Introduction to Tokenomics

Published in

Coinmonks

5 min readFeb 12, 2023

For years, our economy was controlled entirely by rules and regulations made by the government. Whether you support that or not, there was simply no other option.

That is, until the very first cryptocurrency was launched, Bitcoin. Suddenly, there was this entirely different monetary system that was separate from everything else.

And this introduced a completely new concept, Tokenomics. Tokenomics are the methodology behind a decentralized network. They’re the same as rules and laws for our usual money.

So, what are the main ingredients of Tokenomics?

Incentive Theory

The most important aspect that Tokenomics (and every other economy) is built on is the Incentive Theory. In order to drive an economy forward, a system of incentives, both positive and negative, need to be in place.

The most prominent example of this incentive system exists in the token creation process. Usually, the creation of new tokens is through the process of mining, where users contribute computational power in order to validate transactions and get tokens in return.

There are many more examples, and not all tokens and cryptocurrencies use mining. However, in the last couple of years, mining have been the most popular method for token generation.

Do you see? You contribute something and get something in return. The network gives you the incentive to do what it wants. And this is the core of Tokenomics.

Initial Coin Offering

However, in order to give incentives, you need to generate a certain amount of initial value. This happens through an Initial Coin Offering (ICO).

At the launch, the developers would generate a certain amount of tokens, and then sell them to early backers, shareholders, or the public.

This process should be balanced. What does this mean? It means you should give enough tokens to people who supported the project in the early stages, but you should also leave enough tokens to the public.

People don’t want to get into a project where the majority of the value is held by a small group of elites. In this way, they would feel like they are only there to drive the value up for others.

Also, if there are too many tokens in the hands of the developers and shareholders, people might think the project is a scam or a rug pull. Unfortunately, there are a lot of examples where this turned out to be true.

Use Cases

Of course, there is another important component and driving force for a tokenomic system, the use case of the token. If your token can’t be used for anything, why would people want to use it?

The more use cases your token has, the more valuable it will be, and the more robust your tokenomic system will be.

There could be a lot of use cases for your token, mostly depending on the token’s type. So, what are the main token types, and what are their differences?

Utility VS Security VS Platform VS Payment

So, there are four main types of players in the token world.

The first is a utility token, as is inferred from their name, which is a token that provides a certain service to the user. As such, they naturally have as much value as the services it provides.

A security token is a bit more interesting. Those represent ownership in a company, fund, or asset, similar to traditional securities. Their value is naturally tied to what they represent.

A platform token is a bit more special. They are tied to a certain platform or application, and every service this platform provides. Their value comes from the utility that their platform provides in exchange for them.

A payment token is a rare beast. This token’s only value is that it can be used as a currency. Then why is it rare?

Because we have cryptocurrencies for that. Don’t be mistaken, crypto currencies and crypto tokens have a significant difference them.

A cryptocurrency is the fuel of the blockchain. It is responsible for the day-to-day operations of the chain, such as running transactions and executing smart contracts.

Thus, it has value as the driver of the economy. But a payment token can’t do the same. It’s simply a type of asset on the chain, and you would still need to use the native cryptocurrency to support transactions. So, why not transact in it instead?

If we were to sum things up, the value of a token’s use cases is dependent on its type. But even then, there is another thing that influences a token’s worth…

The Clout

We can’t afford to talk about the elephant in the room. Yes, sometimes the value of a new token is purely speculative. The best example would be Dogecoin and Elon Musk.

Dogecoin belongs to a fifth category that we haven’t talked about, Meme Tokens. They are tokens that have no value except for the value assigned to them by the public.

In other words, they provide no utility and aren’t backed by any assets or companies. Their only value is the fact that an “influencer” or “crypto celebrity” released a tweet about them and pumped their price.

This makes the already unstable and unsteady scene of crypto tokens even worse. It may rob people of their entire fortune, just because they listened to someone they trust on social media.

Never, ever, trust anyone else with your money, not even family. Do your own research, and even then don’t invest money you can’t afford to lose.

Conclusion

The field of Tokenomics is still very much in the process of rapid development. No one really knows what’s the best way to do something, especially in a market that is often influenced by outside forces.

Hey, if you enjoyed this article, make sure to check out the other articles in the series “Introduction To…”, where I explain concepts in the world of Web3.0 in an easy-to-understand, approachable manner.