Token Economics, or as widely used — Tokenomics, is a detailed description of the Supply, Demand, Valuation, Emission, Distribution, Vesting, and special mechanics of a crypto token.
A “token” is a single digital unit of a cryptocurrency that represents ownership of that one unit in the underlying project/company/protocol on the blockchain. It is the equivalent of one share of a company — when looked at as an asset, or one cent — when looked at as a currency.
A detailed account of how, where, and when each of these tokens ends up, is the basic crux of its Tokenomics.
A sound tokenomics model would be one that takes into consideration the interests of every stakeholder of the underlying project, ie., team members, institutional investors/VCs, users/community members, and retail investors.
Finding the right balance to appease all stakeholders could be tricky, but that is the ultimate goal of a well-designed tokenomics model.
Let’s now look at some of these characteristics in a little more detail.
1. Supply: The supply of a token can broadly be classified into two categories, Total Supply, and Circulating Supply.
The Total Supply of a token is the total number of these tokens that will ever be in existence. Bitcoin’s total supply for example is fixed at 21 million tokens.
Although some projects have an “uncapped” supply of tokens, ie., more tokens may be brought into existence as and when deemed necessary, or as rewards for network participation (eg. ETH), most projects today have a “capped” supply, which is fixed before any tokens are minted.
It is this Total Supply number that is used to calculate the project’s Fully Diluted Valuation (FDV).
FDV = Total Supply x Price of one token
The Circulating Supply is the number of tokens that have been distributed so far and are already in circulation in the market.
It is this Circulating Supply number that is used to calculate the project’s Market Capitalization.
Market Cap = Circulating Supply x Price of one token
A sound tokenomics model usually has a steady increase in its circulating supply, via token unlocks, emissions, rewards, and other methods, ensuring no rapid spikes or drops in the project’s Market Cap occur.
2. Emission: Emission is the process of introducing more tokens into the market, thereby adding to the Circulating Supply of a token. This may happen in a number of ways like, token unlocks, network participation rewards, airdrops, etc.
It is vital for the long-term success of a project that emissions take place in a gradual manner, again, to prevent rapid fluctuations in its Market Cap.
3. Distribution and Vesting: An extremely crucial part of a project’s tokenomics, the distribution of tokens, is the process of allocating the total supply of tokens to various different entities.
These may fall under: Team, Advisors, Seed Investors, Private Investors, Ecosystem Reserves, Exchange Listing Reserves, Liquidity Pool Reserves, Network Participation Rewards, etc.
Vesting is the gradual unlock of tokens received by investors, team members, advisors, and crowdfund participants. It is imperative that all these tokens are unlocked slowly over the period of multiple years, to ensure long-term commitment to the project. It also prevents additional sell pressure on the market, as there are lesser tokens in circulation.
4. Special Mechanics: Since crypto tokens are essentially lines of code written on the blockchain, they can be programmed to behave in different ways as per the team’s ideas. Some tokens have special mechanics like fee accrual, automatic liquidity addition, staking rewards, and many other utilities that the tokens may hold in the project’s ecosystem. These special mechanics play a huge role in determining whether token holders are incentivized to hold their tokens and thereby affects sell pressure on the markets.
Since every project is different and aims to achieve a certain goal, there is no one size fits all tokenomics model. But key factors that play a role in a sound model must be taken into account for prolonged success.
