In the landscape of cryptocurrency, every currency has its unique structure and also plays a relevant role in determining the market price. Tokenomics has a significant impact on the crypto market because it analyzes the basic features of cryptocurrency. The terms “token” and “Economics” in the Tokenomics, encircle the distinct elements that describe the value and sustainability of the cryptocurrency. The progress of a crypto project can be determined by its tokenomics.
This article discusses Tokenomics, why it matters, its components, and the real-world examples of bad and good tokenomics.
What is Tokenomics?
Tokenomics refers to understanding the characteristics of distribution, supply, valuation, and demand of cryptocurrencies. This term is unique to the cryptocurrency market and describes the elements and mechanisms that make tokens appealing to investors. Tokenomics plays a crucial role in shaping the longevity, utility, and value of digital assets within the cryptocurrency ecosystem.
Furthermore, tokenomics is primarily classified into two categories: Layer 1 tokens and Layer 2 tokens. Layer-1 tokens are native to the particular blockchain and used as a medium of exchange, rewarding mechanism, and governance. Meanwhile, Layer-2 tokens are native to networks designed to scale a Layer-1 blockchain, helping the main network process more transactions and handle more data.
Additionally, the classification of tokenomics varies based on the various features of cryptocurrencies. Beyond these classifications, the primary goal of tokenomics is to create a system that supports the long-term value of tokens, aligns incentives, and balances supply and demand.
Why Does Tokenomics Matter?
Tokenomics has a high impact on the success and failure of Cryptocurrency projects. A token with well-defined tokenomics is capable of building a sustainable landscape that aligns with the project’s intention for all stakeholders, from its developers to users. On the contrary, poorly designed tokenomics may result in inflation, centralization difficulties, and lack of utility, which negatively impact the project outcome.
In the crypto market, Tokenomics helps an individual comprehend how much of the supply is in circulation, vested, locked by its core developers, and other important factors such as the concentration of holders. For investors, comprehending tokenomics is relevant for examining the strength of the cryptocurrency project. Analyzing factors like distribution, utility, and token supply assists investors in making informed decisions regarding which project to support. In addition to project development, tokenomics dictates how much an investor will invest in the cryptocurrency and provides them with a bigger picture of its future prospects.
Cryptocurrency issuers must develop better tokenomics models to be competitive in the market and provide value to stakeholders.
Components of Tokenomics
Tokenomics refers to the economic design of a cryptocurrency, including its supply, distribution, and utility. It shapes how tokens are created, used, and valued.
Market Capitalization
Market Capitalization, also known as market cap, indicates the total value of a particular cryptocurrency’s supply currently in circulation. There are small-cap and large-cap cryptocurrencies. Cryptocurrencies with a smaller market cap are considered risky investments, while tokens with a larger market cap can provide bigger returns.
Distribution
Token distribution is a metric that accounts for the distribution of a particular cryptocurrency. Here are some of the ways in which a token’s supply is distributed:
- Initial Coin Offering (ICO) (by selling a portion of tokens allocated to investors)
- Mining and staking rewards (tokens distributed as rewards to miners and stakers)
- Airdrops (tokens freely distributed to the community and active participants)
- Community grants (a portion of the token supply to the DAO to maintain reserve)
- Investor (a portion of the token supply to early investors).
Token supply
Token supply is considered the fundamental component of Tokenomics, and it is mainly divided into three: Max supply, circulating supply, and total supply. Total supply is described as the total number of cryptocurrency tokens or coins that have been created. Circulating supply is the number of tokens that are currently in supply, and maximum supply refers to the total number of tokens that will ever exist.
Utility
The token utility is represented by its practical use cases and value propositions, and it is relevant in driving demand and significance within an ecosystem. Moreover, the Token utility encircles distinct forms such as governance, transaction fees, staking, and access and membership.
Real-world Examples of Good and Bad Tokenomics
A crypto project has good tokenomics, its token will more likely increase in value and maintain it over a lengthy period of time. A cryptocurrency with bad tokenomics may project explosive price surges in the short term, but its long-term price prospects cannot be guaranteed as the project would lack a fundamental economic structure. Let’s analyze some real-world examples of good and bad tokenomics.
Top Cryptocurrencies With Good Tokenomics
These cryptocurrencies have strong tokenomics, ensuring balanced supply, demand, and utility. Their well-designed structures support long-term growth and investor confidence.
Bitcoin (BTC)
Bitcoin tokenomics are highly deflationary and well-studied. It involves total issuance being limited to 21 million coins, and its currency management is different from other popular cryptocurrencies like Dogecoin and Ethereum.
Ethereum (ETH)
Ethereum has a variable total supply, and about 16.7% of the supply is stored for the Ethereum foundation and core team. Similarly, about 83.3% of the supply was sold in a crowd sale, and now the ETH is distributed via staking rewards.
Uniswap (UNI)
UNI has a total supply of 1 million tokens, and about 40% of the supply goes to investors, while 60% is assigned to the community. Additionally, these tokens are utilized for governance, enabling holders to vote on proposals in connection with the forthcoming development of protocols.
There are a lot of meme coins that can be considered examples of tokens with bad tokenomics, the most recent being the LIBRA coin, which was released to much fanfare in Argentina following an endorsement by President Javier Milei. However, the tokens’ creators hid their true intentions and sought the president’s support by making him believe that LIBRA would help small-scale businesses and start-ups in the country. LIBRA’s launch was massive, within hours, its price skyrocketed to $4.5 and recorded a market cap of $4.5 billion. This led to its developers, who held over 80% of its supply, exiting their positions and taking liquidity out of the market, causing its price to crash by 90%. The rug pull is so controversial that Milei is now risking impeachment for promoting a scam.
Bottom Line
Tokenomics is one of the most essential factors to be considered when trading cryptocurrencies. It provides traders with information regarding a particular token’s demand and long-term value proposition.
It is recommended to learn and analyze the various tokenomics metrics specified in this article to be more conscious when dealing with cryptocurrencies. They are highly volatile assets, therefore, it is crucial to do your own research before making any investment decisions.
