Tokenomics

In this inexorable chapter, tokenomics will be the focal point and epicenter of the conversation. This simple but often omitted and neglected segment of crypto projects hides behind a word derived from both “token” and “economics.” In short, Tokenomics (Glossary 23) is the study of the economic system governing a blockchain token. As we’ve now understood the many shapes and forms tokens may take, we must not forget that at its core, a token is a cryptocurrency. It’s in that very word, “currency.” Like all currencies around the world, such as the US Dollar, the Euro, and the British Pound, tokens also must have a clever economic model backing them. As we’ve seen time and time again all around the world, native currencies of countries are prone to fluctuations and manipulation, with even more devastating effects than the crashing of a cryptocurrency. Around 2009, Zimbabwe was struck by hyperinflation due to very poor political and economic decisions, hence driving the value of the native currency down so much that they decided to print dollar notes with “100 trillion Zimbabwe dollars” written on them! The goal of this is to not shift a wheelbarrow filled to the brim of bank notes around to the local shop to buy a loaf of bread. More recently, in 2015, we saw this exact phenomenon with the inhabitants of Greece after the country defaulted, making it one of the first ever developed countries to experience such a disaster. Contributory to more problems with traditional currencies is that of corruption, and the possibility to print an infinite amount of bank notes and coins. Given that the value of a bank note is dependent on the chosen asset or assets backing it, in a perfect world, there would be a ratio which would be respected. For example, when banknotes were first created, they were purely a receipt stipulating how much gold that person had in the bank. Instead of moving the actual gold to make a transaction, the individual could simply leave his precious asset safeguarded in the bank, and hand over the piece of paper (akin to a deed or title of ownership) to the counterparty of the transaction. This method is far more practical than moving grams, kilos, or even tons of a heavy asset, thus making it one of the first forms of modern currency. Being such a practical measure, more and more people started using this chequebook-like feature and gradually stopped requesting to withdraw the gold in the bank. Soon, the banks noticed this and started to write out more banknotes than they had gold in the vault. Of course, when a major event happens and many people wish to withdraw their actual assets from the bank, major problems occur. Today, in the United States, to limit such a problem, there is an obligatory ratio of funds kept in the bank, to funds they’re supposed to have in the bank, known as the “reserve requirement.” As we know, banks make money by loaning out peoples’ deposits. A reserve requirement means they must keep a percentage of deposited funds in the bank, usually around 10%. In my view, it still is a very high risk, and moreover not normal. It’s not normal that they can use the remaining 90% of funds deposited by ordinary people, who deposit in the bank their hard-earned money. ( Bank Reserves: Definition, Purpose, Types, and Requirements [investopedia.com] ). Again, we can see how the traditional financial world leverages currencies for the benefit of a select few. This is a reason why Bitcoin was so revolutionary, forever changing the landscape and possibilities for currencies worldwide. With Bitcoin, there’s no corruption, just as importantly as there’s no, and never can be, any inflation, thanks to its fixed total supply. There can never be one more, nor can there ever be one less. This is where the art of tokenomics forced itself into the spotlight, providing real technique and a much larger array of economic features designed to fashion the perfect economy for your token. It encompasses everything from the total supply of tokens, the release schedules, and the mechanisms driving the use and demand for these tokens within the respective ecosystems. As one engages in such an endeavor, it is highly recommended to reach out to experts in this field such as MHL Solutions or Findaas to help you create the most favorable economy for your token. However, understanding tokenomics is pivotal for any individual or entity looking to launch a token, as it influences the entire longevity of a token-based protocol (Glossary 24).