What is Tokenomics?

Tokenomics are, as the word implies, a mixture of the word “token” and “economics.” Essentially, Tokenomics is about the “value” within a given token, which looks at both it’s economizing functions as well as it’s utility with blockchain technology. Tokenomics is really the study of how a cryptocurrency works within an ecosystem, as well as it’s possible real world uses.

One could compare this with “monetary?policy.” With the use of fiat money being so ubiquitous in all of life’s transactions, then it tends to fall under the control of institutions and governments. For example, Central banks are the sole institutions with the right to issue currency to the public. But the gradual introduction of cryptocurrencies is gradually changing, not only the way that traditional fiat currencies enjoy their hold over economies, but also ideas central to the creation and storage of currency and assets. Thanks to blockchain technologies coming to the fore in so many different aspects of our financial lives, individuals now have a greater choice in their monetary options. So you can view Tokenomics as a reflection of cryptocurrencies in the same manner that monetary policy is a reflection of ongoing fiat financial policy. With Tokenomics,we are taking Central Bank functionality, and turning it on it’s head in order to apply it to blockchain networks.

What Is A Token?

Though we’re going to be looking at tokens in relation to cryptocurrencies, we should point out that the idea of using tokens as a form of market economy is not new. The Harvard psychologist B.F. Skinner propounded the idea back in 1972. Simply put, he believed that by giving tokens a recognizable value, they could be used as a form of incentivization towards positive actions. For their use within the sphere of cryptocurrencies, Tokens really had to wait until the Ethereum network came along. That’s because this network can offer so much more than just acting as a ledger for transactions. On the Ethereum blockchain tokens are required, and these are known as ERC-20 tokens.

Leading on from this, we can see that there are two types of token. The first is Layer 1; which is a token native to its own blockchain. An example would be Ether (ETH) or BNB for the Binance chain. The Layer 2 tokens are used for decentralized applications within a fixed network. Then we can break tokens down by their functionality. This gives us security tokens and utility tokens.

The Security token serves as an investment contract. Essentially, these tokens must entail some sort of monetary investment. There’s a verification process called the Howey Test. Without going into too much detail, once the Howey Test has been passed, then the token is considered to be a financial security token. Contrast this with the utility token. This exists to ensure the financing of a network. It’s often given out via an initial DEX offering (IDO) in order to raise funds for network or platform development.

So what's the difference between a token and a coin within the world of crypto? Well, for a start, they are both decentralized, meaning that there's no need for third party regulation. They also both have value, and can both be?bought or sold. One of the biggest differences is that coins can be used on their own independent blockchain. By design, a coin can only represent monetary value. But a token, on the other hand, can be used for running other services on the blockchain.

And finally, the categories of tokens can be separated into either fungible or non-fungible. A fungible token maintains the same value and so can be forever replicated. For example, one Ether is equal to another Ether, and by replacing one with another, nothing would change. Non-fungible tokens, better known today as NFTs, are each unique. That’s why we hear so much about NFT artwork, collectibles and?virtual real estate. Their very uniqueness means that they cannot be duplicated. Their uniqueness can make them much more valuable than fungible tokens.

An Example: The Next Earth Token

In order to delve into the practical uses of a token, let's have a look at a new metaverse platform, where a token will be released in just a couple of weeks. Next Earth is a virtual metaverse platform which is growing into a virtual business platform. They have already achieved great success through their first virtual land sale. Looking through their?white paper, we can see a road map ahead that includes introducing a Next Earth Token, as well as staking and token burning.

We can also see that Next Earth will have their IDO very soon. For this they will sell their tokens to existing land owners as opposed to retail investors. But there will need to be some form of vesting so that not all the tokens flood onto the marketplace at once, thereby driving the price down. It’s important that Next Earth ensures that the market in their tokens doesn’t become unbalanced. There would be drastic token inflation if there were too many tokens in the supply, with the pressure on the price driving it downwards. Deflation occurs when there’s a scarcity, leading to a price increase.

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Next Earth plans to implement token burning. This acts as a means of maintaining and regulating the token’s marketplace value. Though it sounds rather dramatic, nothing is physically burned. Essentially, the tokens are sent to an address that’s totally unknown. Finally, we should touch on?staking tokens. This refers to the locking down of a specific number of tokens for a specific period of time. This can give the stake holder a passive income or some other type of reward from the network. One thing to keep in mind is that staked tokens cannot be moved until their staking period is complete. As you can imagine, if a large number of tokens are staked all at once, this can have a serious effect on the token’s price.

Implementing DeFi And DAO

When dealing with tokenomics, we should probably talk a little about “governance.” As with all crypto projects, the Next Earth has a core team of devs overseeing everything. As such, they devise the rules as to how their tokens are created, as well as how they move within the network itself. Next Earth is one of the only metaverse virtual world-building platforms to implement real DeFi solutions. Coupled with?DAO, it means that the team takes an absolute “hand’s off” approach. As such, they play no active role in how the marketplace functions or how the network runs. Now it’s up and running, their job is to simply maintain the network, and follow where it’s going, thanks to the steering consensus of the ecosystem’s own users.

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