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What is Tokenomics? A Look Into Web3 Economies

Polemos
07/10/2022

The world of GameFi is unique in many capacities—its terminology is no exception. Tokenomics is a term included in nearly every whitepaper in the blockchain metaverse and serves a valuable purpose in each project’s ecosystem. 

What is Tokenomics?

Tokenomics is a term used in decentralized finance that is a blending of  “token” and “economics.” This term is used to describe the blockchain project’s cryptocurrency economy. Each GameFi project has its own specific rules and guidelines for its tokenomics functionalities. 

Tokenomics are written in a code that is transparent, easily documented, and very difficult to revise. In respect to tokenomics, the “token” component also includes coins. To gain a more in-depth insight into the differences between coins and tokens, read our article here.

Factors of Tokenomics

Every crypto economy’s tokenomics are different, but all GameFi projects share a core set of key factors that make up their tokenomics. 

Supply

What is Tokenomics article, explaining supply.

Just like the traditional market, supply and demand is a main component of a token’s value. Supply metrics for tokenomics can be categorized into two parts: maximum supply and circulating supply. 

A maximum supply is the fixed amount of tokens that can be in mint. Once the maximum supply of that particular token is reached, no more will ever be created. This is known as a deflationary token. Inflationary tokens do not have a maximum supply, such as Ethereum, which increases its output of tokens every year. 

Circulating supply is the total amount of tokens in circulation at any given time. Several factors that affect the circulating supply are how many tokens are being minted, burned, sold, or locked for a set period of time. 

Utility

token utility in cryptocurrency economies. When wondering what is tokenomics, it's crucial to understand it.

The utility of a token refers to what the token is designed to do within the project. This is arguably the most important component of tokenomics. A token must be purposeful in order to have any value. There are four different types of tokens: utility, governance, security, and stablecoin. 

Most cryptocurrency tokens are considered utility tokens. These tokens provide access to a particular service by utilizing blockchain technology. Utility tokens can be used to make in-game purchases, pay trading fees, as well as be traded on many crypto exchanges. 

Governance tokens can be considered stakes in a company and are used for voting rights on the token’s protocol. This type of token helps keep blockchain projects decentralized. The use of governance tokens is an efficient way to distribute voting control amongst stakeholders.

Security tokens are used as preservation of stake in a blockchain project. These tokens help provide peace of mind to stakeholders because their stake is preserved on a public ledger, mitigating the possibility of financial misunderstandings within the organization later down the line. Security tokens can be utilized as smart contracts to indicate asset or partial asset ownership. 

A stablecoin is also known as a digital dollar. Stablecoins differ from the other token types because they are pegged to some form of fiat currency. For example, USDC is a stablecoin managed by Circle, a private company that has an investment portfolio that matches the circulating supply. To learn more about USDC and the treasuries that back up this coin, click here.

Allocation and Distribution

tokenomics, how crypto gets distributed

The launch and distribution of tokens is also a crucial component of understanding tokenomics. There are two types of token launches: pre-mined and fair launch. 

Pre-mining is a way to reward early investors, developers, and founders by offering a certain amount of tokens before the public release. These tokens are either awarded for free or offered at a discounted price. This type of launch is associated with Initial Coin Offerings (ICOs).

A fair launch means that there is no access to the tokens before public release. This gives the entire community an equal opportunity to buy, sell, and earn tokens. 

Incentives

Establishing trust within a project’s community paves the way for an increased monetary value of its respective token. If the community believes in the project and it reflects in significant token ownership, the more likely the price of that coin is to increase. A solid incentive structure is an important component in ensuring the stability and growth of the project. 

Why Do Tokenomics Matter?

Tokenomics are like the financial blueprint of GameFi. Understanding a project’s crypto economy allows you to make an informed investment decision. Your time, your investment, your choice. Knowing what different tokens are used for within a project makes for a well-informed investor. 

Having a solid understanding of tokenomics is only one piece of the puzzle in the complex world of GameFi. Check out our other educational articles to elevate your understanding of crypto, DeFi, and GameFi, so you can invest safely and securely. 

Additional Resources

FAQ: Crypto Basics

Article: What is NFT Staking?

Article: What is a Fiat Withdrawal?
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