What is Tokenomics?

The economic characteristics of a token are referred to as "tokenomics," a portmanteau of the terms "token" and "economics." Supply, issuance schedule, burn functions, and many other characteristics may fall under this category. The attributes of a token are relevant in establishing its current and future worth.

Bitcoin, like many cryptocurrencies, has a tokenomics-driven value proposition. With a fixed supply of just 21 million and a timetable that sees that number gradually dwindle, inflation is kept in check. Since its founding 12 years ago, its monetary policy has stayed mostly unaltered and steady, making it seem like a permanent fixture. Bitcoin's tokenomics are seen as appealing by some prospective investors because of these properties. 

Tokens Vs. Coins

It's important to note that currencies were originally designed to work only with their own blockchain. 

Tokens are used for something else entirely. Because of their specific applications and roles as "things" in their ecosystem, they are often referred to by those terms. However, they may play more than one part. Tokens may be used to represent a variety of rights and interests, including stakes and votes, and they are not limited to a single blockchain. When buying virtual goods in Decentraland's MANA token marketplace, for instance, tokens are destroyed.

Coins, on the other hand, have a history of usage as currency but also have other use. Coins, then, are the native monies of certain blockchains, such as Bitcoin or Ethereum. The Securities Exchange Commission (SEC) claims they are equivalent to currency in practice. That's why you'll see Bitcoin and Ethereum on the list.

With your newfound knowledge, you can now be that person at social gatherings who politely corrects others when they use the words "token" or "coin" in the wrong context. Moreover, you can now join the briansclub community to have tokens or coins.

However, compliance with laws is one of many factors that necessitates distinction. As an investor, you should care about the difference in how regulators approach coins and tokens. You want the SEC to avoid coming along and hitting your project with a big punishment or, worse, shut it down since certain tokens have qualities that make them strikingly similar to corporate stocks.

What is Tokenomics Supply?

Token scarcity and its associated value are closely related to the number of tokens created and distributed. Tokens with a limited quantity are assumed to be rare and valuable, whereas tokens with a huge supply are assumed to be low in scarcity and low value. However, these assumptions only tell part of the story. Scarcity is a part of the supply picture, but supply and demand also play a role.

Scarcity alone does not elevate an item's value. Taking a photograph of anything may make it rare, but it doesn't mean it's always valuable. The present and future worth of that photograph depends on how much interest there is in it. Even if a painting has perfect composition and vivid coloration, its worth will be minimal if no one wants to buy it. This is also true with digital currency.

To begin, there is the total number of tokens in circulation. This metric assesses the total number of tradable, usable, and holdable tokens in existence at any one time. There are now more than 18 million Bitcoins in circulation. This is the total amount that has been mined and released into circulation. Bitcoin's maximum supply, or the maximum number of coins that will ever be minted, is 21 million. 

When counting coins in circulation, the total supply is calculated by deducting the maximum supply from the actual number of coins in circulation, which may be done by burning or other techniques that can be accounted for. Due to the fact that no Bitcoins have been intentionally taken from circulation by the network, the total supply and the circulating supply remain the same. Coins may be lost, destroyed, or confiscated without affecting the overall supply since these events are not the responsibility of the network.

The total market value of a cryptocurrency is based on its current price and the total number of coins in circulation. For this reason, coins with vastly different prices but the same market cap may both trade at the same price. To illustrate, Chainlink is trading at over $40 while USD Coin is trading at just $1. However, due to USD Coin's significantly greater circulating supply of over 14 Billion compared to only 400 Million for Chainlink, their market capitalization are quite close at $17 Billion and $14 Billion. A coin is not "cheap" only because of its price, and it is crucial that you realize this. Even at $3 each, tokens might be overpriced in certain situations. As a result, it is more appropriate to look at the token's market cap than its current price when trying to estimate its true worth.

A token's value may rise or fall in response to events that affect its circulating supply, which is tied to its price and market capitalization. If for a Proof of stake blockchain, tokens may be staked for rewards in exchange for acting as a validator, then those tokens will be effectively "locked up" and taken out of circulation. Because of the interplay between supply and demand, prices tend to rise when demand is steady while supply falls. On the other hand, the price may drop if a significant number of staked tokens are suddenly unstacked and added to circulation. When supply rises, but demand remains unchanged, prices fall.

This idea is also applicable to the maximum and total supply. The price may benefit in the short and long term from an occurrence that reduces the maximum supply of tokens. Keep in mind that the fundamental drivers of pricing are changes in supply and demand. This allows the value of tokens with an infinite supply to be maintained and even to rise as time goes on. Some people have issues with Ethereum since there is no hard cap on the total amount that can ever be created of the cryptocurrency. And yet, huge demand is what's allowing Ethereum's price to keep going up despite all of this. This is due to the tremendous demand from both institutional investors and regular people who wish to use ETH-based apps. The price of ETH rises when the desire to purchase it exceeds the supply, both in terms of the number of persons selling and the number of new tokens being introduced to circulation.

