Tokenomics

Tokenomics is a term that refers to the study and analysis of the economic aspects of a cryptocurrency or blockchain project, with a particular focus on the design and distribution of its native digital tokens.[1][2] The term is a portmanteau of words token and economics.

Key areas of interest include determining the value properties of the tokens themselves, and how the properties of tokens (together with other cryptographically secured rules and associated system actions) affect broader economic characteristics of the system including:

  • How they provide and distribute scarce resources
  • How that system interacts with other external economic processes
  • How economic agents behave
  • The economic efficiency of all these processes

The field often has a strong applied focus, concerning itself with how to use its insights and principles to engineer economic systems to possess specific, desired properties.[3][4]

Both cryptocurrency and tokens are the subclasses of digital assets that use the technology of cryptography.[2] Crypto is the native currency of a blockchain, and it is developed directly by the blockchain protocol.[2]

Tokens can be created as native elements of a blockchain protocol, or by using a smart contract that is deployed on a blockchain which will host the new token.[5] For example, Ether (ETH) is the native crypto asset of the Ethereum blockchain, and was created by the core Ethereum developer team to incentivise proper maintenance of the blockchain. While Axie Infinity Shards (AXS) tokens, were created using an Ethereum smart contract developed an unaffiliated third party, in order to give token holders certain governance rights over the game Axie Infinity.[5]

In both cases, different tokenomic attributes are chosen to support the token's intended role. With particular attention typically being paid to tokens' ability to function as an incentive mechanism, and choosing monetary policy that brings token supply into line with its demand.[6] This includes specifying rules about how and when new token should be generated or removed from the system. Rules that are written into smart contracts allow these system processes to be automated.[6]

In the real-world economics system, the economy is subject to fluctuations like inflation and deflation.[6] Central banks intervene through monetary policies.[6] Tokenonomics can be thought of as an approach to implementing monetary policies and economic rules via automated smart contracts.[6] On the blockchain, different projects may issue their own tokens with different tokenomics to complete their ecosystem for various purposes, such as fundraising and governance. Some common tokenomics models include the deflationary model, inflationary model, and dual-token model.[7] For instance, before the very last Bitcoin is added to the Bitcoin pool, it is inflationary because as miners (people who find Bitcoin by using algorithms to solve mathematical puzzles) keep mining Bitcoins, the amount of Bitcoins increases and the purchasing power of each Bitcoin decrease.[7] However, the tokenomics of Bitcoin has multiple mechanisms to lower the rate of inflation, such as making mathematical puzzles harder and harder to solve and allowing fewer and fewer miners to receive the coin.[7]

  1. ^ Wandmacher, Ralf (2019), Goutte, Stéphane; Guesmi, Khaled; Saadi, Samir (eds.), "Tokenomics", Cryptofinance and Mechanisms of Exchange, Contributions to Management Science, Cham: Springer International Publishing, pp. 113–123, doi:10.1007/978-3-030-30738-7_7, ISBN 978-3-030-30737-0, S2CID 239396338, retrieved 2022-11-07
  2. ^ a b c Nahar, Pawan. "Crypto class: Difference between crypto coin & token". The Economic Times. Retrieved 2022-11-08.
  3. ^ Lamberty, Ricky; Poddey, Alexander; Galindo, David; Danny de Waard; Koelbel, Tobias; Kirste, Daniel (2020). "Efficiency in Digital Economies -- A Primer on Tokenomics". arXiv:2008.02538 [cs.CY].
  4. ^ Freni, Pierluigi (March 2022). "Tokenomics and blockchain tokens: A design-oriented morphological framework". Blockchain: Research and Applications. 3 (1): 100069. doi:10.1016/j.bcra.2022.100069. S2CID 247126100.
  5. ^ a b Lo, Yuen C.; Medda, Francesca (December 2020). "Assets on the blockchain: An empirical study of Tokenomics". Information Economics and Policy. 53: 2. doi:10.1016/j.infoecopol.2020.100881.
  6. ^ a b c d e Kampakis, Stylianos (2018-05-02). "Why do we need Tokenomics?". The Journal of the British Blockchain Association. 1 (1): 2. doi:10.31585/jbba-1-1-(8)2018. S2CID 169216722.
  7. ^ a b c Chiu, Jonathan; Koeppl, Thorsten V. (2017-09-01). "The Economics of Cryptocurrencies – Bitcoin and Beyond". SSRN 3048124.