Tokenomics: The Main Principles

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  • Tokenomics is the economics of using tokens. A token is another name for crypto-assets or cryptocurrencies that people can use to buy and sell or play in casinos like Vulkan Bet. Tokens also rely on blockchain technology. Some companies sell tokens instead of shares in the hopes that the tokens will increase in value over time.

    Today, we will be exploring the main principles behind tokenomics. We will attempt to explain what it is, how it works, and what the future is likely to be in the world of crypto assets.

    The Basics of Tokenomics

    Tokenomics has something in common with how central banks operate. Central banks control the printing of money, and it either encourages or discourages people from increasing the value of goods and services.

    However, unlike central banks, tokens and coins operate with a code. This code or rule is transparent and predictable. On the other hand, central banks are operated by people — the authorities can print paper at will.

    For example, Bitcoin has a limit of 21 million coins. A new bitcoin can only be generated by mining. Mining means solving a complex problem, and people with powerful computers that can solve these problems get rewarded with a coin every ten minutes.

    Since people know that bitcoin has a limit, they also know what will happen to its supply and make projections on how much it will cost. In short, they can predict the economics of bitcoin.

    The Elements of a Token

    Tokenomics refers to the entire umbrella of principles in the world of blockchain. However, it has certain elements or factors that one has to consider before investing.

    The Supply

    As with any other thing in the world, a price is dictated by supply and demand. In cryptocurrency, there is a maximum supply. For example, bitcoin will reach 21 million and no more. As bitcoin reaches that capacity, no other supply of bitcoin will be added.

    However, not all tokens have a maim supply. One example of this is Ethereum, whose supply count increases every year. There are also coins like USDT and BUSD, with no maximum supply. Instead, the number of coins in circulation relies on the reserves or assets that back the coins.

    The next thing to know about supply is the amount in circulation, or what experts call the circulating supply. While people can mine coins, it is important to know how many are in circulation so they can make projections about the price and its movement.

    The Utility

    The next factor that affects tokenomics is utility or function. It essentially refers to what the coin was designed to do. For example, a token called BNB is used primarily to pay fees when someone makes a transaction on the Binance cryptocurrency exchange system.

    Bitcoin, on the other hand, functions like fiat currency where you can use it to purchase just about anything from anyone who accepts bitcoin.

    Tokens are designed for many reasons, not just to buy and sell. Today, some tokens represent fiat money, like the USDT. Some companies may also issue tokens when they sell shares, which they call an Initial Coin Offering, or ICO. People who buy the coins have the right to the company’s dividends and ownership of shares.

    What Is an Incentive Mechanism?

    An incentive mechanism refers to what a person or owner of the token could get from owning it. Bitcoin, for example, has value. The price goes up, and as such, the owner’s incentive is profit.

    Today, many token creators use Proof of Stake as an incentive mechanism. It allows the owners of the tokens to lock their tokens and then validate the transactions. The more locked-up tokens they have, the higher the chances are of being chosen as a validator, not just an owner.

    The incentive here is that participants will act honestly and not manipulate the system. If people act honestly, the reward, or incentive, is a fair token system.

    Another example of an incentive is Compound, which is a crypto that lends money. It allows investors to collect interest on the money they lent. As they lend money, they also get COMP tokens, which they can sell later.

    The Future of Tokenomics

    Tokenomics will continue to evolve. Its main components are supply, integrity or credibility of the process, and incentives. Unlike central banks and fiat money, most tokens are decentralized, meaning no single person or entity controls its supply and economics.

    Governments are now on track to use tokens. China as e-CNY, a digital coin that represents its very own fiat, but in digital form. The US has USDT, and other countries are also beginning to create stable coins that the public can use without the need for paper money. In essence, tokenomics is paving the way for a cashless society.