Intro to Tokenomics
4/5: Tokenomics Networks & Models
A cryptocurrency’s network is made up of its founders, developers, team members, and its community of supporters and investors. These are the people who believe in the cryptocurrency’s potential and dedicate their resources, whether time and effort or financial support, to help the project succeed.
These stakeholders work together to ensure a token's long-term viability. Without a talented and dedicated founding team, the project is unlikely to attract enough support from investors to maintain an upward trajectory. Likewise, without the backing of a large community, the cryptocurrency is unlikely to sustain enough engagement to keep moving forward.
Of course, these two do not always go hand in hand: The relationship between a cryptocurrency’s network and its success in the market is notoriously hard to predict. Just because a token has a strong community doesn’t mean it has solid fundamentals. Investors should beware of projects that look too good to be true, as well as the scams and false promises that–have and continue to–plague the crypto industry at large.
On the other hand, a lack of utility doesn't always mean failure. For example, Dogecoin (DOGE) and Shiba Inu (SHIB) are two cryptocurrencies best categorized as "meme tokens." Without any particular utility, they operate primarily on the momentum of their social community. These tokens have exploded in popularity and value but have also experienced dramatic corrections.
To further explain the difference between tokenomic models, let's look at the two most influential cryptocurrencies: Bitcoin and Ethereum.
Bitcoin is deflationary. That means that issuance slows, and the total number of coins in circulation will never surpass its fixed supply of 21M BTC. At the current speed of around ten minutes per block, the last BTC is expected to be mined around 2140.
The reason Bitcoin can still be mined for over a hundred years, even though over 90% of the total supply has already been mined, comes down to the halving rate. Every four years, the Bitcoin block reward is cut in half. Since this reduces the rate at which new BTC enter circulation, it promotes scarcity and pushes the price upwards. (This is affectionately referred to as ‘NGU Technology’, for ‘number go up’.) Historically, Bitcoin halvings have resulted in dramatic price increases.
What about Ethereum? Unlike Bitcoin, Ethereum is inflationary and doesn’t have a maximum supply. At its current rate, the total supply of ETH grows by almost 5 million per year. Since such a large supply of tokens would harm its value over time, Ethereum introduced a burning mechanism (EIP-1559, described above) to combat inflation.
Ethereum also has a different rewards model than Bitcoin: Instead of only receiving block rewards by mining–and today, post-merge, validating–network participants also receive a portion of the transaction fees for each block. Since Ethereum’s network uses ETH as a utility token to pay for transactions, “gas,” it incentivizes greater network participation and transaction volume. Now that Ethereum has moved to a Proof of Stake model, anyone holding ETH can stake their tokens via staking pools and earn rewards.
These are just two examples in an ecosystem of thousands of different cryptocurrencies. There are many types of tokens, each with its unique tokenomics models.
Stablecoins, for example, are not built to encourage scarcity or reduce inflation. Instead, they're tied to the value of a fiat currency, such as USD, to provide price stability and payments to the digital assets market. Stablecoins allow crypto holders to trade volatile assets like DOGE or SOL for a stablecoin such as USDT to park value without cashing out to fiat rails. This makes it easier to transfer between exchanges or use it to buy more cryptocurrency when the opportunity arises.
Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.