Behind blockchain technology and the very dense universe of cryptocurrencies, there is the question of the fundamentals of these cryptos and projects. It is important to understand how a protocol, a token, is articulated. It is in this sense that the study of the tokenomics of a project is essential before getting involved and investing capital in it. In particular, this can help answer the following questions:
- What is the total supply of the token?
- How is governance structured?
- How is the token distributed and distributed?
What is “tokenomics”?
Etymologically, tokenomics is made up of two English notions: token and economy. It is literally “the economy of a token”. In other words, it covers all the fundamentals of a crypto project produced by the development teams. It is in a way the specifications of a cryptocurrency project. To refer to tokenomics, it is therefore necessary to delve into the white paper of the crypto project.
The component information of this tokenomics is of great importance for investors who participate in a project. They will encompass all the layers of a crypto protocol. To know, its blockchain, the token associated with it, but also the total quantity of currency (often known as total supply) or the fees and staking methods.
Finally, note that the valuation of the token can be strongly influenced by the tokenomics of the cryptocurrency.
How does it work concretely?
To fully understand how tokenomics works, you have to understand that there are two opposing models: deflationary and inflationary tokens.
- The balanced inflation model : Many projects are created without token issuance limitation. This is the case, for example, of ethereum protocol. However, there are mechanisms that have been put in place to limit inflation, or even create a deflationary system. The tokenomics of this Ethereum project evokes all these elements and in particular the implementation of future updates of the Ethereum network.
- The limited-quantity deflationary model : We find here the model used by bitcoin, that is, a fixed total supply and less and less money issued over time. Solana or even Tron use this same process. In the case of Bitcoin, we know in advance that a miner’s reward will go down over time. This is because the reward is halved every 210,000 blocks, resulting in a halving every 4 years with the assumption of 10 minutes of mining time per block.
Read also Understand cryptocurrency white papers in just 3 minutes
What is it used for ?
One of the primary goals of tokenomics is to guard against inflation, the pet peeve of market economies. The idea is therefore to prevent the same phenomenon from occurring within the cryptosphere. To do this, a mode of operation is put in place which makes it possible to ensure the stability of the course of a cryptocurrency.
Another element determined by tokenomics, it is to ensure control of the quantity of tokens in circulation. By defining this crypto mass in advance, this avoids too large and harmful creation for the good development of the project.
The key elements to take into account in the tokenomics of a project?
To be in line with a solid business model, the project needs different milestones. It is important to find these steps in the tokenomics of the project.
- The total supply : it is the maximum quantity of tokens issued by the functioning of the blockchain.
- The show : it is the quantity of tokens created and donated to the validators of a blockchain. A part
- The distribution : It generally takes place during the introduction on the market (ICO) of a cryptocurrency project. The allocation will be between the project developers, the community, the investors, or any other type of buyer during fundraising.
Conclusion: the specifications of a cryptocurrency
Tokenomics is fundamental for both professional and private investors. The latter must fully study the tokenomics of a project before investing. It is a necessary work to know well the rules of governance, the distribution… and everything related to it.