What is Tokenomics and What Are Its Factors?

What is Tokenomics?

Tokenomics is a combination of two terms: ‘token’ and ‘economics’. Hence, it is essentially the economics of a cryptocurrency – referring to all the factors that determine and affect the value of a token.

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A token is a digital unit of a cryptocurrency that is used as a specific asset or to represent a specific use on the blockchain.

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Tokenomics covers all the aspects of a cryptocurrency’s creation, management, and even removal from the network. As such, it is one of the most important features – alongside community, roadmap, team, and whitepaper – when deciding whether to invest in a particular blockchain project.

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What Factors are Included in Tokenomics?

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Token Burning

Several cryptocurrency projects regularly employ a burning mechanism, which means a portion of the token’s supply is removed from circulation permanently. This mechanism helps to reduce the token supply over time to make a deflationary cryptocurrency. As such, it has the opposite effect of inflation.

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Token Distribution

One of the main factors that determine a crypto token’s value is how the manner in which it is being distributed. There are generally two ways of generating and distributing tokens:

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Fair Launch

A fair launch refers to when the concept of early access or private allocations do not exist. Instead, a cryptocurrency is mined, earned, owned, and governed by the community from the beginning.

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Pre-Mining

With pre-mining, a portion of the cryptocurrency is created and distributed to a select group of prospective investors in an Initial Coin Offering (ICO) before being offered to the public.

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Token Market Capitalization

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Market Capitalization

Market capitalization, or market cap, is a metric used to determine how popular a token is. It is calculated through the following formula:

Market Cap = Current Price x Circulating Supply

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For example, if the current market price of Token A is $10 and its circulating supply is 50,000,000. Then, Token A’s Market Cap = $10 x 50,000,000 = $500,000,000

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The market cap of a token is generally a good indicator of its value, even in the long run. Therefore, small-cap cryptocurrencies are typically considered riskier (although they can also promise higher returns), while large-cap cryptocurrencies are often considered safer.

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Fully Diluted Market Capitalization

On the other hand, fully diluted market capitalization can be calculated through the following formula:

Fully Diluted Market Cap = Current Price x Max Supply (or Total Supply is a token doesn’t have a maximum supply)

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For example, if the current market price of Token A is $10 and its maximum supply is 200,000,000. Then, Token ’s Market Cap = $10 x 200,000,000 = $2,00,000,000

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Fully Diluted Market Cap help emphasize the potential for a user’s investment to be diluted by an increase in the token supply if the market demand for the token does not keep up with or exceed the inflation rate. Token owners are generally affected by supply dilution, barring a few exceptions.

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For example, a user buys 1,000 Token Bs, which make up of 5% of B's circulating supply at the time. If the inflation rate doubles the supply the following year, the user would only end up owning 2.5% of the circulating supply.

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Token Supply

Supply and demand are the key factors influencing the price of any good or service, including cryptocurrency. In fact, a crypto’s supply can be a powerful factor in determining a token’s price – especially over a longer period of time. There are various metrics that measure a token’s supply:

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Circulating Supply

Circulating supply refers to the number of tokens circulating in the market. The initial circulating supply differs significantly among different cryptocurrencies. Once a token is launched and its initial token supply has started circulating, its rate of supply distribution could remain linear or vary over time. Some facts that can affect the inflation rate are mining rewards, staking rewards, incentives, and the token unlock schedule that determines when eligible investors will receive their tokens in exchange for their initial investment.

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Total Supply

Total supply is the number of tokens that currently exist, minus the tokens that have been burned. It can also be calculated as the sum total of the tokens in circulation and the tokens that are locked.

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Token Supply = Onchain Supply – Burned Tokens

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Maximum Supply

Maximum supply refers to the maximum number of tokens coded to exist in the lifetime of the cryptocurrency. For example, Bitcoin (BTC) has a maximum supply of 21 million coins and MANTRA (OM) has a maximum supply of 888,888,888 tokens.

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On the other hand, some tokens don’t have a maximum supply, such as Ethereum (ETH) and Dogecoin (DOGE). In other words, they have unlimited supply and their network supply increases every year. Stablecoins, such as Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) also don’t have a maximum supply as they are issued depending on the reserves backing them.

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Token Utility

Token utility refers to use cases of a token. These use cases can include using a token to:

• Pay for transaction fees
• Enjoy trading discounts
• Accessing crypto launchpad
• Staking
• Governance
• And more

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One Last Thing…

Users who are interested in finding a cryptocurrency’s tokenomics can usually find them in the project’s whitepaper. Otherwise, the information can also be taken from cryptocurrency data aggregators, such as CoinGecko and CoinMarketCap.