Tokenomics 101

Tokenomics, Cryptocurrency, NFT / By Ric

If you’re in the Web3 or NFT space chances are you’ve heard the term “tokenomics” being thrown around more than once. But what does it all mean? It’s pretty much a given that it is the combination of token + economics.

Essentially, it refers to the qualities of a crypto asset that make it appealing to investors and users. In other words, it helps us understand the supply and demand characteristics of the asset.

However, like most things in life, there are many more pieces to this intriguing puzzle. Below, we’ve explored and shed some light on tokenomics, making the subject easier to grasp.

What is tokenomics?

Before we go down the rabbit hole of tokenomics, we first need to understand what a token is. A token (not to be confused with a coin) is a digital unit of cryptocurrency that is used to represent a specific use on the blockchain.

Tokens can be used for a number of things but they are more commonly used for security, utility, or governance. These tokens are created with pre-set issuance schedules that are all created with an algorithm.

This helps everyone understand the supply of the token (ie how much has been made available). Although some smart contracts allow for the quantity to be increased and decreased, that would involve signing a new agreement and could be difficult to carry through.

This helps users know that their asset (and the creation thereof) is more predictable than the FIAT currencies we use daily.

We’re all aware that Bitcoin does in fact have a finite amount made available, 21 million to be precise. However, it will only cease creation around 2140 and until then new coins will decrease by half every four years (give or take) – otherwise known as Bitcoin halving – which was implemented to create scarcity and in turn put pressure on price.

The issuance schedule has also led the way for many others to have the same approach – such as Bitcoin Cash, Bitcoin SV, and ZCash (all with a hard cap of 21 million). Other tokens have a much larger overall number being made available.

Dogecoin (and many others) on the other hand essentially have unlimited supply due to its issuance schedule. In other words, Bitcoin has a deflationary supply and Dogecoin has an inflationary supply.

What is tokenomics?

Okay so we’ve covered bits and pieces but let’s get down to business. Understanding the forces that will ultimately influence the supply and demand of a crypto asset is extremely important to investors of the respective asset.

One of the first questions that need to be addressed when discussing or reviewing a crypto asset’s tokenomics is “How will it be used?”. We’re basically asking if there is a clear link between using the platform and the asset.

If there is a link, it could lead to an increase in price due to the fact that for the service to grow it would require increased purchases and usage. However, if there is no link to the asset’s role in the platform or service, ( 🚩) what use or value is there really?

Other questions or points to ponder on include (but aren’t limited to):

How many coins or tokens currently exist?
How many will exist in the future? And how will they be created?
What is the distribution of the coins/tokens? Are some set aside for future team members and developers?
Is there any information that could point to some coins/tokens being lost, burned, deleted, or that are simply unusable? ( 🚩)

There are a few variables that could ultimately affect the tokenomics of a project:

Mining and staking
Yields
Burning of tokens
Supply (limited vs unlimited)
Allocation and vesting periods

How do the tokenomics determine value?

By understanding the tokenomics of an asset you could essentially understand where it’s going – and how valuable it could become (and ultimately whether or not it would be wise to invest). It is always recommended to DYOR before parting with your hard-earned (albeit FIAT) money.

Projects should have whitepapers made available to give further insight into the project and generally these would include the tokenomics – if not, simply ask the project heads for the tokenomics and they should be able to enlighten you – if not, 🚩.

From a project founder or developer side, it is crucial to review and understand the tokenomics of your project to ensure the project is deemed valuable and attractive to prospective investors.

Creating a token for your project

Cryptocurrency, NFT, Tokenomics / By Ric

If you’re in Web3 or building your own NFT project, chances are you’ve probably considered creating your own token as an added incentive to your community.

More often than not tokens are created as a project-linked currency of sorts.

Tokens can be used for a number of things including processing transactions; acting as a store of value; buying assets on a platform; voting rights in a dApp and crowdfunding.

What you need to know about creating a token

Like most things NFT-related, there’s some important information to consider before jumping in and creating your very own token.

Fortunately, we’ve made it super simple and consolidated all the essential juicy bits that you need to know.

In this piece we’ll cover the following:

Types of tokens (chains)
How to mint your own
Some links to mint your own

Types of tokens (chains)

As you may have guessed, the token you create will ultimately be determined by the chain your NFT project is being built on and the direction your project is taking.

There are three main chains that founders are minting their own tokens on, namely Binance, Ethereum, and Polygon.

Each chain essentially has its own token so you’ll have to decide which you’ll be building on or which ecosystem you’ll be attracting.

These tokens are:

BEP-20 (Binance Smart Chain)
ERC-20 (Ethereum)
MRC-20 (Polygon)

Cost and standards are major contributing factors when it comes to deciding which to go with. There are a number of reasons why you would choose to opt for one chain over another.

These include but aren’t limited to gas fees; requirements of the chain; transaction fees and security. Ethereum wins when it comes to security solely because it takes longer for verification (which can prove to be a pain sometimes).

However, there are a few flaws with the Ethereum model as we pointed out in our previous piece.

Ethereum is on the losing end when it comes to the other factors namely cost, speed, and requirements. BEP-20 for example is held to a much higher standard due to the fact they have stronger requirements than ERC-20.

BEP-20 transactions can be as quick as 3 seconds, whereas ERC-20 can exceed 15 seconds per transaction and with the flaw in scalability, the Ethereum chain is bogged down quite a bit when it comes to their transactions per second.

