Understanding Tokenomics - Hard - Token Metrics

• Tokenomics is vital for anyone in or interested in cryptocurrencies.
• Tokenomics concerns creating, maintaining, and circulating digital tokens within a blockchain system.
• Just as traditional economics deals with making, distributing and using products and services, tokenomics directly affects a digital asset's value, usefulness, and potential.
• Learning about tokenomics helps understand key concepts and why it is important for decentralized finance's future.
• Tokenomics is the study of the economic models behind crypto tokens or crypto assets.
• Tokenomics considers total supply and future dilution, initial distribution, vesting durations, utility, burn mechanisms, and economic stability.
• If a token features high utility, restricted supply, and high demand, its value will likely increase in a thriving ecosystem.
• A token's value diminishes with little utility, oversupply, and a negligible role in its platform.
• A token with a capped supply and regular burn mechanisms might appreciate as circulating supply falls, assuming demand remains constant or increases.
• Tokens that reward holders may face selling pressure if holders liquidate their incentives consistently.
• Tokenomics is a blueprint for a token's potential value trajectory, influenced by market sentiment, adoption trends, legislative changes, and tech breakthroughs.
• A crypto token is a digital asset generated and managed on the blockchain.
• Coins have their own blockchains; examples are Bitcoin (BTC) and Ether (ETH).
• Coins mainly function as a means of commerce, a store of value, and a unit of account, similar to real money.
• Tokens are created using smart contract capabilities on another blockchain, like Ethereum or Solana, and serve various purposes beyond monetary use, like representing assets, stakes, voting rights, and access to specific functions.
• Educating yourself has never been more important in order to make well informed investment choices given the growing number of released coins and tokens.
• Bitcoin is a peer-to-peer value transfer protocol.
• Altcoins try to attract investors using innovative ideas with their coins or tokens.
• It is critical to understand what drives Altcoins and what an investment might entail, as these assets vary.
• Tokenomics combines "token" and "economics", and it is the architecture and framework governing token distribution and operation within a blockchain environment.
• For cryptocurrency investors, tokenomics is critical because it demonstrates a token's utility, demand, and value proposition, allowing investors to assess its potential long-term value and relationship to the product.
• Some tokens are only used for fundraising.
• Tokenomics manages token scarcity or abundance, which impacts price and adoption.
• Distribution of tokens to the team, early investors, advisors, or a reserve treasury, can significantly affect prices, because this impacts how certain parties affect token prices.
• Lockup periods and token issuances offer insight into future market price swings.
• A well-structured token economy improves network security, incentivizes user behavior, and secures long-term viability, while faulty tokenomics can cause imbalances and manipulations.
• Key components of tokenomics define how a cryptocurrency or token operates within its ecosystem.
• Understanding a token's utility, distribution, and long-term value is important.

Token Supply

• A cryptocurrency's token supply is influenced by a number of preset protocol rules and external influences.
• Maximum supply includes all tokens that will ever exist.
• Most of the supply is locked up initially for new projects and becomes available over time.
• Circulating supply is the number of liquid tokens that can be traded on the market.
• Some projects create a set number of tokens for fundraising, developer rewards, and marketing, which are then gradually given to ecosystem players.
• The total number of tokens is fixed, simplifying economic modeling by only assessing the demand side.
• Inflationary supply: Miners or validators are rewarded with new tokens as they validate and add new blocks to the blockchain in PoW and PoS systems.
• The same principles can be included in a token smart contract.
• The supply can be almost impossible to predict at a specific time in the future.
• Consider the maximum supply, because looking solely at circulating supply and market capitalization may be misleading when determining a project's valuation.

Token Distribution

• Cryptographic tokens are being used as a unit of account, transforming the fundraising process for startups and DAOs.
• Issuing tokens gives investors early liquidity and utility and increases transparency for all stakeholders.
• Initial allocation is about how tokens are distributed during the initial coin offering (ICO), pre-sale, or airdrop.
• Allocations can be made to developers, investors, advisors, and the community.
• Distribution mechanisms and allocations include ICOs, Security Token Offerings (STOs), and Initial Exchange Offerings (IEOs).
• Vesting periods are timelines set to unlock tokens for team members or investors to prevent large sell-offs and promote long-term commitment.

Use case (Utility)

• The token is designed for governance, staking, payments, or accessing services on the network.
• The token incentivizes users and powers transactions, thus defining the token's role in the platform or ecosystem.

Governance

• Many tokens allow holders to participate in decision-making (governance) by voting on proposals regarding the platform's future.
• Voting power is proportional to the number of tokens held, giving more influence to larger holders.

Incentives and rewards

• Tokens may offer staking rewards where holders receive interest or additional tokens for locking up their assets.
• Some tokens are earned by miners or validators who secure the network and confirm transactions.
• Users may also earn tokens by contributing to the ecosystem or providing liquidity.

Burn mechanism

• Token burning removes tokens permanently from circulation, increases scarcity, and boosts token value over time.
• The frequency and amount of tokens burned can be pre-determined or based on network activity.

Economic model

• New tokens are regularly issued in an inflationary model, which may dilute value over time but support network growth.
• The supply decreases over time in a deflationary model, creating scarcity and potentially increasing value.
• A dual-token model allows an ecosystem to use two types of tokens: one for utility and another for governance or rewards.

Liquidity

• Market access shows how easily tokens can be bought, sold, or traded on exchanges.
• Decentralized finance (DeFi) platforms often require liquidity pools, where users provide tokens for trading pairs and earn fees or rewards.

Legal and regulatory compliance

• Regulatory classification governs how the token is classified in different jurisdictions (as a security, utility token, etc.) and how it complies with legal requirements.
• Smart contracts and token distribution mechanisms may undergo third-party audits to ensure security and compliance.
• These components collectively shape a cryptocurrency project's value, functionality, and long-term success.