Welcome to Kafycrypto, your number-one crypto news, and marketing channel. In this article, we are going to be discussing different token economics models.
Tokenomics plays a vital role in every crypto project and is the basis on which investors base their investment decision and also one of the very good ways to spot rug pull projects as early as possible.
What is Tokenomics in crypto
Tokenomics is a crypto word, comprising two terms: economics and token. Therefore, it is essentially crypto economics, also known as token economics. It’s an analysis of economics behind the crypto token, starting with its attributes, circulation and manufacture, and more.
To be able to understand more about the field of tokenomics it is essential to be aware of the different kinds of tokens. One classification divides tokens into two Layer 1 and Layer 2.
- Layer 1 tokens: Layer 1 tokens form the blockchain of a particular company and are used to provide other services such as storage, investment and purchase, among others. They pay for every transaction through their network.
- Layer 2 tokens: Layer 2 tokens are created to aid in scaling decentralized applications within the network.
Beyond that, there’s another well-known classification of crypto
- Fungible tokens
Fungibility is the ability of assets that allows them to be exchangeable with another similar type. Thus, fungible assets are those that have identical values and can be exchanged with one another. Gold can be an excellent example of a fungible asset since its value remains the same in all countries.
- Non-Fungible Tokens
Non-Fungible Tokens, also known as NFTs however are distinct and don’t have identical worth. Through the tokenization of assets like furniture, art, or real estate properties, they are physical time that is digitally stored. This new trend of ownership via digital technology has led to NFTs becoming extremely well-known in recent years and even being auctioned off for thousands of dollars.
Last classification of crypto
- Security tokens
Security tokens are contracts for investment that represent the ownership of a fraction of assets.
- Utility tokens
Utility tokens are more widely known. They are issued by an ICO and are beneficial to fund an entire network.
What is tokenomics model
Every crypto token has a model which ultimately determines its value and also determines the supply of the token.
What makes a good Tokenomics
Every tokenomics model comes with something unique in relation to the use of tokens and their supply, as well as their distribution. Tokenomics is usually the main aspect that is mostly used by investors, developers, and community members since it defines the community’s broad scope, operational goals, intentions, and scope.
And also in a situation whereby a token is distributed evenly across all aspects the token tends to cover e.g let’s say a tokens maximum supply is 100% and 50% of the token goes to the community while 10% goes to the team and 10% goes to the marketing of the token, while let’s say 20% goes to the cause in which a token stands for and the remaining 10% is for burning.
Now looking at the tokenomics with such an even token distribution, you can see for yourself that the developers of the token aren’t out to accumulate all the tokens and rug pull the project.
So now we can say that what makes a tokenomics model best in class is an even distribution of the token.
Best Tokenomics models
Token economics has two models, deflationary and inflationary
Token Economics: Deflationary tokenomics model
A deflationary system means that there is a limit (limit) in the number of tokens that can be created.
In the deflationary model, the token supply will decrease over time.
Models of deflation are possible by token burn mechanisms. token burning mechanism.
The burning of tokens refers to the procedure by which a token is removed permanently from the database and the burned tokens will never be in existence again
There are two main methods of implementing token burns in the models of deflation:
- Buyback and Burn-The platform or token creators buy the tokens on the market, and then purposely transfer them into the “burn” wallet, where they can’t be recovered.
- Burn on the transaction Automatic mechanism in the token smart contract which burns a specific amount of token after each transaction.
Additionally, people sometimes have to lose or forget their wallet keys and private keys which render the tokens inaccessible. This means that every token model that has a finite supply will eventually become deflationary.
Deflationary models of tokens are typically easier to create; hence the majority of new projects use these models for their tokenomics. A deflationary model is easier to increase the value of tokens in the long run because the supply will only get smaller.
Looking for a Web3 Marketing Agency?
Kafycrypto is a leading crypto, web3, and metaverse marketing agency that has helped some of the top projects in crypto create buzz, grow a digital community and connect with influencers & investors. We’ve been called one of the best agencies in the world because we have the track record and case studies to prove it. Book a call with our team to learn more.
Token Economics: Inflationary tokenomics model
There is no limit on the number of tokens that can be created under an inflationary model of economics based on tokens which means that the supply of tokens grows over time.
There are a variety of examples from the inflationary system. Certain no of tokens are released on a fixed schedule, others employ non-linear functions, while others simply mint tokens on demand.
Although inflationary models are a little more difficult for sustaining than those that are deflationary models, there are some guidelines to follow when making your currency using an inflationary method.
The rules for an inflationary model
- Do not permit the minting of tokens on demand. It’s not a good idea to allow someone (e.g. the project team) to make new tokens whenever they wish. If the general public examines the contract’s code and discovers that you can issue an unlimited amount in tokens, at any moment, investors are likely to run away from your venture as if it was an explosion.
- More than 200 per cent annual inflation is not a good idea for a single model to last.
- Try to achieve a minimum of 20% in the initial supply of circulating stock and a 150 per cent annual inflation rate
The process of creating new tokens by staking and mining constitutes the primary factor behind inflationary models.
Staking refers to the process of token holders confirming transactions while maintaining the security of the network. Therefore, those who validate transactions earn tokens for their support of the network.
Tokens that are awarded to network validation in the process of creating blocks are the reason for market inflation.
Token Economics: Mixed Models
A lot of projects have succeeded by using a mix of deflationary as well as inflationary models. They use an inflationary model that is a basic one, along with the use of some methods of deflation (token burned).
For instance, Solana’s (SOL) is an inflationary coin. The rate of inflation for the year began at 8% and will slowly decrease until it reaches its maximum rate of 1.5 per cent in 10 years. But, the percentage of the transaction fees is burnt (depending on the volume of transactions). With sufficient processing per second rate of burn could reach 1.5 per cent annually or more which will make the currency deflationary.
These are the three major tokenomics models that are highly adapted by most token developers. But so far there has been a major attack on the inflationary model as some financialists assume that crypto founders can print unlimited tokens over time making the price stagnant over time.
So for most economists, the deflationary model tends to stand out and also is more transparent to users. Because some investors don’t go for a token beyond 1 million token supply while for some any token supply that surpasses the bitcoin supply is a no-no for them.
So for this type of investors, inflationary tokenomics model will be a No for them because chances that this project from 20 million max supply to 40 million max supply is there since the token uses the inflationary model
So having said this, I can say that the Deflationary model, for now, is the best tokenomics model that is fully supported by most financial analyst