Tokenomics: What You Need to Know
The crypto space is evergrowing. It seems like each year, we’re tasked with a new set of vocabulary words to learn about. At times, this influx of new information can be overwhelming but as is the case with learning anything new, it’s important to remind yourself that all it takes is breaking down the terminology until you understand the meaning. In this way, you can build upon the things you already know and you can follow along with anyone wanting to have a conversation about a particular crypto topic. Crypto Market Cap is a great website to visit because it offers a comprehensive vocabulary list pertaining to all things crypto. You can take a look at that glossary here. One new key term that keeps popping up in the crypto community is “tokenomics.” This article takes you through the meaning of tokenomics and how it’s applied to different tokens.
Tokenomics simply means the economics of a particular token. To break things down even more, economics of these tokens are evaluated by specific criteria that determine the price of a token. It’s important to note that tokens are not coins. Crypto assets like Bitcoin and Ethereum operate via their own blockchain and therefore are considered coins. Tokens are assets that don’t have a native blockchain but build on other blockchains and become a second layer asset on top. For example, Ethereum is a coin and operates using its own blockchain but the token BAT (Basic Attention Token), uses the Ethereum blockchain and therefore is not a coin but a true token. BAT uses a browser called Brave to monitor consumer patterns when it comes to advertising/marketing. It can track how long a consumer spends on a particular website. Tokens can be used to encourage the crypto community.
Some other tokens like BAT that use the Ethereum chain are commonly referred to as ERC20 tokens. There are other types of tokens with different standards than the ERC20 outline. One example is Chainlink. Chainlink is known as an ERC677 token which is an extension of the ERC20 protocol but with some variation in code structure to ensure it works with all guidelines and meets the needs of the project. ERC stands for Ethereum Request for Comment and this means there is a specific outline by which all ERC tokens must abide by in order to create a project that will run on the Ethereum network. Another project example of tokens comes from Cobalt Lend, they’ll soon be using tokens to create a way for content creators on the platform to get more engagement and will use tokens to incentivize their customer base. Tokenomics will be applied to their token creations just like it would be for any other project.
Back to the topic at hand, how are tokenomics applied to these different types of tokens? Several factors are taken into account to determine a token’s value. Think along the lines of economic valuations outside of crypto. It comes down to things like utility, supply and demand, and even the volume it’s trading with. When you set out to invest, you’re looking for the utility of the project (will it work or is it a good idea). You also might be looking at the types of people and companies investing in the token. You may also consider the team and who makes up that team (is it a team with people we trust). These are ways in which tokenomics comes together to provide a clearer picture of an asset. Tokenomics can help people decide whether or not they want to be invested in a project.
There are so many projects using Ethereum to build out with. In addition to Ethereum, we’re beginning to see projects move to chains like the Solana chain which offers faster transactions and lower fees for specific functions. Keeping in mind all that we’ve just discussed above, tokenomics can be applied to any token being created on any blockchain. Just keep in mind the key aspects you look for when investing in various crypto projects and you’ll be utilizing tokenomics! Please remember to do your own research and never invest in a project just because someone else is telling others to. Your finances and investments are up to you, so keep being diligent about fact-checking and research.