What is Tokenomics and how does it work

According to Cointelegraph, tokenomics help to create the economy of a cryptocurrency project through incentives and utility associated with tokens

For tokenomics, one needs to take into account the total number of tokens in circulation
For tokenomics, one needs to take into account the total number of tokens in circulation

Tokenomics refers to the amalgamation of between token and economics, which means supply and demand characteristics of a cryptocurrency project, as stated by Cointelegraph. The term is related with with characteristics of a cryptocurrency token such as issuance, attributes, distribution, supply, demand, among others. Cryptocurrency projects have pre-determined and algorithmcally created issuance schedules for tokens.

According to the publication, tokenomics help to create the economy of a cryptocurrency project through incentives and utility associated with tokens. The different factors which influence tokenomics are:

Supply

An important aspect of tokenomics is the supply of coins, where one needs to take into account the total number of tokens in circulation.

Token allocations and vesting periods

Detailed token allocations and stakeholders are important to cryptocurrency projects. To ensure credibility on the project, one needs to keep a vesting period on the tokens allocated to venture capitalists and developers. As the vesting period keeps the developers’ tokens locked for a certain period, investors get relieved from the disadvantages of pump and dump schemes.

Mining and staking

Blockchains such as Bitcoin and Ethereum give out tokens to remunerate members for providing validation to transactions. This process is known as proof-of-work (PoW). Computing power of miners enables them to mine new blocks and add them to blockchain. The proof-of-stake (PoS) blockchains implemented a staking model for validators which rewards them for locking a certain number of coins in smart contract. 

Yields

It allows cryptocurrency holders to earn additional tokens. One can lend their funds to anyone in need of a loan through smart contracts, earn interest and principal in the form of tokens. Yield farming enables pools of yields in decentralised exchanges (DEXs).

Token burns

For preventing inflation, cryptocurrency protocols need to burn tokens for a permanent removal of them from circulation. With the reduction in the volume of tokens, the price gets driven up. 

(With insights from Cointelegraph)

Also read: India’s cryptocurrency yield account 24Carret earns up to 17% APY on cryptocurrency holdings

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