# Tokenomics

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{{Short description|Study of how cryptographic tokens create economic value}}
{{Essay-like|date=November 2022}}
'''Tokenomics''' is the study and analysis of the economic aspects of a cryptocurrency or [blockchain](/source/blockchain) project, with a particular focus on the design and distribution of its native digital tokens.<ref name=":3">{{Citation |last=Wandmacher |first=Ralf |title=Tokenomics |date=2019 |work=Cryptofinance and Mechanisms of Exchange |pages=113–123 |editor-last=Goutte |editor-first=Stéphane |series=Contributions to Management Science |place=Cham |publisher=Springer International Publishing |language=en |doi=10.1007/978-3-030-30738-7_7 |isbn=978-3-030-30737-0 |s2cid=239396338 |editor2-last=Guesmi |editor2-first=Khaled |editor3-last=Saadi |editor3-first=Samir}}</ref><ref name=":5">{{Cite news |last=Nahar |first=Pawan |title=Crypto class: Difference between crypto coin & token |url=https://economictimes.indiatimes.com/markets/cryptocurrency/crypto-class-difference-between-crypto-coin-token/articleshow/88947666.cms?from=mdr |access-date=2022-11-08 |work=The Economic Times}}</ref> The term is a portmanteau of words [token](/source/Token_coin) and [economics](/source/economics).

Key areas of interest include determining the [value](/source/Value_(economics)) properties of the tokens themselves, and how the properties of tokens (together with other cryptographically secured rules and associated system actions) affect broader economic characteristics of the system including:
* How they provide and distribute scarce resources
* How that system interacts with other external economic processes
* How economic agents behave
* The [economic efficiency](/source/economic_efficiency) of all these processes 

The field often has a strong applied focus, concerning itself with how to use its insights and principles to engineer economic systems to possess specific, desired properties.<ref name="2008.02538">{{cite arXiv |title=Efficiency in Digital Economies – A Primer on Tokenomics|year=2020 |class=cs.CY |eprint=2008.02538 |last1=Lamberty |first1=Ricky |last2=Poddey |first2=Alexander |last3=Galindo |first3=David |author4=Danny de Waard |last5=Koelbel |first5=Tobias |last6=Kirste |first6=Daniel}}</ref><ref>{{cite journal |last1=Freni |first1=Pierluigi |title=Tokenomics and blockchain tokens: A design-oriented morphological framework |journal=Blockchain: Research and Applications |date=March 2022 |volume=3 |issue=1 |article-number=100069 |doi=10.1016/j.bcra.2022.100069 |s2cid=247126100 |doi-access=free}}</ref>

Both cryptocurrency and tokens are the subclasses of digital assets that use the technology of cryptography.<ref name=":5" /> Cryptocurrency is the native currency of a blockchain, while tokens are created as part of a platform that is built on an existing blockchain.<ref name=":5" /> 

Tokens can be created as native elements of a blockchain protocol, or by using a [smart contract](/source/smart_contract) that is deployed on a blockchain which will host the new token.<ref name=":4">{{Cite journal |last1=Lo |first1=Yuen C. |last2=Medda |first2=Francesca |date=December 2020 |title=Assets on the blockchain: An empirical study of Tokenomics |journal=Information Economics and Policy |language=en |volume=53 |pages=2 |article-number=100881 |doi=10.1016/j.infoecopol.2020.100881}}</ref> For example, Ether (ETH) is the native crypto asset of the [Ethereum](/source/Ethereum) blockchain, and was created by the core Ethereum developer team to incentivise proper maintenance of the blockchain. While Axie Infinity Shards (AXS) tokens, were created using an Ethereum smart contract developed by an unaffiliated third party, in order to give token holders certain [governance](/source/governance) rights over the game [Axie Infinity](/source/Axie_Infinity).<ref name=":4" /> 

In both cases, different tokenomic attributes are chosen to support the token's intended role. With particular attention typically being paid to tokens' ability to function as an incentive mechanism, and choosing monetary policy that brings token supply into line with its demand.<ref name=":6">{{Cite journal |last=Kampakis |first=Stylianos |date=2018-05-02 |title=Why do we need Tokenomics? |journal=The Journal of the British Blockchain Association |language=en |volume=1 |issue=1 |pages=2 |doi=10.31585/jbba-1-1-(8)2018|s2cid=169216722 |doi-access=free}}</ref> This includes specifying rules about how and when new token should be generated or removed from the system. Rules that are written into smart contracts allow these system processes to be automated.<ref name=":6" />

In the real-world economics system, the economy is subject to fluctuations like [inflation](/source/inflation) and [deflation](/source/deflation).<ref name=":6" /> [Central bank](/source/Central_bank)s intervene through [monetary policies](/source/monetary_policies).<ref name=":6" /> Tokenomics can be thought of as an approach to implementing monetary policies and economic rules via automated smart contracts.<ref name=":6" /><ref>{{Cite web |last=Vaughan |first=Dolores |date=2025-08-11 |title=Crypto Economy & Tokenomics Explained |url=https://changenow.io/blog/crypto-economy-and-tokenomics-explained |access-date=2026-03-02}}</ref> On the [blockchain](/source/blockchain), different projects may issue their own tokens with different tokenomics to complete their ecosystem for various purposes, such as fundraising and governance. Some common tokenomics models include the deflationary model, inflationary model, and dual-token model.<ref name=":0">{{Cite SSRN |last1=Chiu |first1=Jonathan |last2=Koeppl |first2=Thorsten V. |date=2017-09-01 |title=The Economics of Cryptocurrencies – Bitcoin and Beyond |ssrn=3048124}}</ref> For instance, before the very last [Bitcoin](/source/Bitcoin) is added to the Bitcoin pool, it is inflationary because as miners (people who find Bitcoin by using algorithms to solve [mathematical puzzle](/source/mathematical_puzzle)s) keep mining Bitcoins, the amount of Bitcoins increases and the [purchasing power](/source/purchasing_power) of each Bitcoin decrease.<ref name=":0" /> However, the tokenomics of Bitcoin has multiple mechanisms to lower the rate of inflation, such as making mathematical puzzles harder and harder to solve and allowing fewer and fewer miners to receive the coin.<ref name=":0" />

