Behind the blockchain technology and the dense universe of cryptocurrencies, there is the question of the fundamentals of these cryptocurrencies and projects. It is important to understand how a protocol, a token, is structured. It is in this sense that the study of the tokenomics of a project is essential before getting involved and investing capital in it. In particular, this can help answer the following questions:
- What is the total supply of the token?
- How is governance structured?
- How is the token distributed and distributed?
What is “tokenomics”?
Etymologically, tokenomics is made up of two English notions: token and economy. It is literally “the economy of a token”. In other words, it covers all the fundamentals of a cryptographic project produced by development teams. In a way, they are the specifics of a cryptocurrency project. To refer to tokenomics it is therefore necessary to deepen the white paper of the crypto project.
Information on the components of this tokenomic is of great importance to investors participating in a project. They will include all layers of a cryptographic protocol. Know, its blockchain, the token associated with it, but also the total amount of currency (often known as the total supply) or the commissions and methods of staking.
Finally, note that token valuation can be heavily influenced by cryptocurrency tokenomics.
How does it actually work?
To fully understand how tokenomics works, you need to understand that there are two opposite models: deflationary and inflationary tokens.
- The balanced inflation model : Many projects are created without restrictions on issuing tokens. This is the case, for example, of ethereum protocol. However, there are mechanisms that have been put in place to limit inflation or even create a deflationary system. The tokenomics of this Ethereum project evoke all these elements and in particular the implementation of future updates of the Ethereum network.
- The deflationary model of limited quantities : We find here the pattern used by bitcoin, that is, a fixed total supply and less and less money issued over time. Solana or even Tron use this same process. In the case of Bitcoin, we know in advance that a miner’s reward will decrease over time. This is because the reward is halved every 210,000 blocks, resulting in a halving every 4 years with the assumption of 10 minutes of mining time per block.
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What is it for?
One of the primary objectives of tokenomics is to guard against inflation, the nuisance of market economies. The idea is therefore to prevent the same phenomenon from occurring inside the cryptosphere. To do this, an operating mode is put in place that makes it possible to guarantee the stability of the price of a cryptocurrency.
Another element determined by tokenomics, it is to ensure control of the amount of tokens in circulation. By defining this cryptographic mass in advance, a creation that is too large and harmful for the good development of the project is avoided.
The key elements to take into account in the tokenomics of a project?
To be in line with a solid business model, the project needs several milestones. It is important to find these steps in the tokenomics of the project.
- The total supply : is the maximum amount of tokens issued by the operation of the blockchain.
- The show : is the quantity of tokens created and donated to the validators of a blockchain. Apart from
- The distribution : Typically occurs during the market introduction (ICO) of a cryptocurrency project. The allocation will be between the project developers, the community, the investors or any other type of buyer during the fundraising.
Conclusion: the specifics of a cryptocurrency
Tokenomics it is essential for both professional and private investors. The latter must thoroughly study the tokenomics of a project before investing. It is a necessary job to know the rules of governance, distribution… and everything related to it.