What is tokenomics? Understanding the token economy

Tokenomics, short for ‘token economics,’ refers to the rules governing a cryptocurrency’s issuance and supply.

Digital coins and tokens built on a blockchain typically have pre-set, algorithmically-created distribution schedules. Additionally, some crypto assets also have hard-coded policies to remove units of the asset in the circulating supply. These are the essential factors determining a digital asset’s tokenomics.

A digital asset’s tokenomics allow us to reasonably predict the number of coins created by a specific date and the group of people who could have the most significant ownership of the crypto network. Though an asset’s tokenomics can be altered at times, it often requires the agreement of most of the blockchain network’s participants to make it happen.

What are tokens?

To understand how tokenomics works, we need to start at the ground level and first understand what tokens are and their difference from coins in the crypto market.

Tokens are digital assets that are issued on and powered by blockchain technology.

Though bitcoin and ether can also be referred to as crypto tokens, it’s increasingly common to use the word “token” to refer to cryptocurrencies that run on top of another cryptocurrency’s Blockchain or to digital assets with specific utility or function within a network.

Generally, tokens are a type of cryptocurrency representing a particular Blockchain use. They can serve multiple purposes, including accessing products and services on the Blockchain and rewarding users for performing specific operations on a blockchain.

What is the difference between coins and tokens in cryptocurrency?

The terms “coins” and “tokens” are often used interchangeably.

However, most people use the word “coins” when they are referring to a digital currency, such as Bitcoin (BTC) or Litecoin (LTC), while the term “tokens” typically refers to digital assets that provide some function or utility, such as Ether (ETH) being used to pay for transaction fees on the Ethereum network.

The idea is that coins refer to money, while tokens refer to non-currency digital assets that can be used for various use cases. Any investment built on another cryptocurrency’s network is typically referred to as a digital token.

How are tokens used in tokenomics?

Tokenomics covers all essential aspects of managing a digital token – either by code or by a centralised issuing entity.

Let’s take a look at the role of tokens in tokenomics.

Ownership:

Tokens can be used to represent ownership in a crypto project. The percentage ownership of the founding team and investors are often expressed in a venture’s tokenomics.

Raising money from the public:

When a cryptocurrency project is launched to the public, it may issue tokens on the blockchain in exchange for other cryptocurrencies. Its tokenomics will determine how much it raises, what currency it uses, and the schedule it follows to distribute the tokens to investors.

Governance:

This is a crucial part of any token’s economics. Tokens often determine the voting power of each community member. Though in the early stage of a crypto project, the core team is typically responsible for dictating the minting of new tokens and project direction, it often reverts to token holders to vote for product features and token economy changes.