== Creation of tokens and token types ==
Companies may create their own tokens for economic and structural reasons. Tokens are created to encourage the holder to interact with and empower the product by distributing the tokens to their stakeholders as rewards or means of incentivization.<ref name="2008.02538"/> Projects may use tokens to raise funds from the public and for proof of internal operation (e.g. game tokens and governance tokens for the right to vote). To achieve the purposes and function of the tokens created, a fine tokenomics structure is needed.<ref name=":6" />

=== Security tokens for fundraising ===
In traditional capital markets, if a company wants to raise funds from the public, it must go through an [initial public offering](/source/initial_public_offering) (IPO), which may take years, costing anywhere from $4 to $28 million in fees, depending on its size.<ref>Jay Preston, Initial Coin Offerings: Innovation, Democratization and the SEC, 16 ''Duke Law & Technology Review'' pp.328 (2018)</ref> In the early stages, only [accredited investor](/source/accredited_investor)s are allowed to enter an investment, such as a [venture capital](/source/venture_capital).<ref name=":3" /> In the decentralized, automated world, with lower cost, tokens can be created by anyone, with fundamental parameters and functions described by tokenomics.<ref name=":3" />{{Explain|reason=this should be in the article itself as this IS the article for tokenomics|date=November 2022}} Instead of equities, blockchain companies raise funds through the issuing of tokens in the process of [initial coin offering](/source/initial_coin_offering)s (ICOs).<ref name=":3" /> The security tokens can be thought of as equity shares of the blockchain companies.<ref name=":3" /> After issuing the tokens, individual investors are allowed to buy tokens and own shares.<ref name=":3" /> For investors, they can become early contributors to gain returns along with the growth of the company.<ref name=":3" /> Web 3.0 investors can sell their holdings of tokens after the [vesting](/source/vesting) period.<ref name=":3" />

=== Utility tokens for internal use ===
Utility tokens are used as proof to access a company's service or product.<ref>{{Cite web |last=FINMA |first=Eidgenössische Finanzmarktaufsicht |title=FINMA publishes ICO guidelines |url=https://www.finma.ch/en/news/2018/02/20180216-mm-ico-wegleitung/ |access-date=2022-11-07 |website=Eidgenössische Finanzmarktaufsicht FINMA |language=en}}</ref> Unlike security tokens, utility tokens are for exchange and securing the liquidity and value of the company. Utility tokens are an in-ecosystem currency.<ref name=":2">{{cite journal|doi=10.1016/j.bcra.2022.100069|title=Tokenomics and blockchain tokens: A design-oriented morphological framework |year=2022 |last1=Freni |first1=Pierluigi |last2=Ferro |first2=Enrico |last3=Moncada |first3=Roberto |journal=Blockchain: Research and Applications |volume=3 |article-number=100069 |s2cid=247126100 |doi-access=free}}</ref> For example, with a token named Smooth Love Potion (SLP) in the game [Axie Infinity](/source/Axie_Infinity), players can use it to breed desired spirits. In this case, SLP acts as the internal currency within the game.<ref>{{Cite thesis|last1=Brucker|first1=Anders C.|title=De-Fi Protocol Token Valuation by Projecting Token Flows and Estimating an Appropriate Risk Premium|year=2022|url=https://scholars.unh.edu/honors/683|access-date=March 2, 2026}}</ref> Users earn SLP from tasks, and spend SLP to defeat opponents.<ref>{{Cite web |title=What is Axie Infinity?. Everything You Need to Know About AXS |url=https://capital.com/axie-infinity-token-axs-crypto-what-is |access-date=2022-11-08 |website=capital.com |language=en}}</ref>

=== Risks ===
Investors risk being "[rugged](/source/rug_pull)," meaning that the token issuer may "raise money and disappear," resulting in a value loss in those tokens and a capital loss for investors.<ref name=":7">{{Cite web |title=Statement on DeFi Risks, Regulations, and Opportunities |url=https://www.sec.gov/news/statement/crenshaw-defi-20211109 |access-date=2022-11-08 |website=www.sec.gov|date=November 9, 2021}}</ref><ref>{{Cite web |title=Watch out for the 'rug pull' crypto scam that's tricking investors out of millions |url=https://fortune.com/2022/03/02/crypto-scam-rug-pull-what-is-it/ |access-date=2022-11-08 |website=Fortune |language=en|date=March 2, 2022|last=Taylor|first=Amiah}}</ref> Hackers may hack into the system and steal the tokens.<ref name=":7" /> Another risk could be the bad management of the market from the team and an excessive inflation or deflation of the token itself. Each tokenomics model has its disadvantages and advantages.<ref name=":2" />

== See also ==
* [Cryptoeconomics](/source/Cryptoeconomics)
* [Token economy](/source/Token_economy)

== References ==
{{Reflist}}

{{Improve categories|date=November 2022}}

Category:Wikipedia Student Program
Category:Cryptocurrencies

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Adapted from the Wikipedia article [Tokenomics](https://en.wikipedia.org/wiki/Tokenomics) by Wikipedia contributors ([contributor history](https://en.wikipedia.org/wiki/Tokenomics?action=history)). Available under [Creative Commons Attribution-ShareAlike 4.0 International](https://creativecommons.org/licenses/by-sa/4.0/). Changes may have been made.