Think of any currency you have in your pocket right now.
Your country’s central bank controls it by factoring in many things, including loan rate, employment rate, GDP, and others, before issuing currency. This same bank monitors economic growth and regulates the currency. A faulty regulation may affect the country, leading to inflation or deflation in the currency. Now, the economic model of a token is tokenomics – token economics.
In blockchain projects, tokens are like the country’s currency that must be properly formulated for the viability of a project. Hence, tokenomics is the economic model of the tokens as the currency of a project. From numerous blockchain projects, token sales were over $20 billion in 2018, and now, the total cryptocurrency market will be well above $1.06 trillion in 2022.
Apart from the currency purpose it serves for a blockchain project, tokenomics also grants the public access to blockchain products and as a revenue generation method. Tokenomics is also a form of a business plan that considers investors, coin founders, users, developers, and other parties of a blockchain project.
Difference between tokenomics and general economics
Unlike the general economics or central economic forces that control our lives and are mostly centralized, tokenomics, through access to the internet and distributed ledgers, make much info available. Therefore, available information on financial capital and supply chain are publicly accessible through the distributed ledger and the internet. Hence, blockchain studios have the tools to develop a secure and transparent token model that favors everyone. Additionally, this available information also makes it easy for the public to determine if any tokenomics is what investing in.
The core aspects of tokenomics
Tokenomics determine the incentives of a blockchain project and lure investors into buying and holding your tokens. Like fiat currency has different policies, tokens differ too. The principal purposes of tokenomics are two – the incentives that determine the distribution of the token and the utility that determines its demand.
- Mining and staking – for layer one blockchain projects, mining is the primary incentive to validate transactions. Tokens are given to miners. Staking, on the other hand, has a similar function, but the beneficiaries are those that lock their coins in a smart contract.
- Yields – people look forward to high yields that decentralized finance promises as an incentive for buying or staking tokens. Staking tokens in liquidity pools power the exchange and lending platforms. The high yields, as ROI, are incentives for stakers.
- Limited vs. unlimited supplies – from a tokenomics, a token’s maximum supply is known. For instance, the total supply of bitcoin is 21 million, the last of it set to be mined in 2140. This contrasts Ethereum with no limited supply, just a capped yearly issuance.
- Token burns – burning tokens remove them from circulation, ultimately reducing the total token in circulation. Token burns will increase the price of the coins through scarcity – obeying demand and supply.
- Token allocations and vesting periods – Most blockchain projects have a detailed token distribution. Some amounts are earmarked for developers and venture capitalists, which they can only sell after a specified period. This is to control the circulating supply and the price of the coin.
The process of designing a token
Blockchain studios mostly design tokens as incentives mechanisms for players to sustain the game and as a revenue model for the business. Designing a token is in five stages and is not sequential but must be factored in.
Establish the token utility
The first process in creating a token is to establish and gain clarity on the utilities of the token and how crucial they are to the project. It is simple when you understand your business value proposition, the token use, and all parties in your ecosystem.
Build your token mechanics
Token mechanics include building the circulation, demand, supply, burn, and the inflation rate of your token, including the user experience of the token. Additionally, the physical part of the token, including the payloads, transferability, open or close source, divisibility, and others, are essential. The policy aspect includes the forks, rails, sale structure, and fiscal policy. It is essential to find out how your mechanism reaches equilibrium in the system.
Legal advice and framework
Your tokens must have legal backing and conform to jurisdictional laws of the country, the blockchain network, and other laws around where the token is launched. You must also define your token, whether for investment, security, governance, or utility token. This will help you in legal dealings.
The next step is to design the token and put the technical feasibility of the token in mind. This technical feasibility should consider the smart contracts and other details. If you are stuck on the technical details of your tokenomics, Bitsapiens can help you design your tokenomics and smart contract.
Testing the tokenomics
It is crucial to test the tokenomics at each stage to determine if everything is still working perfectly. There should be user testing in the first stage, game theory testing in the second stage, legal review in the third stage, and A/B testing in the fourth stage.
The features of the token design process
- Creating a project and product description: A well-designed tokenomics starts by determining the value and consumer characteristics of the product. A vivid description of the project’s result and what aspect of the project should be tokenized need to be determined.
- Highlighting all participants: The stakeholders, investors, and their interests in the project need to be registered to do an impactful project.
- What type of token and which platform: Utility, investment, or security token? You need to understand the type of token being developed and register the interest of all stakeholders. Additionally, understand the functions of the token and its compliance with legal jurisdiction and technical characteristics. Also, determine the blockchain platform to deploy the token.
- Formation of the token model: A good token model should appeal to token holders and stakeholders to partake in the project. Additionally, verifying the token model for legal compliance in the countries intended for the token sale is essential.
- A predictive financial model of tokenomics: A good tokenomics ensures a robust financial model after thorough preliminary calculations and a vast understanding of the mechanics and use cases of the token in the ecosystem.
Token governance and decentralized autonomous organization
In tokenomics, governance plays a crucial role. In recent years, we now have governance tokens that give voting rights to holders and make decisions in a project – decentralization. Instead of some individuals deciding on every single step of a project, token holders have a say in the direction of a project through voting. Thus, a governance token is like stock in a public company.
Decentralized platforms operate through DAOs, granting voting rights to members. Thus, tokenomics plays a role in the success of a project as no holders would vote to harm the project or, if any, would be checked by other contributors. This is a better case than a reckless CEO running a company with poor governance decisions.
Tokenomics and its designs are essential in blockchain projects. They determine the viability of the project, the interest of investors, and the success of a project. Game studios and every blockchain investor must spend quality time on their tokenomics.
Bitsapiens offers Tokenomics consulting services to design and launch your tokens, including developing your smart contract. If you don’t have the technical resources, we have a web3 development Studio to create what you need.
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we’re all gonna make it!
Contact us to explore how to design and create a good tokenomics for your project.