Ever wondered how tokenomics is one of the most prominent factors impacting a token’s use and value? Understanding a fully-fledged token economy can be difficult for a person reading the whitepaper for the first time. In this blog, we will be breaking down the analytical aspects of tokenomics which will help you understand or even draft your own tokenomics.
But first, let’s understand the basics
What is a token?
A token is a simple representation of a digital unit in form of cryptocurrency. This token is represented for a particular use case on the blockchain. For example; Bitcoin which is the world’s largest cryptocurrency in terms of market cap is used as a decentralized payment of mechanism on a peer-to-peer basis.
One can say that a token is the single source of empowerment for a decentralized application to do everything from automating interest to selling virtual real estate in a metaverse. When creating such applications, selecting a particular token type also plays an essential role in the transfer of value from both the project and its users.
Types of Tokens
Firstly, exploration of discovering types of tokens is still undergoing, and mentioning all the types won’t be possible in a single blog. Therefore, we will brief on the primary or most frequently used types.
Layer 1 Tokens
These are the tokens that empower a blockchain network and act as a single medium for value transfer. Prominent examples of such tokens are Ethereum, Binance Coin, Solana, Avalanche, etc.
Layer 2 Tokens
Layer 2 tokens are built upon the layer 1 blockchain itself in order to reduce demand and network congestion. These L2 solutions help the blockchain to sustain sustainability within its ecosystem in terms of transaction fees and speed. Example includes Matic, Loopring, Optimism, and many more.
Utility tokens can be used for a specific purpose within the decentralized application on a blockchain. Through utility tokens, developers are able to customize their offering within a DApp to provide a unique value proposition and become a solution provider. Some examples of such tokens include Basic Attention Token, Chainlink, Zilliqa, and others.
Probably the most hyped token type since the past year, NFTs (Non-Fungible Tokens) represent a unique asset that can include art, digital content, or media. On May 3rd, 2014, Kevin McCoy and Anil Dash, a group of digital artists published the world’s first NFT called Quantum which was a simple short video of McCoy’s wife Jennifer. So any type of digital content has to potential to be converted into NFTs.
Now that we have covered the basics, let’s deep dive into tokenomics
What is Tokenomics?
In very layman’s terms, tokenomics is a term that makes a particular cryptocurrency valuable and consists of similar factors. These factors are as follows:
- Quality of token which convinces users and investors to showcase their belief through monetary input
- Includes a variety of components such as allocation table, functionality, and emission schedule
- Helps the project to avoid bad actors
- Supporting token value and sustainable growth
Process of Tokenomics
- Establishing token utilities involves mapping out possible transactions for the native token of your platform
- An optimal collection of the possible transactions should always result in the formation of token velocity which is an important aspect of the whole token mechanism
- The token distribution schedule laid out the numeric distribution of your total token supply and how much of it will be released at a particular point in time
- The technical and financial model design includes indulging your planned token mechanism and distribution schedule into your platform and smart contract. Financial modeling is required so as to anticipate monetary inflows and outflows for the whole ecosystem
How Do TDeFi Study Tokens?
For studying the whole tokenomics structure, the following are the points that TDeFi as a crypto incubator takes into consideration:
- Studying the business structure in order to identify the need for tokenization
- Advisor studies the pricing, vesting, waves, token launch schedule, velocity, and valuation under token economy
- Evaluation of financial feasibility
- Evaluation of different scenarios on capital raising for the project
To know more about TDeFi, click here