Written by: Chloe Kindangen

A more well-established field of study, economics refers to how consumption, production, and wealth transfer of goods and services connect with one another. The economics of tokens, called tokenomics, examines the internal ecosystem of crypto projects. Coins are cryptocurrencies operating on independent blockchains, whereas tokens can refer to circulated assets on pre-existing exchanges. Unlike the traditional economy, where the money supply relies on the hands of the government, tokens often depend on fixed algorithmic emission schedules for circulation and distribution plans for users and stakeholders – which vary immensely across different crypto projects. Whether it be assessing issuance or attributes, tokenomics is an emerging field that unfolds how technical, physiological, and behavioral elements collectively impact the valuation of tokens. Numerous variables, such as the asset’s distribution and burning mechanism, contribute to a tokenomic lens. Five main features encapsulate tokenomics: token supply, utility, distribution, burns, and incentive mechanisms. At its most fundamental level, tokenomics determines the utility of a token, which refers to the specific purpose of tokens within their respective ecosystems while building attractive incentives for crypto holders. Think about this: while an average person may solely follow the price fluctuations of a token in the market, a crypto-enthusiast will most likely utilize tokenomics to form a more holistic assessment of the token’s future value. In other words, a clear understanding of tokenomics enables individuals to evaluate the likelihood of a token outperforming its competitors.

One of the many features tokenomics explores is incentive mechanisms. At its core, incentive mechanisms establish a reward-penalty framework for desired human behavior and activity. Whether financial benefits or non-monetary rewards, incentive mechanisms are crucial to maintaining an active and dynamic blockchain ecosystem. Bitcoin, for instance, integrates mining rewards and transaction fees as its incentive mechanisms. Designed to have a limited supply of 21 million Bitcoins, this mechanism awards miners newly-created coins when they successfully add cryptocurrency transactions to the public blockchain. Miners are rewarded with a transaction or “gas” fee after solving complex math problems, thereby strengthening the Bitcoin network’s validated transaction data. Approximately 90 percent of Bitcoin has been mined and is yet to be mined; the entire supply of Bitcoin is predicted to persist for more than a century. Another common validation method, staking, navigates the proof-of-stake model to reward users withholding and locking up crypto assets to confirm transactions. In introducing such incentive mechanisms, crypto projects can be strengthened depending on an exchange’s mission and growth projection.

Token distribution is also a vital aspect of tokenomics. In fulfilling myriad end goals, such as increased crypto activity or sufficient raised capital, token distribution allocates digital tokens to participants and stakeholders. Crypto projects adopt different allocation strategies. For example, a Token Generation Event (TGE) issues the tokens to the public in private, pre, or public sale – where phases each have unique pre-determined terms and conditions. On the other hand, the Simple Agreement for Future Tokens (SAFT) privatizes token sales which means tokens can be purchased before the public exchange launch. The TGE model is usually rolled out to gain publicity traction, whereas SAFTs prevent developers from violating legal standards or considerations. While both models ultimately debut token distribution, the private and public implications of fundraising on governance are crucial to evaluating the company’s security risks and long-term vision for token circulation.

A common goal across many crypto exchanges is the emerging industry’s mission for democratization. In contrast to conventional financial services or payment transaction systems, crypto has been a disruptive response to eliminating inefficient centralization networks and fee-collecting intermediaries. The subject of distributing power and responsibility across stakeholders has, in fact, been introduced through specific organizational methods. Decentralized autonomous organizations (DAOs) reinforce a mutual relationship in which participants must invest their money in return for decision-making power. In a decentralized ecosystem, an issued “governance token” allows stakeholders to participate in matters such as protocol updates or treasury allocations.

