Tokenomics and why is it important?

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What are tokenomics and why is it important in cryptocurrency? #NFTs #Crypto

Tokenomics are the building blocks of what make a cryptocurrency. Tokenomics is split into 2 parts "token" and "economics".

Tokenomics encompasses the elements that make a particular cryptocurrency valuable and interesting to investors.

Tokenomics determines 2 things about a crypto economy. 1. How the token will be distributed. 2. utility of the token that influences its demand.

/Core features of Tokenomics 1. Limited vs unlimited supplies. 2. Mining & staking. 3. Yields. 4. Token allocations. 5. Token burns.

1. Limited vs unlimited supplies Tokenomics determines a token's maximum supply. For instance, BTCs directive is that no more than 21 million coins can ever be mined. In contrast, ETH has no max limit, although it has a capped issuance each year.

2. Mining & staking Mining - Base layer blockchains such as BTC & ETH 1.0 work on a decentralised network which rely upon computational power to validate transactions. Miners are rewarded for validating transactions who devote their computing power.

Staking - Instead of using computing power to mine a token and become rewarded from this staking rewards those who lock away a number of coins in a smart contract. This is the model ETH is moving toward with ETH 2.0 Check my PoW vs PoW thread here: twitter.com/WILLDCRYPTO/status/1518868482158256128?s=20&t=bF266QLOScUSQeXuO4bFoA

3. Yields High yields incentivise people to buy & stake tokens which are offered by decentralised finance platforms. Tokens are staked in liquidity pools, which power decentralised exchanges & lending platforms. Yields can be paid out in the form of new tokens.

Examples of High Yield Decentralised Platforms: 1. UniSwap 2. Aave 3. PancakeSwap 4. Curve Finance

4. Token Allocations Often, a certain number of tokens are reserved for VC's or developers - who can only sell these tokens after an agreed period. Which has an affect on circulating supply over time of a token.

In the best case, a project's team will have contrived a system where tokens are issued in a way that reduces the impact to circulating supply & a tokens price as best as possible.

5. Token Burns Certain blockchains & protocols burn tokens, to reduce to circulating supply. Supply & demand laws show that reducing in this instance a tokens supply should support its price.

/Who decides a tokens Tokenomics? Founding developers usually embed this into a cryptocurrency's computer code. Before a crypto is released, tokenomics are outlined in an in depth document. The document explains what the crypto will do & how its technology will work.

/Governance Governance is a huge factor in tokenomics. Many tokens function as governance tokens, this essentially means that holders are granted voting rights to impact future decisions/rules of a token.

Governance tokens are like stock in a public company, just without a CEO. Tokenomics are crucial to the success of a project. Poor governance decisions can effectively run a project into the ground.