Summary
Tokenomics is a term for the economics of a token. This term describes the factors that influence the usability and value of tokens, including but not limited to token creation and distribution, supply and demand, incentive mechanisms, and token burning schedules. Good tokenomics design is essential for crypto projects to be successful. Assessing a project's tokenomics before deciding to participate is important for investors and stakeholders.
Introduction
Tokenomics yang merupakan peleburan kata “token” and “economics” (ekonomi) adalah komponen utama dalam melakukan penelitian dasar terkait sebuah proyek kripto. Selain melihat whitepaper, tim pendiri, roadmap, dan pertumbuhan komunitas, tokenomics sangat penting dalam mengevaluasi prospek masa depan sebuah proyek blockchain. Proyek kripto harus merancang tokenomics dengan saksama untuk memastikan pengembangan jangka panjang yang berkelanjutan.
A look at Tokenomics
Blockchain projects design tokenomics rules around their tokens to encourage or discourage various user actions. This is similar to a central bank printing money and implementing monetary policy to encourage or discourage spending, borrowing, saving, and moving money. Note that the word “token” here refers to coins and tokens. You can learn the differences between the two here. Unlike fiat currency, tokenomics rules are implemented through code and are transparent, predictable, and difficult to change.
Let's use bitcoin as an example. The total supply of bitcoin has been previously set at 21 million coins. Bitcoins are created and put into circulation by mining. Miners are given a certain amount of bitcoin as a reward when a block is mined approximately every 10 minutes.
This reward, which is also known as a block subsidy, halving every 210,000 blocks. Based on this schedule, halving occurs every four years. Since January 03, 2022, when the first block or genesis block was created on the Bitcoin network, the block subsidy has halved three times from 50 BTC to 25 BTC, 12.5 BTC, and currently 6.25 BTC.
Based on this rule, it can be calculated that approximately 328,500 bitcoins will be mined in 2022. This number is obtained by dividing the total number of minutes in the year by 10 (because each block is mined every 10 minutes), then multiplying it by 6.25 (because each block produces reward of 6.25 BTC). As a result, the number of bitcoins mined each year is predictable and the last bitcoin is expected to be mined around 2140.
Bitcoin tokenomics also includes the design of transaction fees that miners receive when a new block is validated. These fees are designed to increase as transaction size and network density increase. Transaction fees prevent spam transactions and encourage miners to continue validating transactions even if block subsidies continue to decrease.
In short, Bitcoin tokenomics is simple and ingenious. Everything is transparent and predictable. The incentives around Bitcoin keep participants compensated for keeping the network strong and contributing to its value as a cryptocurrency.
The main elements of Tokenomics
As an umbrella term for the various factors that influence the value of cryptocurrencies, “tokenomics” primarily refers to the economic structure of a cryptocurrency as designed by its creator. Here are some of the most important factors to consider when assessing crypto tokenomics.
Supply tokens
Demand and supply are the main factors that influence the price of a good or service. The same goes for crypto. There are several important metrics that measure the supply of a token.
The first metric is maximum supply. This means that there is a maximum number of tokens encoded during the lifetime of the cryptocurrency. Bitcoin has a maximum supply of 21 million coins. Litecoin has a maximum supply of 84 million coins, while BNB has a maximum supply of 200 million.
Some tokens do not have a maximum supply. The supply of ether from the Ethereum network increases every year. Stablecoins such as USDT, USD Coin (USDC), and Binance USD (BUSD) do not have a maximum supply, as they are issued based on the reserves backing them. Theoretically, the supply could continue to increase indefinitely. Dogecoin and Polkadot are two other cryptocurrencies that do not have a limited supply.
The second metric is circulating supply, namely the number of tokens in circulation. Tokens can be printed and burned, or locked in another way. This also has an impact on the token price.
By observing the token supply, you can get an idea of the number of tokens that will eventually be available.
