Crypto FAQ: What is Tokenomics?

• Defn: tokenomics
  [portmanteau: noun "token" + noun "economics"]
  Tokenomics refers to the study of the economic properties of a particular cryptocurrency coin or token. These properties—including its distribution, supply, market capitalization, and token model—are generally discussed in the token project's whitepaper, and can be used to determine the value and potential future value of a particular token. The main aspects of tokenomics are further explained below:

Distribution - cryptocurrency tokens can be generated through either pre-mining or a fair launch. If tokens are pre-mined, this means that some tokens are distributed to an exclusive group (e.g. early investors and project members) before the token project is publicly launched. In contrast, a fair launch means that no early access to a token is given before it goes public. In most cases, some pre-allocation of tokens occurs before the project is publicly released, so it is essentially unavoidable. However, as a general rule, the more diversely a token is distributed at launch, the safer it is to invest in; if there are any whales, for example, there is a possibility that these wallets will sell all of their tokens at once and cause prices to drop substantially.

Supply - the supply of a token refers to its circulating supply, its total supply, and its maximum supply—in other words, the amount of usable tokens, the amount of both usable and unusable tokens, and the amount of tokens that can ever be minted. In the case of the maximum supply of tokens, some projects, especially those that operate under a proof-of-stake (PoS) consensus algorithm, have no maximum amount and can therefore be generated indefinitely. However, some tokens—such as Bitcoin, which has a maximum supply of 21 million—have a set amount that can ever exist, after which no new tokens can be generated. As with fiat currencies, if a large amount of tokens is being created at once, inflation may occur and resultingly lower that token's value.

Market capitalization (a.k.a. market cap) - refers to the total amount of investment in a cryptocurrency so far. Generally, the higher the market cap and the lower the total supply is for a particular cryptocurrency, the more valuable it is per coin or token. Additionally, the fully diluted market cap—the theoretical market cap if the maximum supply of a token is in circulation—can provide insight into the value of an individual token.

Token model - cryptocurrencies can either have inflationary or deflationary models—the former means that there is no maximum supply of that cryptocurrency, and the latter means that there is a maximum supply and that new coins or tokens will eventually stop being created. With the deflationary model, prices will increase over time as long as the demand for the cryptocurrency remains consistent. On the other hand, with the inflationary model, the opposite is true.