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.