Tokenomics - the word ‘tokenomics’ is a portmanteau, made up of two words: token and economics. So, tokenomics is basically token economics or crypto economics. It is the study of the economics of a crypto token - from its qualities to its distribution and production, and much more

What is a token?

In tokenomics, crypto tokens (or simply tokens) are units of value that blockchain-based projects build on top of an existing blockchain. Crypto tokens, like cryptocurrency, can be exchanged and hold a certain value but they are a completely different digital asset class.

In order to know more about tokenomics, it is important to know about the various types of tokens, one of the classifications divides tokens into two types: Layer 1 and Layer 2.

Layer 1 tokens - represents a specific blockchain and are used for other services like investments, storage, purchase etc. they settle every transaction on their network.

Layer 2 tokes - are designed to help scale decentralized applications in a network. (polygon)

Fungible tokens - fungibility is the property of assets to be interchangeable for another of the same kind. Hence, fungible tokens are the ones that have the same value and can be replaced with each other. Gold can be a great example of a fungible asset because its valuation remains the same across countries.

Non-fungible tokens - or NFTs, on the other hand, are unique and don’t have the same value. With the tokenization of assets such as artwork, furniture and real estate, NFTs are basically physical times held digitally. This new revolution of digital ownership has made NFTs really popular in recent years, with some being auctioned for millions of dollars. (crypto punks)

 The last possible classification is base on their usage.

1. Security tokens - are digital investments contracts which represent ownership for fractions of an asset.

2. Utility tokens - are more well-known. They are issued through an ICO and are useful in capitalizing a network.

Distribution and allocation of tokens

One of the primary factors that decide a crypto token’s worth is how the token is being distributed. There are two ways of generating crypto tokens - either by pre-mining or by a launch. By the phrase “fair launch:, we mean that a cryptocurrency is mined, earned, owned and governed by the community from the outset. It is a decentralized network and no concept of private allocation exist here. However, with pre-mining, a portion of the coins is created (mined) and distributed before it is launched publicly. A portion of the coins are sold to prospective buyersw in an initial coin offering (ICO). this is a way to reward founders, miners and early investors with newly minted coins.

Supply of Token

A very important paramete required to study a crypto’s tokenomics is the supply of a token. There are three kinds of supply for crypto tokens - circulating supply, total supply amd max supply. Circulating supply refers to the number of cryptocurrency tokens the are issued publicly and are in circulation. Toal supply, meanwhile, is the number of tokens that exist currently, minus all tokens that were burned. It is calculated as the sum total of tokens currently in circulation and the tokens that are locked somehow. Lastly, total supply cannot be confused with max supply, which quantifies the maximum number of tokens that will ever be generated.  IDLE (IDLE)

Market Capitalization of a token

In the context of cryptocurrencies, the market capitalization or market cap is a metric use to determine the popularity of the token, it is calculated by multiplying the current market price of a token with the circulating supply. The market cap is a good indicator of the value of the token, even in the long run. Small-cap cryptocurrencies are therefore riskier. While large-cap cryptocurrencies often potentially guarantee better returns and safety. 

Token Model

Every crypto token has a model which ultimately determines its value. Some tokens are inflationary, which is why they don’t have a max supply and can keep mining as time goes on. Quite the opposite are deflationary tokens where the token supply is capped at max supply. Deflationary tokens are useful to avoid circulating unsold coins and are usually not affected by market volatility. Inflationary tokens, on the other hand, does a good job at incentivizing miners, delegators and validators in the network.

Price Stability

Tokenomics also points out how important it is to study the implications of price stability cryptocurrencies are known for their volatility, which might not always work out in favour of the investor. Fluctuations can often lead to dwindling interest among investors. Furthermore, fluctuations can even lead to networks being restricted.

Investors should make sure that the project is doing everything to combat such fluctuations. The challenge could be dealt with by ensuring there a adequate tokens to match the supply levels. This would stabilize the price anf thereby, investors can use the tokens for their intended purpose. Tokenoics can also help developers to establize the prices by creating equilibrium.