In September 2020, a decentralized exchange (DEX) on Ethereum, Uniswap, introduced its native governance token, UNI. The crypto exchange interestingly did not resort to a traditional initial coin offering (ICO) of UNI. Uniswap instead strategically distributed the tokens across active traders and liquidity providers before September. Most notably, the UNI airdrop solidified a revolutionary message in decentralized finance. The UNI airdrop, which describes the free distribution of crypto assets in user wallets, inflated attention over the new token while garnering user engagement. The company announced an airdrop of 400 UNI tokens to loyal users who reached specific criteria. Uniswip airdropped 60 percent to Uniswap community members, or in other words, anyone who had previously used the exchange, and 40 percent to investors, team members, and advisors reserved to unlock over a four-year plan. UNI users who hold at least 1 percent of the total UNI supply were eligible to submit development proposals, and any UNI stakeholder was given a say in the voting process of such proposals. After all UNI tokens have been distributed over the course of four years, Uniswap will implement a 2 percent annual inflation to preserve network activity. In theory, the voting rights of governance tokens from on-chain governance will promote a transparent and communicative community of stakeholders – who each recognize the direct risk in their respective forms of ownership. However, the silver lining of such risks signals the radical turn of community-driven governance in decentralized ecosystems.

Works Cited

"All Crypto From Scratch." BitDegree, 11 Nov. 2022,

www.bitdegree.org/rypto/learn/crypto-terms/what-is-mining-reward.

Barrera, Cathy. "Blockchain Incentive Structures: What They Are and Why They Matter." Medium, 22 Jul. 2018,

medium.com/prysmeconomics/blockchain-incentives-101-what-they-are-and-why-they-matter-5 127afb56aeb.

Dale , Brady . "Uniswap's Distribution Is Built on Something That Can't Be Forked: Actual Users." CoinDesk, 2 Nov. 2023,

www.coindesk.com/business/2020/09/17/uniswaps-distribution-is-built-on-something-that-cant-b e-forked-actual-users/.

Frankenfield, Jake, et al. "Block Reward: Definition, How They Provide Incentive, and Future." Investopedia, 18 Aug. 2023, www.investopedia.com/terms/b/block-reward.asp.

Howell, James. "A Comprehensive Guide to Uniswap (UNI) Tokenomics." 101 Blockchains, 30 May 2023,

101blockchains.com/uniswap-tokenomics-explained/#:~:text=Uniswap%20selected%20almost% 2012%2C000%20addresses,to%20users%20and%20liquidity%20providers.

Jhackworth. "The Uniswap Airdrop - Lessons for the Industry." Dune, 23 Nov. 2022, dune.com/blog/uni-airdrop-analysis.

Lepcha, Mensholong. "Tokenomics." Techopedia, 13 Nov. 2023,

www.techopedia.com/definition/tokenomics#:\~:text=Tokenomics%2C%20derived%20from%20t he%20words,to%20its%20utility%20and%20more.

Merchant, Murtuza . "Utility Tokens Vs. Equity Tokens: Key Differences Explained." Cointelegraph, 16 May 2022,

cointelegraph.com/explained/utility-tokens-vs-equity-tokens-key-differences-explained.

Shardeum Content Team. "What Is Tokenomics and Why Does It Matter?" Shardeum, 28 Mar. 2023,

shardeum.org/blog/what-is-tokenomics/#List_of_the_5_Key_Features_of_Tokenomics.

Chloe Kindangen

Governance Token Value & Tokenomics

Stevens, Robert. "What Is Tokenomics and Why Is It Important?" CoinDesk, 11 Nov. 2022, www.coindesk.com/learn/what-is-tokenomics-and-why-is-it-important/.

"What Is A Governance Token?" WorldCoin, 4 Sept. 2023,

worldcoin.org/articles/what-is-a-governance-token.

"What Is Tokenomics? A Beginner’S Guide on Supply and Demand of

Cryptocurrencies." Cointelegraph, 18 May 2022,

cointelegraph.com/learn/what-is-tokenomics-a-beginners-guide-on-supply-and-demand-of-crypt ocurrencies.

"What Is Cryptocurrency Uniswap (UNI) and How Does It Work?" Kriptomat, kriptomat.io/cryptocurrencies/uniswap/what-is-uniswap/.

Writer for Coinmonks. "Token Distribution: What Does Token Distribution Mean and How Is It Done?" Coinmonks, 29 June. 2023,

medium.com/coinmonks/token-distribution-what-does-token-distribution-mean-and-how-is-it-do ne-5b4f488ff166.

Quigley, John L., and John Gilbert. "What Is Tokenomics? The Investor’S Guide." Blockworks, 2 Nov. 2023, blockworks.co/news/what-is-tokenomics.