Tokenomics

¿What are Tokenomics? Are you going to launch a project and intend to tokenize it to access third-party financing? Do you know how you will use the funding obtained? Have you stipulated a roadmap or white paper indicating the distribution percentages of these resources? Will you continue to issue new tokens as time goes on? If so, how often are you going to issue them? What liquidity pools will you use to secure the exchange of the tokens? What will token owners have access to?

Tokenomics

These and many other questions arise when tokenizing a project.

It is therefore essential to have a clear outline of the characteristics of the token to be issued.

In order for you to take into account everything you should consider, here is a detailed list of the key aspects of Tokenomics that you should consider:

1. Offering of tokens/cryptocurrencies

Think of a fiat currency such as the euro. You may be wondering how many euros, in total, are in circulation now? How many more can be printed in the future? Are euros printed but not in circulation? Well, there are exactly the same concerns in cryptocurrencies and these are aspects you should consider:

Circulating Supply: the amount of coins (tokens) circulating in the market and owned by users.
Maximum bid: maximum possible number of coins (tokens) that can exist.
Total Offertotal number of coins (tokens) issued so far and not necessarily in circulation. This includes burned coins or locked coins ready to be unlocked in the future.

If this seems too complex for you, enlist the help of a cryptocurrency advisor.

The following image shows the supplies of three globally recognized cryptographic projects: Bitcoin, Ethereum and Cardano.

Here are some quick conclusions you can make after looking at those numbers:

Bitcoin and Cardano have limited maximum supplies.
Ethereum has no maximum supply.
Cardano does not have all of its coins issued in circulation.
Bitcoin has 90% of its maximum supply in circulation.

Now you may wonder why it is important to verify and analyze these numbers.

These data are perfect indicators for analyzing supply and demand.

Here are some examples:

If an asset is scarce and there is a high demand for it, its price may increase.
Similarly, if there is an oversupply because there is no maximum supply, there may be a surplus of the cryptocurrency in the market and a decrease in the price.
Once blocked coins are released to the market, they can affect the price.

2. Token burning

Have you ever destroyed your fiat money? The token burning process is exactly this and is an important aspect of the tokenomics field.

The world of cryptocurrencies has no washing machines, VIP tables in nightclubs, waste garbage cans or governments. However, the flaring process occurs in this industry for a whole set of different purposes.

To reduce coins in circulation
To match supply and demand
Make assets less inflationary

The general idea behind the burning process is to make the currency more scarce and less inflationary.

There is no single approach that all projects follow to burn their tokens. Some are burned at scheduled intervals. Some others burn part of the transaction fees.

The following image shows the burn-in mechanisms of two famous crypto projects, Ethereum and Binance Coin, and the renowned MEME token, Shiba Inu.

Here are some conclusions you can draw after looking at these examples:

Ethereum burning occurs at the transaction fee level.
Binance Coin has scheduled burns.
Shiba Inu burns its token in a completely random and unscheduled manner.

3. Monetary policy

In the world of traditional finance, we hear the terms “inflation” and “deflation”. We also hear a lot about printing money out of thin air.

We will not go into detail about what causes each of these phenomena.

Instead, we would like to emphasize that whether there is “inflation” or “deflation” depends mainly on monetary policies. As the main entities in charge of fiat money, governments and central banks moderate these factors and play an undeniable role in them. Inflation and deflation are terms used in both the world of economics and tokenomics.

Now, back to the world of cryptocurrencies. Monetary policy in cryptoassets is related to two things:

Is the currency inflationary or deflationary?
What are the plans for the issuance of tokens in the future?

Both aspects are essential, for the same reasons that are important with fiat currencies. Inflation, deflation and issuance play a vital role in current and future price movements.

Now the question is how can we review the monetary policy of the different projects?

Some of this data is available online through the projects’ consensus mechanisms. This is something related to the source code and infrastructure of the project under review.

Simply put, a consensus mechanism refers to any methodology used to achieve agreement, trust and security in a decentralized network. The most predominant examples are the proof of work and the proof of stake.

4. Token distribution

This is where things get more interesting. We all know or have heard about the stories of the rich getting richer or the 80-20 rule in traditional finance. Approximately 20% of the total population owns 80% of the wealth. We all know how unfair the distribution of wealth can be, especially in less developed countries.

Obviously we do not want to see this rule applied in the world of cryptocurrencies. A good project will have a fair distribution of its tokens while at the same time attract new investors and

Token distribution is an essential factor in the world of tokenomics that must be verified and analyzed when analyzing a cryptocurrency project.

More specifically, it is necessary to ask:

How were the tokens initially distributed (pre-mining, ICO, etc.)?
What percentage of the tokens are owned by the project founders or initial developers?
What is the maximum percentage that public investors can own?
Are there locked tokens reserved for future distribution? If so, what are the plans to make that happen?
Are there any large wallets that hold the most tokens? And in what percentages?
Is it possible that at some point, a large wallet will sell its tokens and manipulate the market?

These are just some of the questions to ask yourself when evaluating the distribution and economics of tokens (or tokenomics). . The answers to these questions (and others like them) can provide guidance on whether you should invest in a specific project or not.

Let’s review the token distribution of four famous cryptocurrencies – Uniswap, Avalanche, Solana and Elrond.