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NFTs and Tokenomics

Guide: Tokenomics

Breaking down the word Tokenomics - it’s a combination of the word

@Token⁠

and economics and therefore, some basic understanding of economics ahead of learning Tokenomics and evaluating the tokenomics of a project.

Simply put, Tokenomics refers to everything about the mechanics of how the asset works, as well as the psychological or behavioral forces that could affect its value long term.

Supply: Emissions, Inflation, and Distribution

Let’s start with the supply side:

Deflation - A token will increase in value if fewer of those tokens exist.

Inflation - A token will decrease in value if more of them exist.

When you’re evaluating the supply side you don’t have to worry about things like whether the token has any utility, or whether it will generate income for its holders. You’re really just thinking about the supply and how it will change over time. You’re really just thinking about the supply and how it will change over time.

How many of these tokens exist right now?

How many will ever exist?

How quickly are new ones being released?

The last thing you want to consider with supply is allocation. Do a few investors hold a ton of the tokens which are going to be unlocked soon? Did the protocol give most of its tokens to the community? How fair does the distribution seem? If a bunch of investors have 25% of the supply and those tokens will unlock in a month, you might hesitate before buying in.

The last thing you want to consider with supply is allocation.

Do a few investors hold a ton of the tokens which are going to be unlocked soon?

Did the protocol give most of its tokens to the community?

How fair does the distribution seem?

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Supply isn’t the only thing that we need to look at. Having a fixed supply alone does not make something valuable. People need to also believe it has value and will have value in the future - which is where demand comes in.

Demand: Return on Investment

ROI in this case is not how much you think the token price will go up. It’s how much income or cash flow the token is able to generate for you simply by holding it.

Some tokens allow you to tap into the earnings of the protocol they represent. For example, If you hold a certain token,

@Staking⁠

could earn you share of the protocol revenues.

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@PROOF OF STAKE ⁠

lets participants lock their tokens in order to validate transactions. Generally, the more tokens are locked up, the higher the chance to be chosen as validators and receive rewards for validating transactions.

Another form of ROI comes from “rebasing,” similar to a stock split where by holding a token and staking it, you continue to get more of that token as the protocol inflates its supply.

There are many other use cases for tokens. Governance tokens allow the holder to vote on changes to a token’s protocol. Stablecoins are designed to be used as a currency. Security tokens, on the other hand, represent financial assets.

ROI is important to consider because if a token has no intrinsic ROI or cashflows, then it’s harder to justify holding it. You have to believe other people’s belief in the number going up is enough to sustain it which bring us to an important part of the psychology of tokenomics.

Demand: Memes

The other reason people might want a token is simply the belief that other people want the token, and will want it in the future. This requires you to hop into the community and get a feel for it.

Belief in future value is often one of the most powerful drivers of demand. Don’t discount how far a token can get with faith, clever memes, and a cult-like following but don’t let that be the only factor.

In short, the best way to evaluate the tokenomics of an asset is to look at:

how the supply is going to be managed

what forces will drive demand for the token or cryptocurrency

There’s a lot more to Tokenomics but this gives you an overview but if you want to dive in more see our

Master Media List⁠

for sources on Tokenomics. And as always DYOR.

Credit:

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