What is Tokenomics: All Common Questions Answered

Aug 17, 2022
09:08
2 min reading

Choise.com team

What is Tokenomics: All Common Questions Answered

What is Tokenomics in Crypto?
Basic Peculiarities of Tokenomics
How to Evaluate Tokenomics?
Examples of Tokenomics
FAQ

Every project in the crypto sphere would be incomplete without its own native token – the cryptocurrency that fuels inner processes and serves to reward users. Did you know that having a token in place requires developing so-called ‘tokenomics’? If that sounds vaguely familiar to you, read our guide on tokenomics definition with all essential aspects covered.

What is Tokenomics in Crypto?

When you know that the word is a blend of “token” and “economics”, tokenomics meaning becomes clearer. This is a complex set of rules regarding how a project’s inner currency will be distributed, spent, etc. Tokenomics covers everything from how many tokens are in supply to such aspects as the utility of the asset.

As a rule, crypto tokenomics cover:

Total and circulating supply of a token. It defines how many tokens will be released how many will be available on exchanges and for users. Note that inflationary tokens (without maximum supply) will be emitted with time, which can negatively impact the price.
Token allocation and distribution. Tokens can either be pre-mined or released during the project’s fair launch. In the second case, there is no early private access – the token becomes publicly available right from the start. When coins are distributed to as many people as possible, you can assume that the project is legitimate, and the team truly cares about the future development.
Market cap. This ever-changing metric can be analyzed after the project launch. It shows how many funds have been invested so far. On top of that, you could also analyze the fully diluted market cap which shows the theoretical market cap if the max supply of token was in circulation (with the current token price). All that can give you an idea about the token’s real value.

Tokenomics is an important part of a project to consider because it defines the economic viability of a business. Crypto projects with well-developed incentives are likely to last longer and generate more rewards for both users and investors. Owners, in their turn, can rest assured about a steady flow of investors and enjoy token price growth.

Who introduced the notion of Tokenomics?

The term ‘tokenomics’ was first mentioned in 1972 by B.F. Skinner, a psychologist from Harvard, who came up with this economic model. He claimed that tokenomics could help companies control human behavior, while digitalization of value would lead to positive changes.

Now as you know what is tokenomics in cryptocurrency, we should discuss its importance for businesses and investors.

Basic Peculiarities of Tokenomics

Why is it important?

Tokenomics is equally important for:

companies because it defines the amount of rewards to its team and allows controlling token distribution;
investors because it shows how their financial input will pay off;
users because it explains how they will be rewarded and how much they can potentially earn.

Finally, tokenomics explains how the project creators plan to increase token value, and what can fuel the price growth.

How to Evaluate Tokenomics?

No one wants to invest in failing crypto companies, so understanding tokenomics is essential for any crypto enthusiast. When researching a crypto project, consider the following essential factors:

Learn about token allocation. Pay particular attention to the percentage of tokens held by the team: the bigger amount they possess, the bigger is their control over token pricing. The majority of tokens should be allocated for free circulation (trading, exchanges, in-app payments, etc.). A team holding too many tokens (over 50%) is a red flag, as well as a large number of public investors with a significant share of tokens.
Find the vesting schedule. Ideally, every crypto project should have several vesting rounds (at least private and public ones). While the project goes through each round, the value of the token should grow for the investors, including you.
Study the token utility. The more functions a token performs within or outside the project’s infrastructure, the higher its turnover will be. Increased trading volumes, in turn, pump up the token price. Ideally, a token should be used for trading, rewarding and other processes like staking or farming.

Also, if you are researching a new project that has not been released yet, look at their funding goal (the minimum fundraising cap if they are running an IDO). If the project has been released recently, check out the amount of raised funds – that displays investors’ real interest.

Examples of Tokenomics

Let us show you a few examples of famous projects’ tokenomics so you could see what this financial model can include. Tokenomics are usually described in whitepapers or on websites.

Safemoon tokenomics

The Safemoon project has in-depth developed tokenomics that reflects not only numbers (total supply, fees, distribution), but also financial processes, such as token burning, extra rewards, and deductions to a liquidity pool.

SafeMoon Tokenomics

Starting with the total supply of 1 quadrillion tokens (!), Safemoon burned 22% of the supply at the launch. The project has an unusual transaction taxation – it charges a 10% fee split in two ways:

5% fee is distributed over existing holders;
5% fee is split into two parts: the one is sold into BNB, while the second half is added to the liquidity pool in pair with BNB.

This scheme turned out to be profitable at early stages of Safemoon existence, but the token price did not make it close to ATH after short-term success.

Dogecoin tokenomics

When it comes to Dogecoin, this is an inflationary token because the supply is unlimited, and 100% of coins are in circulation. As of August 2022, there are 132 bln DOGE tokens circulating with the market cap exceeding $9 bln. Such a tokenomics model keeps the price of tokens low because of growing supply and limited demand.

FAQ

What is tokenomics?

Tokenomics is a set of rules that comprise a financial model of a project’s inner currency. It describes how many tokens will be released in total, how they are distributed among the team members, users and investors, all transaction fees, and other processes related (burning, emission).

How does tokenomics work?

Tokenomics rules can be implemented right in the project’s smart contract. It will automatically change fees, distribute rewards and send tokens to liquidity pools. If the tokenomics model is well thought-through and people keep investing in the project, the token price will grow.

In what way is tokenomics useful for a project?

It allows the project team to maintain economic integrity and ensure coin price growth in the long haul. Besides, it shows investors the transparency of financial processes.