What is Tokenomics? The role of Tokenomics

Tokenomics is one of the most popular concepts in the cryptocurrency market. At the same time, this is also an important factor contributing to the success of projects in the crypto market. So what is Tokenomics and what is the role of Tokenomics for coins/tokens? Let's find out with Market247.io in this article.

What is Tokenomics?

First, let’s find out What is Tokenomics. Tokenomics is a compound word of the two terms Token and Economics. Tokenomics can be understood as the economy of the cryptocurrency market, how they are built and applied to the operating model of a cryptocurrency project.

It can be said that for cryptocurrencies, optimal Tokenomics design is an important factor. Reviewing and evaluating the Tokenomic of a project before making an investment decision is extremely important.

What is the role of Tokenomics?

To understand what is the role of Tokenomics, let's learn about the components involved in the tokenomics division of a Crypto project.

Teams and Advisors
Market Maker
Large investment fund
Retail investors

In essence, the majority of retail investors are participating in the game of the first 3 components. Retail investors participate in investing in tokens generated by the project and sold at a very low price to the initial investors.

In addition, if a project does not have effective control over the amount and timing of tokens circulating in the market, the possibility of tokens being inflated will be very high. This will result in the token losing its value. Therefore, understanding how tokenomics works, the number and timing of token allocation of a project is extremely important and should be thoroughly analyzed before making an investment decision.

7 factors of Tokenomics

Here are 7 key factors of Tokenomics for any crypto project. If you are learning about what is Tokenomics in crypto market, you need to understand these factors.

Coin/Token Supply

Coin/Token Supply is the first factor that you need to understand when find out what is tokenomics.

Total Supply

Total Supply is the total amount of coins/tokens circulating in the market plus the amount of coins/tokens that are locked minus the amount of coins/tokens that have been burned. At the time of project launch, total supply is the number designed by the development team to best match the project's operating model.

Aggregate supply has two main forms:

Fixed total supply: The number of coins/tokens that are first launched and cannot be changed
Total supply is not fixed: The number of coins/tokens may change during the operation of the project to match the actual situation.

Circulating Supply

Circulating supply is the number of tokens in circulation in the market.

Max Supply The maximum supply is the maximum amount of tokens that will exist, including those that will be mined or will be available in the future.

MarketCap & Fully Diluted Valuation

Market Cap

Market Cap is the capitalization of a project. In other words, it is the total market value of all the tokens in circulation of a project.

Market Cap = Circulating Supply * Token Price

Fully Diluted Valuation (FDV)

This index is understood as the capitalization of a project. The difference of FDV compared to Market Cap is that it is calculated by the total number of tokens in circulation and not yet unlocked of the project.

FDV = Total Supply * Token Price

Token Governance

At the moment, the number of coins/tokens on the market is about 10,000. They are divided into 3 basic categories as follows:

Decentralized tokens: These are coins/tokens whose governance mechanism is completely dependent on the community and is not controlled by any organization. Typical examples are Bitcoin and Ethereum.
Centralized Tokens: These are coins/tokens whose governance mechanism is controlled and decided by a leading organization. This organization has the right to influence and change the nature of a coin or project it represents. Usually, these are projects about Stalecoin such as Tether, TrueUSSD, tokens of issuing exchanges such as FTX, Houbi, ...
From Centralized to Decentralized: In addition to the above two types, some tokens initially went in the direction of centralization but gradually moved towards decentralization, where the community took control.

Token Allocation

Token Allocation is understood as the rate of allocation of tokens to related groups that have an impact on the development of the project. Common components of Team Allocation include:

Team

Most projects always have a token division for the project development team. The ideal number to be divided among the team is usually around 20% of the total supply. If this ratio is too low, the development team will not be motivated to accompany the project for a long time. If this ratio is too high, the community of participants will not have the incentive to hold the project token because it is too much dominated by the development team.

Foundation Reserve

This is understood as the project's reserve used to develop products and features to be released in the future. The percentage of this part is usually around 20-40%.

Liquidity Mining

This is the most common Allocation component in recent times. This is a token that is minted as a reward for those who provide accounts for the protocols of the DeFi ecosystem.

Seed/Private/Public Sale

This is the amount of tokens for the sale to raise capital for product development. For any project, there will usually be 3 rounds of token sales to the community.

Airdrop/Retroactive

In order to attract users to participate in the project at the beginning, projects will often organize an airdrop program for users and use a small amount of token allocation accounting for 1-2% of the total supply.

Token Release

Token Release is understood as a plan to release tokens to the circulation market. This is extremely important information when learning about what is Tokenomics, through Token Release, cps investors can know which phase of a project has a large discharge pressure. There are two main types of release: Initial Availability Scheduled Token Allocation: Common time periods are less than 1 year, 3 to 5 years, and over 10 years. Allocation according to performance: To solve the problem of inflation too fast compared to the original plan of the project. Some projects choose to issue tokens according to certain market-specific drivers rather than an initial set time.

Token Sale

Token sale is a form of raising capital through open rounds to sell tokens to the market. For traditional companies that usually have 5 rounds of funding, Crypto projects usually have 3 token sales. In recent years, projects have tended to lock up tokens for a long enough period of time. In addition, unlocking a small number of tokens will not cause a sharp drop in the token price, thereby ensuring the stability of the token price in the market.

Token Use Case

Token Use Case is one of the important factors when explore what is Tokenomics in cryptocurrency. Token use case is the intended use of a token. This is considered the most important factor of tokenomics to price a token, based on the benefits and applications of that token to the holders. Some common applications of the token are as a means of payment for transaction fees, Staking, Farming, Governance, ....

Conclusion

Above is all the information about what is Tokenomics that Market247.io has compiled. Hopefully this article has provided you with an overview of Tokenomics as well as the role Tokenomics plays in the development of a project. If you have any questions, don't forget to send it to our team for a timely response.

Disclaimer: This article is intended to provide information about what is Tokenomics, it is not investment advice.

FAQs - What is Tokenomics?

What is tokenomics design?

Tokenomics is one of the most important elements of design. Tokenomics design is the analysis, evaluation and design of Tokenomics constituting elements in the most reasonable way suitable for the operation of the project.

How does Tokennomics work for crypto?

In cryptocurrency, tokenomics is a general term used to capture the economics of tokens by describing the factors that affect the token's use and value. Such factors include the creation and distribution of the token, its supply and demand, its incentive mechanism, and its burn schedule.

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