On the cost side, platforms like Coinmanufactory offer users the option of which coin they would like to create and outline the costs associated with each.

Here they are (subject to change)

BEP-20 will cost you 0.1BNB
ERC-20 will cost you 0.03ETH
MRC-20 will cost you as little as 37MATIC (we have seen it go up to around 200MATIC)

How to mint your own token

Okay, so by now you should already know which chain you’ll be working on. Now we’ll run through the general SOPs for creating your token, what you’ll need to have available, and the next steps.

Regardless of the platform you’re using to create your token, the first step would be to connect your wallet so the transaction can go through.

Please also ensure you have sufficient funds in your wallet in the correct currency of the chain you’ll be going with.

Next, you’ll need project specifics which include the token name, symbol and image* along with the quantity you want to make available and decimals (the standard is 18 but you can change that should you wish to).

Finally, you’ll need to decide how your token can be worked with in the future. Most of the platforms will give you the same but some may offer more or less.

These include:

Burnable (tokens can be burnt to decrease supply)
Mintable (tokens can be minted to increase supply)
Fees/Taxes
Holder redistribution

Where to mint your own

Great, now that you have an understanding of what type of tokens you can create, what they can be used for, and how to do it you’ll need to know where to go, right?

Here’s a list of platforms that allow you to create your own token:

As with everything in crypto, web3, and NFTs, it is important to Do Your Own Research (DYOR) before actioning anything.

The platforms we have listed above have their own terms and policies in place for a reason so we advise you to familiarise yourself with the platform and chain requirements before creating your own token.

Many of the platforms mentioned above give guides and videos on how to create your own token and the benefits – we suggest you also take a moment to go through them before diving in.

Create your coin on BSC, Ethereum and Polygon

We wish you the very best in this journey and feel free to browse through our other articles.

Proof of Work vs Proof of Stake

Cryptocurrency, NFT / By Ric

If you’re in the NFT space already, you’ll already know that the main launch of ETH2 is expected soon(ish) as they move away from a Proof of Work (PoW) and towards a Proof of Stake (PoS) model.

Why move from a Proof of Work to a Proof of Stake model?

In a nutshell, there are two consensus models used to validate transactions on the blockchain.

Proof of Work involves solving highly complex cryptographic equations using computer power, whereas Proof of Stake allows miners to stake their digital coins for the right to validate new transactions.

But what exactly is a Proof of Stake, and how does it differ from a Proof of Work? And what are the true benefits of changing? We’ll cover all of your burning questions right here.

In a PoW consensus, miners are actively competing against one another to solve these complex equations using their high-powered computers with the “winner” being awarded the ability to add a new block of transactions onto the blockchain and subsequently rewarded in the respective cryptocurrency for their work.

PoS requires miners to put up a “stake” of cryptocurrency before they can validate transactions. A miner’s capacity to perform this task will depend on the amount of coins they have put up for stake as well as how long they have been validating transactions.

Ultimately the more coins a single miner owns, the more power they will have for minting. The miner’s relative power is taken into account and a weighted algorithm chooses a miner at random to perform the task. Let’s see the scoreboard:

PoW: Powerful computers that use a significant amount of energy that use processes that eventually end up slowing down transaction speeds as the cryptocurrency network expands (causing a huge problem of scalability – one that Ethereum is currently experiencing)

The Proof of Stake model was introduced to solve the issues that were brought on by the Proof of Work model. Mainly scalability, energy consumption, environmental impact, and vulnerability to attacks.

Electricity & Environmental Impact

One of the major talking points (by critics) around blockchain technology and mining specifically is the huge amount of energy required to perform functions like validating transactions – which ultimately has a negative impact on the environment.

Proof of Work consensus models like Bitcoin (BTC-USD) has an energy consumption of 830kWh per transaction or 130TWh per year and Ethereum (ETH-USD) has a per-transaction energy cost of 50kWh or 26TWh per year.

Proof of Stake cryptocurrencies like Tezos (XTZ-USD) has a cost per transaction of just 30mWh or 60MWh per year.

By moving to a PoS consensus model Ethereum will have a huge drop in energy consumption and hopefully lead to increased acceptance and adoption.

Proof of Work consensus leaves very little profit margin for miners after they take into account the electricity consumption and computing costs of their NFT project. Proof of Stake mining results in faster speeds and a significantly lower energy cost and impact on the environment through emissions.

Proof of Work vs Proof of Stake — *Source: Durwin Ho*

Security

Another benefit of Proof of Stake over Proof of Work is the reduced vulnerability to attacks. Proof of Work relies on miners abiding by the consensus rules when validating transactions.

This isn’t always guaranteed and a “majority attack” can occur when a specific group control 50+% of the mining power. This can ultimately lead to them preventing transactions from being approved, creating forks, and many other problems.

Proof of Stake, on the other hand, requires miners to provide a stake which would lead them to avoid forks or they would ultimately lose their stake they have fronted. With PoW there is essentially no benefit to the attacker to disrupt or compromise the chain without coming out on the losing end.

At the end of the day Proof of Stake consensus model provides the following benefits over Proof of Work:

Reduced energy use
Less environmental impact
Faster transactions
Increased security
Increased scalability

Given the above benefits, we can expect more alternatives to Proof of Work in the future.