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Home Blog what is tokenomics and why does it matter?
Article by Yunis
26 January 2023 (Updated 12 June 2024)

Bitcoin was introduced to the public with a white paper which is an informational document that explains how the system will work. The white paper consists of many parts and tokenomics is one of them.

All cryptocurrencies have their own tokenomics model. Tokenomics gives us a clue about the future prices of a crypto asset. The scarcer the supply is, the higher the price will be.
What is Tokenomics and Why is It Important?
  • Tokenomics is created with the combination of two words; token and economics.
  • Tokenomics are essential for fundamental researches.
  • The fair launch is important because token distribution is vital for the decentralization of a cryptocurrency.
  • Some companies announce buyback and burn programs to support their token holders.

What is Tokenomics?

Tokenomics is a term created with the combination of the words «token» and «economics». Tokenomics are a vital part of a token and it is like the manifest of how a project’s economic ecosystem will be like. Tokenomics drafts out the main characteristics and nature of the tokens including what the creation, distribution, supply, demand, incentives and burning mechanisms will be like.

Why is it important?

Tokenomics is a very important starting point for the fundamental research of a project. Tokenomics is an essential guide to estimating a token’s future value because supply is very important in pricing. For example, Bitcoin has a maximum supply of 21 million coins, and its price is tens of thousands of dollars. But for example, TRX or MATIC coins have a much bigger maximum supply. For example, Matic’s maximum supply is 10 Billion and TRX’s maximum supply is 91 Billion. We can’t expect Matic and TRX to reach 10.000$ in price because then those coins’ market cap will be astronomical. If Matic reaches the market cap of Bitcoin, then one Matic price should be around 45$ - 50$. It is not realistic t think of any other altcoin to pass Bitcoin’s market cap. So we can estimate what the maximum value of the Matic can be?

Tokenomics terms

Maximum Supply; Total number of the specific tokens that have been created, or minted plus that will be created or minted. For example, the total supply of Bitcoin is 21 million only. There will never be one more Bitcoin after the 21 millionth Bitcoin is mined. But some cryptocurrencies have infinite supply like Ethereum,

Total Supply; Total number of tokens is the number of tokens that are already created. Unmined, unminted tokens are not counted in the total supply. The total supply changes over time due to several reasons. Some tokens may have been lost indefinitely, some tokens may have been burnt by the token’s nature, or some tokens are somehow destroyed. Those tokens are extracted from the maximum supply to find the total supply. Locked and vested coins are counted in the total supply.
 
Circulating Supply; Some cryptocurrencies have a limited supply and it is capped with a limit of maximum supply some cryptocurrencies have an infinite supply, but there is always a certain number of tokens in circulation. Some tokens are not mined or minted yet, and some tokens are locked under a vesting period.
 
Inflationary and Deflationary cryptocurrencies; If the total supply of a cryptocurrency is increasing over time, it means that cryptocurrency is inflationary. Having a maximum supply doesn't say anything about the token’s inflationary character. For example, Bitcoin has a maximum supply of 21 million, but the last Bitcoin is predicted to be mined till the year 2144 and the total supply of Bitcoins in the market will keep increasing till that year. The increase will linearly slow down over time and cut half every four years, but there will still be increasing supply which makes Bitcoin inflationary.

What is a fair launch?

The fair launch is a type of crowdfunding in crypto. New crypto projects sell their tokens and raise money with this model. When a project calls it a fair launch, it means there is no allocation, or pre-sale for the team, developers, and investors. Every participant gets tokens equal or equal to their commitment. The main purpose of a fair launch is to provide a better distribution of tokens. Better distributed tokens are a good sign of a project’s decentralization. Fairly distributed tokens are safer against price manipulation by big pocket holders.
 
Most projects announce a whitelist before the pre-sale. Whitelists generally include team members, investors, and other related parties. They receive the tokens before it goes public. Whitelist addresses have a big advantage and make a good profit out of the token launch. A fair launch is a sign of honesty for a project.

What is the burning mechanism?

Supply is very important for a token that decides whether to be inflationary or deflationary. When people buy tokens, they expect to make a profit by holding them for some time and then selling them at a better price. Tokens are like company shares that are traded on stock exchanges. Tokens are like the shares of a blockchain project, and each project is a start-up business to provide some services and generates revenue. So when you buy tokens of a project, you invest in a start-up.

What is the buyback program?

The buyback program is a tool to boost a token’s price by lowering the circulating supply. It is a very common method that is used in stock markets. Companies buy their stocks at a market price to support the stock price and its investors. The same method is used by cryptocurrency companies too. Buyback programs are a little different in cryptocurrencies, and the companies burn the tokens they bought back. It is generally known as a «buy back and burn program». Burnt tokens are permanently erased and they no longer exist after the burning action. This program lowers the token supply and creates pressure on the price to go higher.

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