Tokenomics is a term used to capture the economics of a token. Apart from token creation and distribution, supply and demand, incentive mechanism and token burn schedule, it describes the factors affecting the use and value of tokens. Well-designed Tokenomics is critical to the success of any crypto project. It is essential for investors and stakeholders to evaluate the tokenmics of a project before deciding to participate.

A portmanteau of "tokens" and "economy," Tokenmics is a key element in doing fundamental research in a crypto project. In addition to looking at white papers, founder teams, roadmaps and community growth, tokenmics is important to evaluating the future potential of blockchain projects. Crypto projects should plan their tokenomics smartly if they want to confirm sustainable and long-term development.

What is Tokenomics?

To encourage or discourage various user activities blockchain projects design tokenmics rules around their tokens. This is similar to how a central bank prints money and implements monetary policy to encourage or discourage spending, lending, saving, and the movement of money, where the term "token" basically refers to both currency and token. Tokenmics rules are enforced through code, unlike fiat currency, which is very transparent, predictable and difficult to change.

We can look at Bitcoin as an example. Bitcoin was pre-programmed to supply a total of 21 million coins. Bitcoins are created and circulated through the mining processEvery 10 minutes or so when a block is mined, miners are rewarded with some bitcoins.

Blocks are subsidized as rewards, halved every 210,000 blocks, and a halving takes place every four years. From 3^rd January, 2009 to the present when the first block or genesis block was created on the Bitcoin network, the block subsidy has been halved three times from 50 BTC to 25 BTC, 12.5 BTC and 6.25 BTC.

Based on these rules that a block is mined every 10 minutes, it is easy to calculate that in 2022 around 328,500 Bitcoins were mined. Divide the total number of minutes in the year by 10 and then multiply by 6.25, because each block is rewarded with 6.25 BTC. Therefore, the number of bitcoins mined each year can be estimated and the last bitcoin is expected to be mined around 2140.

By incorporating Bitcoin's tokenomics transaction fee design, miners are rewarded as soon as a new block is verified. is designed to grow fees as transaction volume and network congestion grow. This encourages miners to keep transactions valid and helps prevent spam transactions even as block subsidies decrease.

Everything is visible and predictable. The incentives nearby Bitcoin keep participants compensated to keep the network strong and contribute to its value as a cryptocurrency.

Key elements of Tokenomics

As a catch-all term for the broad range of factors that affect a cryptocurrency's value, "tokenomics" refers first and foremost to the structure of a cryptocurrency's economy as designed by its creatorsHere are some important things to consider when looking at the tokenomics of a cryptocurrency.

Token supply

The primary factors affecting the price of a good or service are supply and demand. The same applies to crypto. There are several critical metrics to measure the supply of tokens.

The first one is named maximum supply, which means the maximum number of tokens coded for the lifetime of this cryptocurrency. BNB has a maximum supply of 200 million Litecoin has a hard cap of 84 million coins, and Bitcoin has a maximum supply of 21 million coins. However, some tokens do not have a maximum supplyEvery year the Ethereum network increases the supply of Ether. Stablecoins such as USDT, USD Coin (USDC), MUSD, and Binance USD (BUSD) do not have a maximum supply because these coins are issued based on the coin's backing reserves. They can theoretically grow without limit. Dogecoin and Polkadot are two other cryptos with unchanged supply.

The second is the circulation supply, which refers to the number of tokens in circulation. Token prices can also be affected by minting and burning tokens or locking them in other ways.

Looking at the token supply gives you a better picture of how many tokens you will eventually have.

1. Analyzing token distribution

Apart from demand and supply, it is important to look at how the tokens are distributed. Large institutions and individual investors behave differently. This will give you insight into what types of entities hold tokens and how they may trade their tokens, which will affect the token's value.

Generally, there are two ways to launch and distribute tokens: one is pre-mining launch and the other is fair launch. Fair Launch has no early access or private allocation before tokens are minted and distributed to the public. Examples of this are BTC and Mindcoin.

On the other hand, pre-mining involves minting and distributing a portion of crypto to a select group before offering it to the public. BNB and Ethereum are two examples of such tokens.

Generally, you can focus on how evenly distributed a token is. A little massive organizations holding an outsized part of a token are usually considered unsafe. Holding a token by patient investors and founding teams means better aligning stakeholders' interests for long-term success. You have to watch out if there will be a large number of tokens in circulation, which puts downward pressure on the value of the token.

1. Token Utility

Token utility refers to the use incident designed for a token. For example, BNB's utility includes powering the BNB chain, enjoying trading fee discounts on the BNB chain, paying transaction fees, and serving as a community utility token in the BNB chain ecosystem. Users can also stake BNB with different products within the ecosystem to get additional income.

There are many other use incident for tokens. The holder of the governance token is allowed to vote in exchange for the token protocol. Stablecoins are designed to be used as transaction currencies. On the other hand, security tokens only represent financial assets. For example, a company may issue tokenized shares during an initial coin offering (ICO), providing the holder with ownership rights and dividends.

These factors help you determine a token's potential uses, which is useful for understanding how the token economy will evolve.

1. Examining token burns

Many crypto projects regularly perform token burns to permanently remove tokens from circulation.

For example, BNB does coin-burning to reduce the total supply of tokens from circulation. Total supply of BNB is 165,116,760 with 200 million BNB pre-mined as of June 2022. This means BNB will destroy 50% of its total supply bringing it to 100 million BNB. Similarly, Ethereum also ETH has started burning since 2021 to reduce their total supply.

When the supply of tokens is reduced, it is considered deflationary, and when the supply of a token is expanded, it is considered inflationary.

1. Incentive mechanisms

The incentive mechanism of tokens is very important. At the heart of tokenomics is how a token is incentivized to ensure the long-term sustainability of participants.  A perfect illustration of an elegant model is how Bitcoin designs its block subsidies and transaction fees.

The Proof-of-stake mechanism is another validation method that is gaining wide popularity. This design allows participants to lock their tokens to validate transactions. Generally, the opportunity to be chosen as a validator and get rewards for validating transactions is given as per token lock up. This means that if validators attempt to damage the network, their own asset value will be put at risk. These features encourage participants to act honestly and keep the protocol robust

What’s next for tokenomics

Since the creation of the genesis block of the Bitcoin network in 2009, Tokenmix has developed significantly. Developers have researched various Tokenomics models. There have been many successes and failures.  Bitcoin's tokenmix model is still in a permanent, time-tested state. Others with poor Tokenomics designs have crashed.

Non-fungible tokens (NFTs) provide a different tokenmics model based on digital scarcity. Tokenization of traditional assets such as real estate and artworks may create new innovations in tokenics in the future.

Closing thoughts

Tokenomics is a fundamental concept to understand if you want to gain a detailed understanding of crypto. It's a term that captures the main factors that affect a token's value. It is important to remember that no single factor provides the magical key. Tokenmix can be combined with other fundamental analysis tools to make judgments about the future potential of a project and the value of its tokens.

Ultimately, the economics of a token have a large impact on how it will be used, how easy it will be to build a network, and whether there will be interest in the use of the token.