All We Need To Know About Token Economy

in #hive-1679222 months ago

Token economy, or tokenomics, refers to the features that a crypto asset must have to attract investors. It is possible to group the features of tokenomics under utility and scarcity.

It is extremely important to pay attention to the details regarding the token economy. For example, making sure that the token represents all the value the infrastructure will create. A coin or token usually has three functions: usage, exchange value, and management. The coin can be used directly as gas in the corresponding blockchain, as in the case of Ethereum. Or, it can fulfill this task through staking, as in the Hive example. One of the features that should be sought is that a coin or token also gives the right to participate in the management.

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Photo by Mick Haupt on Unsplash

After making sure that the coin's relationship with the infrastructure it represents is solid, it's time to question the value created by the infrastructure. Does the blockchain or application that we own the coin provides a tangible benefit to people? Or does it create such an expectation for the future? Does the value created by the infrastructure produce results desired by investors, such as systematic coin burns or airdrops? In cases where we cannot talk about a tangible utility, we call the relevant system a pyramid scheme, and in this case, sustainability becomes extremely difficult.

Some coins can be successful even though they do not have a strong use case. Coins that create a price increase momentum and sustain it for a long time gain a brand value after a while. The price is a combination of the tangible benefit created and the hocus pocus of token issuance. As the tangible benefit created becomes stronger, it becomes easier to ensure sustainability in terms of price.

The inflation of a coin is the most important variable affecting its scarcity. When other conditions are the same, low inflation coins show a better price performance. Inflation of coins is not easily accessible information. I reach the inflation of the Hive ecosystem coins through the reports published on the @dalz account. Hive's inflation is 7.25%, however, Hive inflation has been hovering around 1% since the beginning of 2021 due to Hives that have turned into HBD. This allows Hive to maintain its value against ETH and BTC. Moreover, for example, Hive, which is powered up and delegated to @leofinance, provides a 16% return. Add to this the 2.84% power-up APR, airdrops, and the potential return of RC tokens for opening new accounts, and Hive's appeal becomes even more evident.

Coins with high inflation have higher potential DEFI returns. It is necessary to compare the inflation of the coins to be subject to DEFI investments with the LP return. If there is a significant positive difference, the relevant coin can be deemed to have passed its class in terms of inflation criteria. Axie Infinity is one of the few coins that can maintain good price performance over a long period despite high inflation. You can access the inflation of major coins here. The inflation of Cosmos ecosystem coins can be accessed via Minstscan dashboards.

Staking is a factor that temporarily reduces the number of coins in circulation. Coins staked in ecosystems with a loyal investor base can keep the coin price stable for a long time.

The price effect created by the halving of the Bitcoin supply is known to many crypto investors. This has played an important role in the emergence of deflationary coins. The deflationary effect is usually achieved through trading tax. All the coins are initially offered, but their number decreases over time. Examples of deflationary coins are Safemoon and Evergrow coins.

In recent years, the number of ecosystems with multiple coins has started to increase. As an example, we can give the Leo Finance ecosystem, which has coins such as Leo, Cub, and Polycub. In the Leo Finance example, newly released coins and the infrastructures they represent are used to create additional demand for Leo.

Collaborations in the field of DEFI serve to create new utilities for coins. More powerful offers are offered to DEFI investors as more than one ecosystem comes together.

When NFTs join the equation, a new layer is added to the token economy. As in the case of Splinterlands, models can emerge where NFTs and coins support each other's value. Ape Coin, which the Bored Ape Club airdropped to those who own Bored Ape Club NFTs, reached $4.7 billion in a few days. It is an interesting example as it shows the value that can be created by handling the token economy with the logic of the ecosystem.

In the crypto world, coins, tokens, NFT collections, and NFTs representing plots are added together like Lego blocks, helping to create mechanisms that will attract investors. Complex networks of relationships can form between crypto assets, and the token economy is becoming an area of ​​expertise in its own right.

On the other hand, we should keep in mind that crypto-assets represent a value proposition. Developers, investors, and other participants are collaborating around a core promise of value. The stronger the value proposition and the more dedicated the community, the higher the chance of success.

Conclusion

In the earlier days of crypto, the token allocation was done in a way that gave various privileges to early investors, VCs, and project owners. Over the years, mechanisms have emerged to balance the interests of the parties by the principles of "fair launch". Many projects are now starting as DAOs. Expenditures in areas such as software development, marketing, and ecosystem partnerships are determined by the votes of the investors.

In addition to the fair distribution of the value, mechanisms that can keep growth and sustainability in an optimum balance seem necessary for the token economy.

After all these evaluations, of course, it is necessary to check how the token economy is reflected in the price. If we are seeing a sustained uptrend accompanying a decent token economy, we are on the right track.

Thank you for reading.

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