Tokenomics
A Blockonomy Perspective
(Blockchain+Economy)
Prerequisites
Fundamental understanding of
the operations of the
blockchains
Brief exposure to the
economic concepts
2
Coverage
The ecosystems of the
blockchains irrespective of
the use cases they
create/serve for their
founders, stakeholders and
the end-users.
3
Key Takeaways
Insights into the corresponding
roles that the coins or the
tokens perform to ensure the
overall financial sustainability of
the ecosystem of the
blockchain.
4
Intellectual Property Rights (IPR) Disclaimer
The images used in this presentation are only for representational
purposes and are under the IPR protection of their respective
organizations/individuals.
Some or all of these images may not be permitted for usage
/distribution/redistribution as in “Creative Commons License”.
Due diligence is suggested in confirming the Intellectual Property
Rights liabilities attached with these images before using, distributing
and redistributing them.
5
Coin Vs Token
Coins are cryptocurrencies
that are native to their own
blockchains and are used to
pay fees on their native
network (notable examples
include BTC for Bitcoin,
ETH for Ethereum and XMR
for Monero).
6
Coin Vs Token
Coins are used to transfer
value and are given as
rewards to miners when a
new block is mined on the
native blockchain.
7
Coin Vs Token
Instead of being used for
basic network activities like
fee payments, tokens often
have unique use cases that
are specific to the projects,
which created them.
8
Coin Vs Token
Case in point
Mana token of
Decentraland is burned
for purchasing digital
assets (virtual land) from
the marketplace of
Decentraland.
9
Coin Vs Token
Tokens do not have their
own native blockchains and
can even exist on multiple
blockchains.
10
Coin Vs Token
Case in point
AAVE protocol’s AAVE token
exists as an ERC-20 token on
Ethereum and also exists on
the Binance Smart Chain as a
BEP-20 token.
11
Coin Vs Token
Coins function more like
currencies. Bitcoin and
Ethereum are both
currencies according to the
Securities and Exchange
Commission (SEC), USA.
12
Coin Vs Token
Tokens demonstrate
characteristics that are
similar to stocks in a
company.
13
Tokenomics – A Simplistic Approach
Tokenomics (Token + Economics)
describe a series of metrics
relating to a coin or token such as
Supply
Allocation
Distribution
Vesting
Inflation
Staking
Utility
14
Tokenomics – A Simplistic Approach
A well-built Tokenomics
mechanism translates into
higher demand as new
investors take positions in
the blockchain project,
increasing the prices.
Token + Economics = Tokenomics
15
Tokenomics – Factors
Supply
Supply is the total number
of tokens that exist on the
blockchain, including tokens
that aren't in public
circulation.
Tokenomics – Factors
Supply
Almost every blockchain
has coins or tokens that are
not in circulation either
because they have been
locked or still need to be
mined.
Tokenomics – Factors
Supply
The fully diluted valuation of
a blockchain is the
theoretical market cap of
the blockchain when every
coin or token enters the
circulation.
Tokenomics – Factors
Allocation
Coins or token are
allocated/created either
by fair launch or by
pre-mine.
Tokenomics – Factors
Allocation
A fair launch is when a
small community of people
start collectively mining a
coin or token.
Bitcoin Litecoin and
Dogecoin are fair
launched coins.
Tokenomics – Factors
Allocation
A pre-mine is when the
team behind the project
mints some or all of the
coins or tokens before
opening up the network to
the public.
Tokenomics – Factors
Allocation
A portion of these pre-mined
coins or tokens is usually
sold prior to the launch of
the network to raise the
funds needed to build it.
Initial Coin Offering (ICO) *Additional Reading*
Initial Exchange Offering (IEO)
Initial DEX Offering (IDO)
Tokenomics – Factors
Distribution
Generally, most of the pre-
mined tokens get allocated
to the team and private
investors such as venture
capital firms with a small
percentage being sold to
retail buyers.
Tokenomics – Factors
Distribution
This type of distribution
results in the small
circulating supplies for the
blockchain projects.
Also this carries a risk of
huge selling pressure from
the select individuals/firms.
Tokenomics – Factors
Vesting
it is common for blockchain
projects with a pre-mine to
lock up a certain portion of
their coins or tokens and
gradually release them over
time.
Tokenomics – Factors
Vesting
This ensures that the
market is not flooded by
coins or tokens allocated to
the team and private
investors.
Generally, these vesting
schedules are spread over
many years.
Tokenomics – Factors
Inflation
Coins or tokens are either
inflationary or deflationary.
A coin or token with high
inflation can reduce the
value of the coins or tokens
already in circulation over
time.
Tokenomics – Factors
Inflation
A few proof-of-stake
blockchains often have
some degree of inflation to
incentivize validators and
delegators on their
networks.
Tokenomics – Factors
Inflation
This inflation normally
ranges between five to
fifteen percent with
blockchains like Polkadot,
which adjusts their inflation
based on staking
participation to maintain the
security of the network.
Tokenomics – Factors
Inflation
A few blockchains reduce the
supply by burning their coins or
tokens.
Case in Point
The burning of the part of the
ETH received as network fees
may outrun inflation if enough
people use the network, which
would turn ETH deflationary.
Tokenomics – Factors
Staking
Staking restricts the actual
circulating supply of a coin or
token, which could drive a
positive price action.
This effect is much bigger for
proof-of-stake blockchain like
Polkadot where a majority of
supply of DOT token is being
staked.
Tokenomics – Factors
Utility
Utility, also referred to as a
use case, includes basically
anything that drives demand
for a coin or token.
Tokenomics – Factors
Utility
Bitcoin's primary utility is as
a store of value like gold.
Ethereum’s primary utility is
to pay fees for the
decentralized applications
(dApps) built on it and move
any ERC-20 tokens around.
Tokenomics – Factors
Utility
Many decentralized finance
(DeFi) tokens have utility as
votes in the governance
system for the protocol.
As the total value locked in
a protocol increases so
does the demand for its
governance token.
35
