply," which is the quantity of cryptocurrency coins or tokens that are openly traded and in circulation, while the "total supply" is the number of coins or tokens that are currently in existence, either in circulation or locked in some other manner. It is also the amount of coins issued or mined, excluding the number of coins that were burned or otherwise disposed of. Therefore, the total and circulating supply must be taken into consideration. For instance, Ethereum mines about 18 million coins per year, and its total supply is 120.52 million coins, and its limit is infinite, Bitcoin's (BTC) total supply limit is 21 million coins, and the last coin should be mined in the year 2140; Doge has a circulating supply of 132.67 billion coins, while Solona (SOL) has 508 million in total supply. The total number of tokens that can be created is also limited for nonfungible tokens (NFTs), because the more scarce and valuable an NFT is, the more expensive it is. BoredApe CryptoPunks and moonbirds are examples.
Staking and mining
Staking is the process of securing or locking up a token for a predetermined period of time in return for a payout or reward to support the operation of a blockchain. This reward is frequent, but not always. It uses the "proof of stake" (PoS), which underlies certain consensus mechanisms on blockchains, to achieve a distributed consensus. A consensus is a form of agreement, Ethereum, for example, has a consensus that 66% of the nodes in the network must agree on the state of the network.
Mining numerous cryptocurrencies employs the mining process to create a new currency and validate fresh transactions using proof of work (PoW), as its name indicates, which is when nodes on a network prove or provide evidence that a specific task has been done or a problem has been solved to avoid malicious entities taking over the network and to reach consensus in a decentralized manner.
Staking and mining are important in tokenomics because of their additional benefit of enhancing the security and efficiency of the blockchain projects you support. By staking a portion of your money, you may boost the blockchain's capacity for processing transactions and ensuring security.
Issuing and Vesting
Vesting is the act of giving a third party control over an asset through the use of a token vesting contract. Members of the project team, business partners, and consultants frequently own vested tokens. They may also be the property of participants in the project's development, such as developers or investors who bought tokens prior to their general sale, but this is done gradually over a vesting period. The period of vesting maybe once a month or once a week, and this is to avoid scams and the issue of pumping and dumping of the token.
Three types of vesting
Liner vesting is the issuing of tokens over a predetermined period of time in equal and specified quantities.
Twisted or graded vesting is the issuing of tokens in random quantities over different intervals it could be 30% in the first three months and 40% for the next year and so on.
Milestone or cliff vesting issuing of tokens based on conditions and equity. Conditions could be any period maybe 5 months after which vesting begins.
Yield
The practice of token holders maximizing rewards across several DeFi platforms is known as "yield farming." It helps every investor or token holder earn more tokens. Smart contracts can also be used to loan out funds that can appreciate and earn interest. It provides liquidity. Curve Finance, Aave, Uniswap, and many other high-yield farming procedures are examples.
Burning
Scarcity causes a price increase. Therefore, scarcity increases the market value of tokens. One of the most crucial economic principles is the law of supply and demand. According to this, supply and demand determine an asset's price. By reducing the supply, the tactic of token burning raises the price of a crypto asset. It entails transferring cryptocurrency tokens to a wallet devoid of private keys. This wallet only accepts cryptocurrency and can't be accessed anymore.
Why Tokenomics?
As seen, tokenomics is an important aspect of cryptocurrency and decentralized finance because it helps understand the statistics of the tokens in the market. It comprises a lot of criteria, history, and analysis models to check out while choosing a token for investment and to avoid scams.