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Tokenomics Explained

Tokenomics is a combination of the words “token” as in crypto token and “economics” and is about understanding the economics and fundamentals of a crypto token.

Economics is at the root of our lives and always has been. 

Whilst today’s economies are way more complex and sophisticated than from the days of our ancestors the basics still remain the same. 

There is always some form of demand and supply, some form of value measurement and some form of exchange like a currency or barter system to facilitate transactions.

Today’s economies are highly complex and fast-moving, economists, governments and businesses need to understand the trends and in the case of businesses navigate the economy for maximum benefit.

In much the same way, investors, traders and others interested in crypto need to be able to understand the fundamental economics behind the tokens they are interested in in order to be able to ascertain if they are wise investments. 

Tokenomics is the study of the economics and fundamentals of a crypto token.


What are tokens?

The first thing we need to look at and understand is what are tokens?

A crypto token can typically represent an asset or a utility that resides on a blockchain, allowing for the user to use it as an investment or for economic purposes. 

In the non-digital world, one could imagine a piece of gold as a token, as it could be used as a means of pure investment, i.e. hold onto it and let it appreciate in value, as a currency, pay for something with gold, not common nowadays but technically still possible or you could turn the gold into a piece of jewellery which can be considered a form of utility, a piece of jewellery to wear. 

If we looked instead at a $1 banknote, it serves no other purpose other than as a way to hold and transfer value, there’s nothing else you can actually do with it. 

These two examples could be used to crudely illustrate the difference between a crypto coin such as Bitcoin or a token just to be able to understand what a crypto token in fact is. 

In more specific terms a coin is native to the blockchain, for example, ETH or Ether is the native coin for the Ethereum blockchain whereas a token is not native to a blockchain such as Ethereum but independently operates on the Ethereum blockchain and provides some form of utility or service.


Let’s examine some token types so as to see how this fits into tokenomics?

There are four principal types of crypto tokens, these are:

Payment tokens – payment tokens are generally coins and their primary purpose is to act as a medium of exchange, a way to hold value or as a unit of account. In economic terms, the price of the payment token is highly influenced by supply and demand, just as in fiat currencies like the EURO, GBP or USD.

Security tokens – security tokens are similar to securities in the world of stocks and shares. If one owns shares in a company they can use their shares to vote for actions, hold onto the shares as investments in the hope the price will rise and also be able to enjoy a share of profits in the form of dividends. In a similar way, security tokens come with certain rights, privileges and means to earn money beyond simply the appreciation of the price of the token

Utility tokens – utility tokens give the holder access to a blockchain-based product or service. Where security tokens have some form of money-making at their core, utility tokens provide some form of utility hence the name. Imagine a piece of software like WinZip, it compresses and decompresses files on a computer, you cannot make money with it. However, you could buy shares in the company behind WinZip which would be a security token in this case. WinZip itself would be a utility token.

Non-fungible tokens – all crypto coins and most tokens are interchangeable, my one bitcoin is exactly the same as your one bitcoin. Just like my €20 banknote is worth exactly the same as yours. Non-fungible tokens (NFTs) are different as these tokens can represent a unique item, property or asset such as the deeds of a particular house, a piece of artwork or a collectible, no two are the same. The NFT can be considered as the legal title or deed to that asset, much like the deeds to a property.


What is tokenomics in crypto?

Okay, so now we have an understanding of what tokens are and the common types of crypto tokens out there. 

How does tokenomics fit into the picture? 

As we determined at the very beginning of this article, demand and supply are at the root of all economic systems, they in most cases determine the supply and the price. 

If the demand for something is high and there is limited supply the price will go up, if demand is low and/or the market is flooded then we can expect the price to come down. 

In much the same way, in tokenomics, we need to study the demand and supply of a crypto amongst other things in order to get at the fundamentals and determine if it’s a good buy or simply goodbye!


Below are some of the fundamentals we would be looking at in tokenomics

Allocation and distribution of tokens – how are the tokens being distributed, there’s a fair launch in which case the token is mined, owned, earned and governed by the community at large without any pre-release. 

On the other hand, some tokens can be pre-mined and issued to developers and early investors in an ICO for example. Imagine there’s a wallet with a huge amount of tokens sitting there, the owner of this huge amount of tokens could dump them on the market and cash in causing the price to plummet, this would represent a significant risk to the other token holders. 

Token supply – the supply is probably one of the biggest factors when it comes to the ongoing price of the token, there’s circulating supply, the amount of the token currently in circulation potentially available to buy and sell, there’s the max supply which is the maximum amount of the token that will ever be produced and there’s total supply which is the total amount of tokens out there excluding any that may have been burned.

Market capitalisation – the market capitalisation of a token is similar to that of a company, it’s basically the price of a share multiplied by the number of issued shares. In the same way, it’s the price of the token multiplied by the number of tokens in circulation. The higher the market capitalisation the more solid the token, or in theory at least.

