What is Tokenomics?

The creation of money used to be simple when it was backed by a tangible asset. In recent years, tangibility has been missing but replaced with trust and the belief that money will hold value no matter what happens. The pandemic has stressed this system even more as the US Federal Reserve started creating money out of thin air to stimulate the economy as it froze up in 2020. Unfortunately, with a large influx of cash into the market, it is triggering deflation in the value of the current supply. In economics, this is known as inflation, and we see this in our daily life as everyday items increase in price yearly.

Tokenomics involves the creation of tokens, a digital unit of currency that represents specific assets or use cases on a blockchain network. Tokenomics involves applying financial rules to a blockchain network. Its purpose in crypto is to incentivize positive behavior within the network by providing financial incentives to its participants in a sustainable manner. Giving financial incentives motivates participants to use the project in exchange for the monetary value offered by the network, creating a feedback loop that grows the network, ultimately benefiting that given project.

How it Works

Bitcoin ($BTC) is the most popular digital currency, and it established its token logic by capping the max supply to 21 million. This limited supply makes it a finite resource, and it becomes even more scarce due to its creation process (minting), which reduces the number of new coins created by half every four years (Bitcoin halving). It artificially creates scarcity and drives the price up over time. It is estimated that the last Bitcoin will be mined/created in 2140.

On the other hand, Dogecoin ($DOGE) rewards its miners with 10,000 tokens every minute. This essentially makes the supply unlimited. With a current supply of 132,67 billion as of January 2022, it is an inflationary supply as compared to Bitcoin, which is deflationary.

Alternatively, many coins have a max supply but are set very high. For example, Algorand ($ALGO) has a total capped at 10 billion.


The answer to balancing supply for some projects is to burn tokens, which has nothing to do with a bonfire. At set intervals, tokens will be transferred into a wallet that cannot be recovered. Cryptocurrencies are stored in digital wallets where users can retrieve their assets whenever they need them. They represent a real-world wallet and also function as a digital hall pass when they interact with blockchain technology. The conditions that lead to burning generally involve operation costs, and the more frequently a token is used it is burnt. With a system like this implemented, it creates a deflationary mechanism that can be adopted by newer crypto projects can adopt.

Objective in Crypto

Tokenomics defines cryptocurrency value as it pertains to participants and the overall ecosystem. It is crucial to clarify a few foundation issues when creating tokens and evaluating them.

  • Total that currently exists
  • Future supply and creation date
  • Owners and is the supply distributed equitably; are they carve-outs for developers?
  • Will burning be implemented at some point?

Types of Tokens

Layer 1 and Layer 2 tokens are the main classifications of tokens. Ethereum, Near, and a few others have layer 2 tokens, most blockchains are monolithic. Layer 1 is on the underlying blockchain architecture. Layer 2, is the overlapping network that lies on top of the underlining blockchain network.

Layer 1 tokens are the infrastructure that allows other applications and protocols to build on. It is the primary underlying technology in that Blockchain.

Layer 2 piggybacks off the infrastructure created and developed by layer 1 to build its services.

Tokens can also be broken down into categories based on usage. They are security, utility, fungible, and non-fungible.

Security Tokens

Security tokens are assets like stocks and shares represented by digital tokens on the blockchain network. Its value is directly correlated with the value of the issuing company. They benefit from government regulations and utilize the speed of the blockchain network, reducing its potential to be a scam.

Utility Tokens

Utility tokens have specific usefulness. They may be used on a platform in exchange for a unique service or receive a preferred treatment for a service. Companies use it to stir up interest in their project and for use in the blockchain network.

Fungible Tokens

Fungible tokens are assets that are not unique. For example, $1 is always equal to $1 no matter who owns it. In crypto, a fungible token can also be Ether ($ETH); 1 ETH is worth 1 ETH despite where it was issued.

Non-Fungible Tokens

Non-Fungible Tokens (NFT) represent one unique and indivisible item, either physical or digital. The Blockchain is used to prove ownership of these digital items.


Establishing that Tokenomics contains more than the definition of the divided parts is essential. Understanding a project’s future goals and objectives is major when considering a token. Bitcoin and Ethereum leverage their coins to incentivize members to use their networks.

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