What is Tokenomics

Tokenomics describes the factors that impact a token’s use and value, including the token’s creation, supply and demand, incentive mechanisms, etc. Assessing a project’s tokenomics before deciding to participate is essential since tokenomics is crucial to the future prospects of a blockchain project. Crypto projects should carefully design their tokenomics to ensure sustainable long-term development.

For more information about Token, please refer to the content: What is Coin and Token

Here are some variables that developers commonly change to influence tokenomics.

Token supply

Maximum supply: The maximum number of tokens coded to exist in the lifetime of this cryptocurrency. For instance, Bitcoin has a maximum supply of 21 million coins and Binance Coin has a maximum supply of 200 million. Some tokens don’t have a maximum supply. For instance, Ethereum’s supply increases every year. Stablecoins like USDT, USDC, and BUSD have no maximum supply as these coins are issued based on the reserves backing the coins.

Total supply: The total number of tokens that exist on the blockchain, including tokens that aren’t in public circulation. For example, there might be some tokens forgotten by someone in a wallet but these tokens should be added to the total supply. However, the total supply doesn’t include coins that have been burned.

Circulating supply: The number of tokens in circulation. Circulating supply can be used to determine a cryptocurrency's Market Cap. This number can fluctuate constantly depending on the number of new tokens being minted and burned, or being locked up in other ways.

Token Burn

Token burn refers to tokens that have been permanently removed from circulation by being sent to a wallet to which nobody has the key. The goal of token burning is to reduce the overall supply of a cryptocurrency, thus raising demand and preventing inflation.

Yields

Yield farming is a method of pursuing investment gains through depositing cryptocurrency in a pool. Decentralized finance platforms offer high yields to incentivize people to buy and stake tokens. People may lend funds to anyone expecting a loan via smart contracts, and earn interest and principal in the form of tokens.

For more information about yields, please refer to the content: What is Yield Farming & Liquidity Mining

Mining and Staking

Initial blockchains like Bitcoin and several other cryptocurrencies release tokens to incentivize miners for validating transactions. This process is called proof-of-work (PoW). New tokens are given to those who devote their computing power to mining new blocks and adding them to the blockchain. In proof-of-stake (PoS) platforms, cryptocurrency owners can validate block transactions based on the number of staked coins. Cardano and Solana are the prominent platforms that use this model.

Conclusion

Apart from the above variables, there are also some other elements such as token distribution and vesting, token utility, and token governance, which would affect tokenomics. It’s important to note that no single factor can let you fully understand a token. Your assessment should be based on as many factors as possible and analyzed as a whole.