What is Tokenomics?

Tokenomics is the study of cryptocurrencies within a particular ecosystem and how they work. Thanks to tokenomics, studies can be made on how to perform transactions such as token distribution more efficiently.

What is done with tokenomics is analyzing the methods central banks apply for their regular monetary policy and using them in the blockchain network. Thus, it is possible to transform cryptocurrencies in the blockchain into more functional ones.

What is a token?

A token is the unit of value of blockchain-based technologies. A token is like a cryptocurrency. Because it can be traded, have a specific value, or be obtained through mining. In addition to technical details, there is a usage difference between a cryptocurrency and a token.

Before learning about tokenomics, it is necessary to know about token types. Layer 1 token represents a blockchain, while Layer 2 token is used to implement decentralized applications in the network. Layer 1 tokens can be stored, sold, and purchased.

In addition, there are different formats for security and utility tokens. Security tokens represent ownership of a particular asset. Utility tokens are used to raise capital for a specific network. In addition, there are two different token classes: fungible and non-fungible tokens.

• Fungible token: The Fungible token can be exchanged for other assets of the same type. Fungible tokens have the same value. Maybe gold is an ideal example when it is not considered an asset on the blockchain. Because the value of gold is the same in every country.
• Non-fungible token: The non-fungible token is called NFT for short. Because it is unique, these tokens do not have the same value. They are mainly used for works of art. Some NFT collections are worth millions of dollars.

After learning about token types, you can switch to tokenomics. Tokenomics is concerned with the economic management of units of value called tokens. In this way, additional measures can be applied to protect the value of assets and keep them in circulation.

What does tokenomics mean?

Tokenomics stands for the science of token economics. It has many different aspects, such as the creation, management, distribution, and removal of a token from a network. With Tokenomics, cryptocurrencies are made much more functional and popularized.

Blockchain technology is at the heart of projects. This technology creates micro-economies. A self-contained system is developed in line with the working methods determined for the token. Therefore, tokenomics is very important.

Regarding tokens, it is not possible to develop a one-size-fits-all economy method. Blockchain has a wide variety of use cases. Developer teams try to create a specific model for the token. Also, this model includes different requirements.

1. Token distribution

Token distribution means the distribution of token or coin assets to be issued to users. If there is no token distribution, the blockchain network created can exist. However, no one can use this network. Therefore, it is not possible to talk about possible functionality.

One of the essential methods used in token distribution is the rewarding of miners and validators. Networks are created this way, but there is an alternative method. This method is to sell a portion of the token supply via ICO.

There may be much more specific methods of token distribution. More token rewards can be offered to people who verify transactions in a network. This method supports the network to gain more functionality. It is not popular with others because additional configurations may be involved.

2. Price stability

There are large fluctuations in the price of cryptocurrencies. Many people are wary of token holdings as these fluctuations destabilize prices. Specifically, speculators who sell in bulk, causing price volatility, are a big problem.

Various steps are taken to prevent this in token projects. The most common of these steps is ensuring enough tokens to match the supply levels. Thus, token developers try to maintain price stability and encourage people to use tokens.

3. Token management

Behind every token project is a core team. This team is responsible for token management. The core staff sets the rules for how token assets are created, integrated, and removed from the network. A different approach is preferred for each token project.

Specific projects aim to stimulate growth, unlike others. A reserve can be created to be included in the ecosystem created for the token later. The main goal here is also to meet the maintenance and management costs required for the system.

Another preferred method for token management is to create the infrastructure and not interfere with the rest. Project developers prefer this method, as interventions may withdraw potential investments. In some cases, token burning can bring the price to the desired level.

Commonly known examples of tokenomics

Every network created for the token may not continue to be stable in the future. Since it is a decentralized structure, the preferred management method for the token may change as the network grows. Tokenomics is therefore essential, and there are some well-known examples.

1. Tron

Tron network has a different structure from other networks. This is because several different levels of governance are in place to ensure that the token network remains active. In the Tron network, how many tokens will be added to the network is decided by automatic mechanisms.

The most important aspect of the network is ensuring enough tokens are in circulation. The price remains constant regardless of how much Tron is added to the network. If there are not enough tokens in circulation, the amount is increased or decreased by community intervention.

2. Bitcoin

Satoshi Nakamoto carried out the first configurations for Bitcoin. The protocol created is for a fixed flow of tokens. Block rewards are used so that any token can enter the network. The miner verifies a block, and minted Bitcoin is revealed.

One hundred one blocks must be confirmed before the miner can reach a reward. This is why miners want to keep verifying transactions. The reward amount for each verified block decreases over time. This prevents too many Bitcoins from entering the network at once.

3. Ethereum

In the Ethereum system, the token is obtained through block rewards. The beginning of the project dates back to 2014, and during the initialization, 7 million Ethereum was sold via the ICO method. Ethereum does not have a fixed cap. The expansion of the network could mean an increase in token supply over time.

In the Ethereum network, the system functions differently from the others. As a result, the tokenomics model can’t be fully clarified. The tokenomics model can change as the network expands and new updates are made.

Tokens are mainly developed by trial and error. It can be decided exactly how to take a step in line with the principles and philosophies. It is essential to be inspired by tokenomics methods to create future projects.