What is Tokenomics?
When ICO bench released their report on ICOs for the first quarter of 2019, there were some very interesting takeaways. The total amount of money raised in Q1 2019 was less than that raised in Q4 2018 by half a billion dollars. However, the average amount raised per ICO was about $2 million higher than in the previous quarter. This demonstrated a change in the way investors and entrepreneurs structure their ICO and thus enters tokenomics. But what is tokenomics exactly?
The basic definition can be derived from the two combined words – token and economics. A token is simply an item that represents an individual’s right to access services and goods. An example in real life is a hotel key card that indicates you have paid for your room. Even currency acts as a token, whereby it is issued by government to give access to goods and services. When used in terms of cryptocurrency, tokens give holders a right to vote, purchase or stake. Meanwhile, economics can be defined as investors’ behaviour in relation to their ecosystem. Therefore, tokenomics can be loosely defined as the study of factors that affect the value of tokens and its reception by investors.
In order to study tokenomics, you have to study the various factors that affect the value of a token. There are many factors to consider, but these are the six basic questions investors need to ask:
1.Does the project have any actual use in the real world or is it just about the token itself?
2.Who is in charge of the project and their team members?
3.How is the company hoping to make money and what is their business model?
4.How are the tokens being distributed to investors? What is the maximum number of tokens, how are they allocated and is there a lock-up period?
5.What support does the project have in the crypto community?
6.Is an investment safe from a legal perspective or at risk?
These questions help investors to understand the economics of investing in any token being issued; thus, tokenomics. Nevertheless, this doesn’t address the technical aspects of a token, which is also something an investor needs to understand before making a financial commitment. These are the elements that affect the actual functions in the ecosystem created by blockchain technology. Some of the aspects everyone needs to know are:
- Token flow – this is how the developers will ensure that there are enough tokens circulating in the ecosystem and that investors have an incentive to keep them
- Token stability – the developers must put in place a system similar to a government monetary policy to ensure stability of the token in the ecosystem and avoid severe fluctuations
- Token utility – in most cases, tokens are classified as utility tokens rather than securities. Then it becomes crucial to analyse the utility a token provides to its users
By now, you should have an idea about what is tokenomics, but there are a lot more details that go into it that we shall cover later.