Token Utility
Token utility is the purpose designed for a token. For example, BNB is used to support BNB Chain, pay transaction fees, and enjoy trading fee discounts on BNB Chain. BNB also serves as a community utility token in the BNB Chain ecosystem. Users can also stake BNB with various products in the ecosystem to generate additional income.
There are many other uses for tokens. Governance tokens allow owners to vote on changes to the token protocol. Stablecoins are designed to be used as currency. On the other hand, security tokens represent financial assets. For example, a company may issue shares during an Initial Coin Offering (ICO) to provide ownership rights and dividends to their owners.
These factors can help you determine the potential usefulness of a token. This is important to understand the development of the token economy.
Analyze token distribution
In addition to demand and supply, you should observe how tokens are distributed. Large institutions and individual investors behave differently. Knowing the type of entity holding the tokens will provide insight into its propensity to trade tokens. This will have an impact on the token value.
Generally, there are two ways to launch and distribute tokens: fair launch and pre-mining launch. A fair launch is when there is no initial access or private allocation before tokens are minted and distributed to the public. BTC and Dogecoin are examples of this category.
On the other hand, pre-mining allows a portion of crypto to be minted and distributed to a certain group before being offered to the public. Ethereum and BNB are two examples of this type of token distribution.
Sometimes it is important to pay attention to the even distribution of tokens. Several large organizations that own most of the tokens are usually considered riskier. A token that is largely owned by patient investors and the founding team means that stakeholder interests are more closely aligned with long-term success.
You should also pay attention to the token locking and release schedule to see if a large number of tokens will be in circulation. This can impact the value of the token.
Observe token burning
Most crypto projects burn tokens periodically. This means that the token is withdrawn from circulation permanently.
For example, BNB adopted coin burning to remove coins from circulation and reduce the total supply of tokens. With pre-mining of 200 million BNB, the total BNB supply is 165,116,760 as of June 2022. BNB will burn more coins until 50% of the total supply is destroyed. This means that the total supply of BNB will decrease to 100 million BNB. Ethereum also started burning ETH in 2021 to reduce the total supply.
A reduction in the supply of a token is considered deflation. Conversely, a continuous increase in token supply is considered inflation.
Incentive mechanisms
The incentive mechanism of a token is important. The way tokens encourage participants to ensure long-term sustainability is at the heart of tokenomics. The way Bitcoin designs block subsidies and transaction fees is a perfect illustration of an elegant model.
The Proof of Stake mechanism is another validation method that is becoming increasingly popular. This design allows participants to lock their tokens to validate transactions. Generally, the more tokens locked, the higher the chance of being selected as a validator and receiving rewards after validating transactions. This also means that if validators try to damage the network, the value of their own assets will be threatened. This feature encourages participants to act honestly and keeps the protocol strong.
Most DeFi projects have used innovative incentive mechanisms to achieve rapid growth. Compound, a lending and borrowing platform, allows investors to deposit crypto into the Compound protocol, collect interest on it, and receive COMP tokens as additional rewards. Additionally, the COMP token serves as a governance token for the Compound protocol. This design choice aligns the interests of all participants with the long-term prospects of the Compound.
The future of tokenomics
Since the Bitcoin network's genesis block was created in 2009, tokenomics has undergone significant evolution. Developers have explored a wide variety of tokenomics models. There have been many successes and failures. Bitcoin's tokenomics model still stands the test of time. Various other tokens with poor tokenomics have fallen by the wayside.
Non-fungible Tokens (NFTs) provide a different tokenomics model based on digital scarcity. Tokenization of traditional assets such as real estate and works of art may lead to new tokenomics innovations in the future.
Closing
Tokenomics is a fundamental concept that must be understood if you want to get into crypto. This term covers the main factors that influence the value of a token. It is important to note that no single factor plays an important role. Your assessment should be based on as many factors as possible and analyzed as a whole. Tokenomics can be combined with other fundamental analysis tools to produce precise assessments regarding a project's future prospects and its token price.
Ultimately, the economics of a token will have a major impact on its use, the ease of building a network, and the level of interest in the utility of the token.
