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Tokenomics is the study and analysis of the economic aspects of a cryptocurrency orblockchain project, with a particular focus on the design and distribution of its native digital tokens.[1][2] The term is a portmanteau of wordstoken andeconomics.
Key areas of interest include determining thevalue properties of the tokens themselves, and how the properties of tokens (together with other cryptographically secured rules and associated system actions) affect broader economic characteristics of the system including:
The field often has a strong applied focus, concerning itself with how to use its insights and principles to engineer economic systems to possess specific, desired properties.[3][4]
Both cryptocurrency and tokens are the subclasses of digital assets that use the technology of cryptography.[2] Crypto is the native currency of a blockchain, and it is developed directly by the blockchain protocol.[2]
Tokens can be created as native elements of a blockchain protocol, or by using asmart contract that is deployed on a blockchain which will host the new token.[5] For example, Ether (ETH) is the native crypto asset of theEthereum blockchain, and was created by the core Ethereum developer team to incentivise proper maintenance of the blockchain. While Axie Infinity Shards (AXS) tokens, were created using an Ethereum smart contract developed by an unaffiliated third party, in order to give token holders certaingovernance rights over the gameAxie Infinity.[5]
In both cases, different tokenomic attributes are chosen to support the token's intended role. With particular attention typically being paid to tokens' ability to function as an incentive mechanism, and choosing monetary policy that brings token supply into line with its demand.[6] This includes specifying rules about how and when new token should be generated or removed from the system. Rules that are written into smart contracts allow these system processes to be automated.[6]
In the real-world economics system, the economy is subject to fluctuations likeinflation anddeflation.[6]Central banks intervene throughmonetary policies.[6] Tokenonomics can be thought of as an approach to implementing monetary policies and economic rules via automated smart contracts.[6] On theblockchain, different projects may issue their own tokens with different tokenomics to complete their ecosystem for various purposes, such as fundraising and governance. Some common tokenomics models include the deflationary model, inflationary model, and dual-token model.[7] For instance, before the very lastBitcoin is added to the Bitcoin pool, it is inflationary because as miners (people who find Bitcoin by using algorithms to solve mathematical puzzles) keep mining Bitcoins, the amount of Bitcoins increases and thepurchasing power of each Bitcoin decrease.[7] However, the tokenomics of Bitcoin has multiple mechanisms to lower the rate of inflation, such as making mathematical puzzles harder and harder to solve and allowing fewer and fewer miners to receive the coin.[7]
Companies may create their own tokens for economic and structural reasons. Tokens are created to encourage the holder to interact and empower the product by automatically distributing the rewards to their stakeholders.[3] Projects may use tokens to raise funds from the public and for proof of internal operation (e.g. game tokens and governance tokens for the right to vote). To achieve the purposes and function of the tokens created, a fine tokenomics structure is needed.[6]
In traditional capital markets, if a company wants to raise funds from the public, it must go through aninitial public offering (IPO), which may take years, costing anywhere from $4 to $28 million in fees, depending on its size.[8] In the early stages, onlyaccredited investors are allowed to enter an investment, such as aventure capital.[1] In the decentralized, automated world, with lower cost, tokens can be created by anyone, with fundamental parameters and functions described by tokenomics.[1][further explanation needed] Instead of equities, blockchain companies raise funds through the issuing of tokens in the process ofinitial coin offerings (ICOs).[1] The security tokens can be thought of as equity shares of the blockchain companies.[1] After issuing the tokens, individual investors are allowed to buy tokens and own shares.[1] For investors, they can become early contributors to gain returns along with the growth of the company.[1] Web 3.0 investors can sell their holdings of tokens after thevesting period.[1]
Utility tokens are used as proof to access a company's service or product.[9] Unlike security tokens, utility tokens are for exchange and securing the liquidity and value of the company. Utility tokens are an in-ecosystem currency.[10] For example, with a token named Smooth Love Potion (SLP) in the gameAxie Infinity, players can use it to breed desired spirits. In this case, SLP acts as the internal currency within the game.[11] Users earn SLP from tasks, and spend SLP to defeat opponents.[12]
Investors risk being "rugged," meaning that the token issuer may "raise money and disappear," resulting in a value loss in those tokens and a capital loss for investors.[13][14] Hackers may hack into the system and steal the tokens.[13] An other risk could be the bad management of the market from the team and an excessive inflation or deflation of the token itself. Each tokenomics model has its disadvantages and advantages.[10]
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