From Supply to Demand: The Principles of Tokenomics Explained

Tokenomics is a term that is used to describe the economic and financial principles that govern a token. The name "tokenomics" is derived from the combination of the words "token" and "economics". The two main aspects of tokenomics are supply and demand.

Supply is an important aspect of tokenomics because it determines whether a token will perform well in the long term. The lower the supply, the higher the value of the token. There are various factors that affect supply, including emissions, inflation, deflation, token burns, token allocation, and vesting, as well as market cap.

Emissions refer to the speed at which new tokens are created and released. In the case of a blockchain, these tokens are usually distributed to miners or validators. Inflationary tokens are those whose value or price decreases with an increase in their supply. These tokens do not have a fixed supply, and they do not have any mechanisms to reduce the supply. Doge coin is an example of an inflationary token since it doesn't have a supply cap and inflates at a rate of 5% per year.

On the other hand, deflationary tokens have a fixed supply, and their value or price increases with a reduction in their supply. These tokens have mechanisms such as burning to reduce their supply. Binance's BNB is an example of a deflationary token with a max supply cap of 200 million BNB. Binance schedules quarterly BNB burns to reduce the supply of BNB, and the burning will continue on a quarterly basis until 100 million tokens are burnt.

Token burns refer to the process of burning tokens that are in circulation to reduce the supply. This reduction in the token's supply increases its value due to an increase in demand. For example, Avax burns all its transaction fees generated on its blockchain.

Tokens can be distributed through presales, IDOs, private sales, or fair launches. Presales, IDOs, and private sales often have a vesting schedule where tokens get released to investors according to the vesting schedule. Fair launch is a more transparent and decentralized token distribution process where market participants have access to tokens at the same price at the same time.

There are three types of token supply that need to be understood: max supply, circulating supply, and total supply. Max supply is the maximum number of tokens that will ever be minted, while circulating supply represents the tokens circulating in the market currently. Total supply is the total amount of coins in existence right now (minus any tokens that have been burnt).

Demand is the second important aspect of tokenomics after supply. Demand for a token is created by ROI, utility, and memes. ROI is the income created by holding a token, and rewards may also be earned when the tokens are staked. For example, Sushi swap provides a 10.5% Apr on staking $SUSHI plus a share in protocol revenue.

Utility for a token arises when there is a demand to use it in gaming, protocol, or service. In gaming, you need to purchase the token to play the game or for in-app purchases in the game. In service, you must be holding tokens to use a service provided by a Dapp. In a protocol, you need to buy the token to use a DeFi protocol.

Finally, meme tokens are driven by community, belief, and cult following. Although the tokenomics of a meme token might seem bad, the belief and conviction of the community can drive the price. Doge and Shiba Inu are the best examples of meme tokens.

In conclusion, tokenomics plays a significant role in determining the value and performance of a token. It is important to understand the various factors that affect supply and demand to make informed investment decisions.