Inflationary or deflationary token type – a token is deemed to be deflationary if there is a limit to the total supply, for example, there will only ever be 21 million bitcoin, no more can be produced and this should lead to an increase in value in the long run due to the ultimate scarcity, just as with oil or gold, there’s only so much out there and this keeps the price up. An inflationary coin is the opposite, there is no upper limit to the amount that can be created, very much like fiat currencies like the EUR or USD, in these cases, oversupply can force the price down and this means that each token has less buying power or inflation as it is known in economic terms.



In summary, tokenomics is about understanding the fundamentals of a token in order to be able to determine if it is a potentially good investment. 

Just as government and business economists study economic fundamentals and patterns the same is true with tokenomics when it comes to crypto.

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crypto coin burn

Crypto coin burn is when crypto coins or tokens are permanently and intentionally removed from circulation in order to help elevate the price by decreasing supply.


The crypto market is driven largely by supply and demand economics

Unlike say the money supply which is backed by the government or a commodity such as oil or gold which has an inherent value, there is no such inherent value in crypto. 

If Bitcoin were to collapse, there is no liquidation process where assets can be sold off in order to compensate shareholders and suppliers. 

As demand and supply are the primary levers behind the price, more coins or tokens can be added to the supply which can bring prices down, or coins or tokens are permanently destroyed “burned” in order to drive the price up. 

What is a crypto coin burn?

A crypto coin burn is the intentional permanent destruction of a crypto coin or token by the development team behind the crypto. 

The coin burn removes the desired amount of crypto tokens or coins from circulation. 

It is as permanent as taking a big wad of Euro notes, wildly spraying them with gasoline and setting them on fire. 

Once those notes are burnt, they are totally unusable and out of circulation. 

Well, the same happens with a coin burn, without the gasoline and fire of course!

What is the purpose of a crypto coin burn?

There are a couple of primary reasons why coin burns take place. 

One of them is to help maintain/stabilise the price of a stablecoin. 

Stablecoins are generally pegged to a fiat currency like the US Dollar or to a valuable commodity such as gold or they maintain their price using an algorithm. 

If the price of the coin or token were to fall beyond a certain level a coin burn would take place which would lead to the price going up to the desired price point, for example, to match the price of the US Dollar due to the decreased supply. 

Naturally, the reverse happens should the price be too high, more coins or tokens would be added to the supply. 

A further reason for coin burns is to help push the price upwards by removing coins or tokens from the available circulation. 

The decrease in supply makes each coin more valuable and therefore more attractive to investors. 

Corporations employ a similar technique known as a share buyback, where they are reducing the supply of available shares in the market in order to drive the share price up. 

The key difference is that the shares are not being destroyed, but rather reabsorbed by the corporation. 

The end goal is very much the same though. 

To reduce the supply in the open market and drive the share price up. 

Another example of a similar dynamic is the supply of oil into the market. If the price of a barrel of crude oil drops below a certain level, the oil-producing nations will often restrict supply in order to drive the price back up in order to maximise their profits.

How does crypto coin burn work?

A crypto coin burn is a totally transparent process and anyone can verify the coin burn on the blockchain. 

As dramatic as it may sound, there is no fire or actual burning involved, it’s all happening in the digital realm. 

A crypto coin burn occurs when a predetermined amount of coins or tokens are sent to a special address also known as an “eater address”. 

Nobody has an access key to this address, not even the developers and once the coins or tokens have been transferred there, there’s literally no way of getting them back. 

Think of it like a safety deposit box where you can push valuables in, but you have no way of opening the box to take anything out. 

The valuables remain there. Now, in the case of the safety deposit box, it’s still somehow possible, for example by opening the box by force, no such possibility exists in the crypto world. 

The coins or tokens are technically still accounted for but not available for use. 

It’s worth remembering that coin burn is intentional, it is different to situations where coins or tokens are accidentally sent to the wrong address or a person loses access to their wallet after they have lost their private key and those coins or tokens are no longer retrievable. 

The crypto world is brutally clear and very unforgiving when it comes to lost coins, burned or otherwise.

A couple of high profile coin burn examples

Ethereum, the second-largest crypto after bitcoin undertook a major coin burn event, burning through an eye-watering $144m ETH in 2021 following major network upgrades. 

ETH was being burned at a rate of 3.15 tokens or around $10,000 per minute. Another different coin burn event was by the founder of Ethereum as it happens, Vitalik Buterin. 

In this case, it was a Dogecoin, Shiba Inu. Vitalik burned a staggering 410 trillion SHIB, 90% of what was in his wallet, this drove the price up 40%, as the coins Vitalik burned represented about 40% of the total SHIB supply. 

In this case, his motives were different, but, the end result was as expected, the removal of a significant number of coins from circulation, made the remaining coins more valuable, well, for some time at least.


Demand and supply dynamics drive the crypto market, pure and simple. 

As non-stablecoin crypto typically does not have an inherent value and is not generally backed by anything or anyone, there are not many levers that can be intentionally pulled to somehow control the price. 

Coin burning is one useful lever available to all crypto coin developers and also communities. 

By reducing supply via a coin burn event the price can be artificially driven up thus making existing coin and token holders happier and making the coin or token more attractive to new investors.

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