Tokenomics - things to consider

Tokenomics refers to the underlying economic principles guiding the creation, destruction, use and value of a token in a crypto project. It has a huge impact on whether you will want to spend your hard earned funds into supporting both the cryptocurrency and the game or service it represents.

Understanding a project's tokenomics will give you a better handle on its chance of success, sustainability and the motivations of people behind it. Whether you are deciding on starting to play a new crypto based game or using a new DeFi service; taking the time to learn about its tokenomics will help protect you from wasting time, reputation and money.

For me, I start by looking at two aspects; Token Utility and Token Scarcity. Viable ongoing utility creates lasting value for token holders and users. Limited supply in the face of consistent demand likewise helps to support a floor in the token's pricing. I find using a checklist is a good start in deciding whether it's worth investigating a project further. There's a link to one at the end.

Let's take a look at some important parts of a tokenomic model.

Key Components of Tokenomics:

1. Supply Metrics:
   • Maximum Supply: The total number of tokens that will ever exist. For instance, Bitcoin has a capped supply of 21 million coins. A limited supply can create scarcity, potentially increasing value if demand remains strong.
   • Circulating Supply: The number of tokens currently available and in circulation. This metric helps determine a token's market capitalization and liquidity.
2. Demand Drivers
   1. Strategic partnerships
   2. Market perceptions such as reputation and sentiment
   3. Innovative product roadmap
   4. Real World Utility
3. Distribution and Ownership:
   • Initial Allocation: How tokens are distributed among stakeholders, including developers, investors, and the community. A fair and transparent distribution reduces the risk of market manipulation.
   • Vesting Periods: Timeframes during which certain tokens remain non-transferable. Vesting prevents early investors or team members from selling large quantities immediately, which could negatively impact the token's price.
4. Utility:
   • Functionality: The specific use cases of a token within its ecosystem, such as governance rights, access to services, or staking. Tokens with clear and valuable utilities are more likely to sustain demand.
   • Use case examples;
     • Governance - pro-rata voting rights such as on protocols and resource management
     • Transactional - some form of medium of exchange
     • Utility - access to specific project services
5. Emission Rate and Inflation:
   • Token Creation: The rate at which new tokens are introduced into circulation. Understanding whether a token is inflationary or deflationary helps assess potential value changes over time.
6. Burn Mechanisms:
   • Token Burning: The process of permanently removing tokens from circulation to reduce supply, potentially increasing scarcity and value.
7. Incentive Mechanisms:
   • Incentives should be designed to align stakeholders towards project success and growth; whether they be users of the project or token holders and collaboration partners.
   • How does the token incentivise its participants, are they fairly designed and is it sustainable? Incentives could be in the form of;
     • Airdrops and preferential distribution
     • Rewards for Staking
     • Exclusive access to perks and advance notification of upcoming events
8. Governance & Security:
   • Strong decentralised governance protocols come out of good tokenomics and project design. Benefits include;
     • empowering token holders in decision making
     • which builds both loyalty and engagement
     • a strong, engaged community which builds project resilience
   • Assess the project's security measures. Strong governance and security protocols enhance trust and stability.

This isn't exhaustive by any means and there will always be project specific elements that need particular attention. The authentication and security protocols for an idle clicker game and its token will probably require less analysis than for an innovative decentralised DePIN service.

I promised a a simple checklist that captures a lot of what we've discussed. I hope it helps. Comment below on anything I've missed and thanks for reading!