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Note: The words Token and Cryptocurrency will be used interchangeably in this post.
The word tokenomics is gotten from two words: Token and economics. It describes the economics of a token. Tokenomics deals with those things that affect value and utility of a token. They could include the tokens demand, it's distribution, it's supply, incentive structures and burning plans.
In other words, tokenomics points at how the economics of a cryptocurrency is structured as specified by its creators
Adequately planned tokenomics is essential to ensuring the success of a crypto project.
Tokenomics is pivotal in assessing the future of a project and if it is worth investing in. Hence, crypto projects should really out a lot of efforts in their tokenomics.
A deeper look into tokenomics
Just like the central banks of various countries print money and make policies about monetary transactions, Crypto projects as well make tokenomics policies for their tokens in order to promote certain actions of their users or discourage some action. In contrast to fiat money, the policies of tokenomics are introduced through code, thereby making it immutable, transparent and trustworthy.
Basic components of tokenomics
Use of the token
This has to do with the use cases a token was made for. For instance, steem is the main cryptocurrency used in the steemit blockchain. Ether is used in the Ethereum Blockchain to pay for transactions fees. BNB powers the BNB blockchain and is also utilized in paying fees for transactions made.
In the case of governance tokens, holders are eligible to vote on policies concerning the token. Security tokens can be used as assets.
Understanding these use cases help you determine how the economy of the token will probably evolve
Supply of the token
Just like regular goods, the price of cryptocurrencies are also affected by demand and supply.
When it comes to token supply, one of the factors taken into consideration is maximum supply.
Maximum supply refers to the maximum amount of a token that is designed to exist throughout lifetime of the token.
The maximum supply of Bitcoin is 21 million coins while that of litecoin in is 84 million coins.
On the other hand, stablecoins such as USDT and BUSD don't have a maximum supply. Other coins like Dogecoin also don't have maximum supply.
Another factor to consider is circulating supply. This has to do with the amount of the token in circulation. This has a major effect on the token's price.
Burning of the token
Constant token burns is done by several crypto projects. Burning is all about permanently taking out some of the tokens from circulation. Burning can help to increase the price of the token.
An example is the #burnsteem25 initiative on steemit which is all about setting 25% of steem earned from a post to @null, thereby getting rid of that amount of steem. This was introduced to improve the steem economy.
Distribution of the token
This is another crucial component. It is important to focus on the distribution of a token.
It is more riskier if a few big organizations are holding a large portion of the token than when a larger portion of the token is held by investors and founding members whose goals are for long term success.
You should also look at how the token is locked and distributed in order to know if a huge amount will be let into circulation, which drops the value of the token.
Tokenomics is a crucial concept to understand if you're planning to invest in crypto. It deals with the factors that influence a token's price/value.
Eventually, a token's economics will determine its uses and the amount of interest in it's use case.