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What is tokenomics?

Have you ever heard of macroeconomics, microeconomics, and geoeconomics? If yes then tokenomics will be super duper easy for you to understand. Just as microeconomics is a fusion of two words – micro and economics – tokenomics is also a merger of two words – token and economics. 

Essentially the study of virtual currency or cryptocurrency, it studies the elements, factors, and phenomena that are in play in making a certain currency valuable and attractive to investors. It primarily studies the supply and demand aspect of cryptocurrencies. 

For a currency like, say, Solana, tokenomics may prove to be highly beneficial because it will essentially study the growth and other elements behind the success and user base of the currency. Solana tokenomics will, therefore, study why Solana is the way it is.

Tokenomics also examines a token’s underlying technology and its relationship with other tokens, as well as the economic incentives and rewards provided to token holders.

Moreover, tokenomics does not only deal with numbers; it also helps evaluate a currency qualitatively, which makes it all the more important. In short, tokenomics is the name of analyzing a token’s behavior and impact within a specific ecosystem.

Key economic principles used in tokenomics

Economics is a vast field of study with a plethora of old and new concepts. Some of these concepts are used in the world of tokens as well and they are:

1. Scarcity

Scarcity is a valuable concept in economics. In tokenomics, the scarcity of a token has a huge impact on its value. As per the concept of scarcity, an in-demand scarce token will be more valuable because albeit it has a high demand, it is not enough to be sold to everyone.

Therefore, it will automatically lead to a spike in the overall price. Thus, supply and demand – the most basic concept of economics – is also applied in tokenomics.

2. Inflation

Inflation is yet another strong concept in economics that is applied in tokenomics as well. In inflation, a currency loses its value and almost everything becomes expensive meaning more spending of money. 

In tokenomics, inflation can occur when there is an increase in the supply of a token leading to a decrease in the value of the currency as a whole because the token can become less scarce and less valuable.

3. Game theory

Game theory is yet another very important concept of economics that is used in tokenomics as well. It is the study of decision-making in situations where two or more parties have conflicting interests. In tokenomics, game theory can be applied to how token holders interact with the token and with each other. 

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For example, a token holder may choose to hold onto their tokens in the hope that the price will increase, but this decision could be influenced by other holders selling or buying tokens.

Tokenomics and token characterstics

Each token in cryptocurrency has some features and characteristics which make a currency sustainable. These elements may range from the distribution of tokens to the utility of the tokens and all the way to how tokens are governed in centralized and decentralized systems. 

For example, assume that Luna has a certain utility value and is really good at the distribution side. Now, Luna tokenomics will have these features at the center in order to attract more investors and buyers. Thus, token design, features, and characteristics matter. 

Similarly, here’s a list of some token elements and characteristics that can impact the tokenomics of a currency.

1. Token distribution

How a token is distributed has an impact on the value of a token. If you have heard of whitelists and initial coin offerings (ICOs), you would know that in whitelists and ICOs some 1% of the people have easy access to the token. Thus, the overall pattern of a token’s distribution has an impact on tokenomics. 

2. Token utility

Token utility is not just an important measure of a token’s tokenomics but it is also pivotal for the buyers and those interested in a token. The more places that accept a certain token, the better. The utility of a token can impact its value and adoption.

3. Token burning

Token burning is more linked to the concept of scarcity which we discussed earlier. In token burning, you deliberately destroy tokens to increase scarcity, reduce supply and consequently increase the value of a token. It can also be used as a mechanism to reward token holders by reducing the supply of the token, which can increase the value of their holdings.

4. Token governance

Token governance refers to the opportunity given to token-holders to participate in the decision-making process for a project or a platform. For example, currencies that allow staking allow the individuals who stake to part in the decision-making processes of the currency, make meaningful additions, and give suggestions. This plays a role in tokenomics.

Real-life examples of tokenomics

Although the applications of tokenomics, in theory, are quite a lot, there are some real-life examples that can help you better understand tokenomics and its applications.

1. Bitcoin tokenomics

If you know a bit about Bitcoin, you would know that it has a limit of 21 million tokens. Once bitcoin has fulfilled its supply quota, there would be no new bitcoins. Bitcoin tokenomics thus ensures that the tokens reach their target of supplying 21 million tokens.

2. Ethereum tokenomics

Ethereum, one of those blockchains that have a high user base, is a cryptocurrency platform that has Eth as its native currency. Ethereum recently also introduced a new set of tokens named ERC-20. Thus, Ethereum tokenomics will ensure that the native currency remains Eth while it will also deal with the token distribution of both ERC-20 and Eth.

3. Binance Coin 

Binance Coin (BNB) is a cryptocurrency created by the Binance cryptocurrency exchange. Binance uses a unique tokenomics model where it offers discounts on trading fees to users who hold and use the currency. This has resulted in a growing demand for BNB and an increase in its value.

In conclusion, the aforementioned examples are the reasons why tokenomics is a crucial concept to take into account when making an investment decision. Overall, tokenomics is a critical aspect of any cryptocurrency or token project, as it can impact the supply, demand, and value of the token.