The Science of Tokenomics
Tags: blockchain, web3, crypto, technology
Published: 2022-02-18 08:19:21

---
title: The Science of Tokenomics
published: true
description: Tokenomics is the analysis of the economics of crypto tokens or cryptocurrencies. It refers to all of a crypto token's characteristics that make it desirable to investors.
tags: blockchain, web3, crypto, technology
cover_image: https://dev-to-uploads.s3.amazonaws.com/uploads/articles/bzps9yxvhs5k9w7cr12s.jpg
---

Hello. I'm Tudor, blockchain developer and writer at  [The Crypto Journal](https://thecryptojournal.substack.com/)

I help people understand Blockchain & Crypto concepts with the help of 5-minute worth-of-reading reports.

If you are intrested, you can subscribe  [here](https://thecryptojournal.substack.com/).

Today we are going to do a short report about … Tokenomics. 
To read the full report, go here: [The Science of Tokenomics](https://thecryptojournal.substack.com/p/the-science-of-tokenomics)

## ⚡️ What it is?

**Tokenomics**  is the analysis of the _economics_ of crypto tokens or cryptocurrencies. It refers to all of a crypto token's characteristics that make it desirable to investors.

## 🧪 Why it matters?

-   You heard this lots of times: Before you invest in a cryptocurrency project, it's advised to make an **analysis/research** it so you can manage the risk of the investment.
    
-   It is essential to examine why a token (a crypto asset issued on top of a Blockchain) has value and why it's reached its price. By looking at different aspects which describe the world of cryptocurrencies, tokenomics provides an answer to the economizing issues of tokens and their functionality in Blockchain environment.
    

[![](https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fa9f0228a-d9f5-4383-8a53-102441a33b3d_480x480.gif)](https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fa9f0228a-d9f5-4383-8a53-102441a33b3d_480x480.gif)

## **🔍** Problem

Lately, we could notice tens of thousands of new tokens arrived on the '_market'._ A token will be successful and appreciated over time only if it has good tokenomics. Developing proper tokenomics is crucial to creating a token that reflects the growth in value and protocol utilization. The most important thing is to understand how the token will be used.

Token _functions._

-   product / service use;
-   access to the product / service;
    
-   value exchange
    
-   voting / governance / ownership;
    
-   property rights;
    
-   control;
    
-   reward;
    
-   discount;
    
-   payment unit;
    
-   profit distribution;
    
-   security


## **💡** Solution

-   Understanding tokenomics before starting investing or **developing your own token.**
    

## 🩺 Core Elements

### **⚡️ Distribution and Allocation**

-   Pre mining vs. Fair-launch: In **pre-mined** token launch (ICO), investors, developers, and select individuals and organizations are granted tokens before the public offering. A **fair launch** is when a cryptocurrency is mined, earned, owned, and controlled by the whole community.
    

### **⚡️ Token Supply**

-   Circulating supply & maximum available: The **circulating supply** of a token is the number of tokens that have been published so far and are currently in circulation. The **max supply** of a token is the maximum number of tokens that can ever be generated (mined or minted).
    

### **⚡️ Market Cap(italization)**

-   The Market cap is an essential factor to think about before you invest. It's calculated by multiplying the number of tokens in circulation (supply) by the current market price of a single token.
    
-   A lower market cap might suggest that the cryptocurrency has more potential to grow, and large-cap tokens might be a securer investment. At the same time, their growth possibility leans to be smaller (more about market capitalization: [here](https://www.merrilledge.com/article/company-size-why-market-capitalization-matters-ose)).
    

### **⚡️** Inflationary vs. Deflationary

-   I know, big words, but it's not that complicated.
    
-   An inflationary token doesn't have a maximum supply and will continue to be produced over time. In a deflationary token standard, the max supply of the token is locked. (If many tokens were in supply, there would be an excess. And whenever there's an excess, a price decrease follows).
    

### **⚡️** Consensus

-   We will cover the different aspects of a Consensus Mechanism, which one they are, and the advantages/disadvantages in a future report. Short one: there are 2 important ones Proof-of-Work (e.g., Bitcoin) and Proof-of-Stake (e.g., Polkadot).
    

### **⚡️** Rewards / Staking / Earnings

-   Another essential aspect of a project is sharing the benefits and helping the network.
    
-   Often, token projects give rewards to users and investors for contributing to the network. Incentivize the miners (proof-of-work model), secure the network (proof-of-stake), or just confront the inflation are some reasons to do it.
    
-   How to earn rewards? Mining, Staking, or even running Masternodes.
    

### **⚡️** Utility

-   Of course, don't you ever forget about the utility of a token!
    
-   Does the token make sense in Blockchain? They can be used for payment inside or outside the protocol environment or, they can be used in staking and participating in governance. Or maybe, just holding a token gives you access to an app.
    

[![](https://cdn.substack.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F255609fb-d239-44ba-83ba-213135647835_500x250.gif)](https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F255609fb-d239-44ba-83ba-213135647835_500x250.gif)

Tools, opportunities and trends in the full article here: [The Science of Tokenomics](https://thecryptojournal.substack.com/p/the-science-of-tokenomics)