Token economics is the economic theory of how a token, cryptocurrency, or digital asset should be created, designed, and managed - applying to any asset with an incentive structure, including asset-backed securities and collectibles.
Therefore, the different ways you can design your token economy will affect the values of different types of assets.
Token economics is becoming an integral aspect of crypto - with more and more companies using tokens to incentivize participation.
This article defines token economics and the properties unique to tokens, such as minting, staking, and mining.
In this lesson you will learn about the theory of token economics, and learn the concepts of the properties unique to tokens, such as minting, staking, and mining.
Minting is a method designed to allow companies (or individuals) to generate unique tokens on an existing blockchain such as Ethereum or BSC.
Essentially, these tokens are circulatable within a project’s ecosystem but function equivalently to fiat currency.
Examples can be NFTs or crypto coins.
Token minting occurs in many ways, including the proof-of-work (PoW) and proof-of-stake (PoS) mechanisms. Let’s define:
Involves generating new coins by adding transactions to a public ledger using high-powered processors solving complex cryptographic equations simultaneously.
Cryptocurrencies must be staked in exchange for potential rewards. Token holders must stake/lock up a specified sum of the currency (the number varies according to different currencies.)
The amount they stake then determines they will be selected to verify transactions; Generally, the higher the number of tokens locked, the greater the rewards.
Staking amounts aren’t stored anywhere but instead sent back into circulation once the blocks are validated.
Projects mint new tokens using smart token contracts. The benefit of this process is the network can create tokens without wasting extra resources.
Anyone can mint cryptocurrency coins and tokens. But, minting a token is more accessible than a minting a coin because a blockchain needs to be built from scratch to create a coin.
Staking cryptocurrencies is committing crypto assets to support blockchain networks and confirm transactions. With staking, users can use their crypto to earn passive income by using an open and connected wallet.
Individuals can stake in two ways: joining staking pools or buying proof-of-stake cryptocurrencies.
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Like mining, staking is another way to add new transactions.
Here, participants pledge their coins and try to be chosen as validators - so they can confirm blocks of transactions on behalf of everyone else and earn rewards.
The more coins a user pledges, the more likely they will be chosen as validators.
Once participants decide the number of coins to be staked, they will be locked for a certain period.
If they want to use their tokens after this period, they can unstake them by removing them from their corresponding wallets or exchanges.
Unlike mining, which sometimes requires expensive staking setups, with staking, none is necessary.
Staking is one of crypto’s most popular ways to earn interest on holdings, with some cryptocurrencies offering APYs of up to 20%. All the individual has to do is commit their crypto to the network validators.
Crypto mining wastes excessive amounts of energy and contributes to environmental pollution.
Besides being a more scalable option, staking doesn’t take as much energy.
Prices and holdings could experience volatility. So, if your staked assets suffer a significant price drop, you could lose interest earned.
Staking can require you to lock up your coins for a specific period - during this period, the utility of the tokens locked decreased. Not to mention an unstaking period where to unstake your assets, individuals need to wait for seven days or longer.
Cryptocurrency mining is verifying and adding new transactions within a blockchain using proof-of-work.
Decentralized, global computer networks allow people to verify and transfer digital assets.
Because of the vast scale, these computer networks earn reward coins in return for their processing power.
One of the main ways to get cryptocurrencies like Bitcoin is by buying them on an exchange like Coinbase or mining them.
Computerized systems ensure every new bitcoin transaction is verified and securely recorded.
For rewards, the miner must first guess a 64-digit hexadecimal number called “a hash.” The faster they can produce guesses, the more likely the network will reward them with cryptocurrency. This explains why computing power is so important.
In Bitcoin, for instance, the ‘winner’ is responsible for adding a new block to the chain, which contains all the verified transactions. After which, they earn cryptocurrency - last we checked, this was 6.25 BTC.
As Bitcoin has grown, the computational power required to maintain it has increased, making it unprofitable for individuals. So now all mining is done by groups and specialized companies.
However, it’s still possible to mine other cryptocurrencies at home—all without investing thousands in a GPU mining rig or paying for expensive ASIC miners.
Examples of mineable tokens and coins include Litecoin (LTC), Ethereum Classic (ETC), Dogecoin (DOGE), and Monero (XMR).
For now, investing in a mining setup is still a good way of making profits.
Mining is expensive. With electricity and the GPU required, miners usually have to keep updating their hardware as GPUs break down or become irrelevant to newer, more advanced models.
If a miner isn’t careful, expenses will surpass income.
Controversial and sometimes confusing, token burning is almost similar to the way companies repurchase back their shares.
‘Burning’ involves permanently removing several tokens from circulation in a process involving transferring tokens to a burn address - a wallet where tokens can never be retrieved.
Projects burn tokens to reduce the overall supply of a specific token and introduce a deflationary mechanism to the project's tokenomics.
The motivation behind token burns is to increase the value of assets still in circulation. In simple terms, when circulating supplies decrease and tokens become scarcer, the price rises.