What are Tokenomics?

Oct 13, 2021 1 min read

In traditional economics, central banks are in charge of a currency's monetary policy. In most cases, they tend to work with a fairly stable, established currency and attempt to promote sustainable growth within the economy. This is done by managing the money supply; adding to the supply by printing money, lowering interest rates to promote spending, raising rates to control inflation, etc.

In the world of cryptocurrencies, however, each project launching its own token finds itself in the position of having to decide its own monetary policy for the currency it will create. This process, which is often outlined before a token launch and adjusted over time, is known as tokenomics.

Tokenomics must consider the distribution and emission of a token, how these will affect the token’s price in the future, and how changes to the model may be enacted at a later date.

There are many distribution models for a token’s launch, ranging from fundraising models like ICOs, to airdropping tokens directly into the wallets of users that have been using a platform in a beneficial way, for example by providing liquidity. In addition, some tokens will likely be used to create liquidity pools to ensure that the new token can be traded with other common assets, and some tokens will likely be reserved for team members and early financial backers of the project, if appropriate.

The emission of new tokens over time depends on many factors, as well as the type of token being considered. For example, a blockchain-native token such as ETH is mined with the production of each block as a reward for securing the network, whereas a given project’s native token such as SDT is minted with each new block and can be used as an incentive or reward for users.

Some cryptocurrencies have a defined total supply. In the case of Bitcoin, for example, that means there will never be any more than 21 million coins mined, and every four years or so, the rate of production halves. Other coins, however, are inflationary and will continue to be produced at the same rate indefinitely.

In some cases, coins can also be destroyed, or “burned”, which is what happens to a portion of the ETH paid in gas fees when transacting on the Ethereum network. This is a novel way of controlling supply in proportion to the activity on the network.

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