Teams may increase the value of their token by "burning" tokens, a process that permanently eliminates tokens from circulation. In order to increase the worth of tokens, they are "burned," or destroyed. Scheduled burns and fee burns are two frequent practices. Depending on the volume of tokens being burnt at any one time, planned burns have the potential to increase prices by creating a sudden drop in available tokens. In their most recent quarterly burn, which occurred on April 15, 2021, 1.09 million BNB, or $595 million at the time, were destroyed. While this may have a positive effect on BNB's price in the short term, it is not a sustainable strategy.

With the fee burn method, tokens are destroyed with a percentage of each charge to process a transaction, thereby reducing the total number of tokens in circulation. Since the quantity of tokens is decreased in response to the volume of traffic on the network, this method has the potential to be more long-lasting. It might be used to slow the issuance of new tokens, hence slowing inflation, or it could be used to make the token deflationary if it grows faster than inflation. Given that EIP 1559 will add a fee-burn mechanism to the Ethereum blockchain, this will be a massively-scaled test of the fee-burn strategy.

Newly launched tokens are available of many websites like briansclub where people can sell and buy tokens with their cards.

Token characteristics such as supply limit, inflation rate, and more are set by the cryptocurrency's monetary policy, just as they are for fiat currencies like the US dollar. This strategy may be utilized to effect either a rise or a drop in price or even to maintain the current level of prices.

Monetary policy

You may think of the token supply schedule as the rate of inflation since it specifies how many tokens will be issued or generated over a certain time period. A token's value might be negatively affected if the supply schedule issues too many tokens and there isn't enough demand to support them. On the other side, if there is more demand than supply, the price will rise if the token supply timetable is too tight. This schedule of deliveries might be either constant or flexible. Some cryptocurrencies, like Bitcoin, are designed with a static supply schedule and, by extension, a static monetary policy. 

Inflation of Bitcoin Vs Time

If you look at the chart below, you can view that the rate at which new bitcoins are being mined is now 6.25 per block, and that rate will remain constant even after the block reward is half every four years. Bitcoin's inflation rate is halved every four years, making the currency potentially deflationary if the maximum supply is reached. Since no further coins are being minted, those that are lost or destroyed are essentially withdrawn from circulation, increasing the value of the surviving ones and so contributing to deflation.

Ethereum’s Projected Issurance Rate

When we talk about tokens like Ethereum, we're talking about something whose monetary policy can be altered. The first block reward for Ethereum was 5 ETH, and since then, there have been two adjustments. This has reduced the block reward to its present level of 2 ETH and created a supply schedule similar to Bitcoin's, where the block reward has fallen over time, essentially reducing its inflation rate.

EthHub

Ethereum is interesting because its large ecosystem of Dapps is seeing an increasing use and lock up of ETH, even though it lacks a max supply like Bitcoin. Since ETH is the native token used to power its Dapps, the rise in usage drives up demand since more ETH is being locked up in these Dapps and, therefore, out of circulation. Since there is no limit on the number of Ethereum that can be created, its price has been rising steadily due to the high demand for the cryptocurrency.

Ethereum has several network updates planned for the future, some of which may raise demand while others reduce supply. Ethereum is able to experiment with and learn about how to optimize ETH and the network as a whole because of the flexibility of its monetary policy. Although a fixed monetary policy has its uses, a flexible one enables the token to try out different monetary solutions, which may improve the token's tokenomics.

Distribution of Tokens

There are two ways a team might release a token: a fair launch or a pre-mine. When a token is launched, it should be possible for everyone to get it, and this is known as a "fair launch." Tokens are "pre-mined" before they are released, which may be done in whole or in part. Before releasing it to the general public, it is given to a select group of people, including the company's founders, private investors, the development treasury, and other influential people.

Everyone who wanted Bitcoin had to go through the same procedures. This is an example of a fair launch. Anyone who wanted Bitcoin at the time had to "mine" for it. Every miner used identical procedures to mine Bitcoin successfully; there was no initial distribution of Bitcoins to investors or the inventor.

In contrast, a pre-mine may favor certain people more than others. There's nothing intrinsically wrong with a pre-mine; rather, it's how the tokens are allocated upon launch that may make or break the project.

For instance, there are costs, like labour and other development overhead, that must be covered in order to create a token and the ecosystem that surrounds it. Considering this context, it's reasonable to assume that the development team will need access to capital in order to support further expansion. It is usual practise to do this by allocating a certain fraction of the overall supply to each member of the team. A source of contention might arise from the method through which this supply is allocated. It's possible that the team's decision to keep 5% of the overall supply for internal use in order to finance development wasn't seen as problematic at the time. 

One may argue that the team is hoarding tokens that could have been distributed to the public if the allocation to the team was 50% rather than the more common 25%. Since development requires token sales, a significant sale by the team might have a negative effect on the price if they control a substantial share of the supply.

Teams have a lot of options on how to get tokens into the hands of the public. It is clear that they have developed and shifted through time in the examples provided. Each of these approaches of distributing tokens to the public and the incentives they provide varies in what it can and cannot do.

Coinlist

In 2017, Initial Coin Offerings (ICOs) became the most common way for companies to generate capital by making a portion of their token supply available for purchase by the public. Token prices would be determined beforehand, and the public sale would close after the target amount of cash had been acquired. At its ICO in 2014, Ethereum raised $16 million for $0.31 per ETH.