A term that you might hear if you’ve spent much time in the Bitcoin world is tokenomics. The word can cause confusion, frustration, and sometimes even fear. Tokenomics are a significant part of many blockchain-based projects. But what are tokenomics, and why do they matter?
We’re going to answer those questions and a few others in the post below, so keep reading to learn more!
Before we dive deep into what tokenomics are and how they work, we should probably first discuss and define a token. Tokens are digital assets developed on a blockchain. These assets are used in a variety of ways, including governance, security, and utility.
With a definition of token in hand, let’s take a closer look at what tokenomics are. The word is a combination of two words - token and economics. It’s a way to define the mechanisms and principles of how tokens on a blockchain are organized and managed within a crypto project. You may also see it referenced as crypto-economics.
Tokenomics impact supply and demand of the project. With well-defined and strategic economics in place, a blockchain project has a better chance of success.
We mentioned several uses for tokens as they relate to each project. Here are a few of the most popular ways you’ll see tokens used in the crypto market.
One of the most prominent ways tokens are used is as a form of payment. An example of this type of token is Bitcoin, the original crypto. It’s not uncommon to find a retailer or merchant that accepts Bitcoin as a form of payment in exchange for goods and services.
These types of tokens are used for voting on changes to the way the blockchain is operated. Token holders get voting rights, which vary based on the project. With voting rights, holders can propose changes or updates to the network and vote on these changes.
Utility tokens are similar to governance tokens, but instead of voting rights, users are granted access to services offered by the project. The most well-known utility token is Ethereum as its token ETH is used to pay gas fees on projects built on its blockchain.
One last type of use-case for tokens is to provide privacy on the blockchain. Most blockchains - like Bitcoin - are viewable on a public ledger. That means anyone can take a look at the blockchain explorer and see any transactions that occur on the network. Privacy tokens, however, are developed so that transactions are hidden, so no one will know who sent or received crypto.
There are metrics associated with tokenomics, often referred to as Supply metrics. Here are the most common metrics you’ll find in regard to tokenomics. You can often find this information on sites like CoinMarketCap.
Don’t be intimidated by these metrics. They’re easy to understand once you know what they are. For example, the circulating supply is simply the total amount of the crypto currently in the market and available to buy, sell, or trade. Keep in mind that circulating supply will fluctuate depending on the market.
Maximum supply is just what it sounds like. It’s the maximum number of tokens that will ever exist. Bitcoin has a maximum supply of 21 million tokens. That’s the most that will ever be in existence. However, there are projects that have no limit on the number of tokens they will generate.
This is the total number of tokens that are currently in and out of circulation. This number does not include any tokens that have been burned or destroyed by blockchain projects.
Blockchain projects use different model types as it relates to the economics of their tokens. These are some of the more common tokenomic models you’ll find in the crypto world.
The inflationary model does not have a hard cap on the number of tokens that will be created. That means there can be an infinite number of tokens. These types of projects simply generate more tokens anytime they feel the need.
Bitcoin is defined as a deflationary crypto since its tokens are hard-capped. Only a certain number of tokens (BTC) will ever exist.
These are projects that use two tokens on the same blockchain. Most often, these projects will use one for providing services on the network while the other is used for managing the protocol itself.
Asset-backed models are tokens that use the backing of an asset, like fiat currencies or precious metals like silver and gold.
Many people prefer Bitcoin because it’s deflationary and has a limited supply of tokens. By understanding the tokenomics of a project, you get a better idea of the project as a whole and the fundamentals behind it.
Now that you know that there are only a certain number of Bitcoin that will ever be available, don’t you think you should add some to your wallet? Lucky for you, Bitcoin Depot has BTM locations throughout the United States that make it easy to purchase Bitcoin.