Who decides on tokenomics?
All these decisions are made at the protocol level, and most tokenomics are embedded in the computer code of a particular cryptocurrency by the founding developers.
Before a cryptocurrency is released, its tokenomics are often described in an appropriate white paper, a detailed document that explains what the proposed cryptocurrency will do and how it and the underlying technology will work.
Crazy Tokenomics – Game Theory in Action
The above list forms the basis for tokenomics, but this is just the beginning. Cryptocurrencies are basically a free ticket to the introduction of any kind of game theory that the creators want.
Many tokens are so-called utility tokens, i.e. they have a specific purpose within a specific ecosystem – AMP, for example, is used for a decentralized escrow system, and the DeFi Pulse Index token from Index Coop drives a decentralized index fund for top DeFi tokens.
Game theory is an economic concept that assumes that traders are rational actors and, with certain incentives, eventually decide on the optimal choice (for example, staking ETH to get high returns, mining Bitcoin, etc.). For example, compare two completely different Tokenomic schedules: that of Olympus DAO, the controversial decentralized reserve currency project, and that of Loot, the NFT character arc game created by entrepreneur and programmer Dom Hofmann, who co-founded the video hosting service Vine.
In recent years, token holders have been able to vote on rules that define the economy of a cryptocurrency by voting on decentralized autonomous organizations (DAOs) with the help of tokens. For example, a DAO can vote to change the number of tokens issued to stakers – those who pledge tokens to validate transactions.
The Olympus DAO, for example, operated a kind of huge decentralized money market fund, where those who wanted to create a reliable reserve currency benefited from additional funds that joined the pool. According to the game-theoretical model of the project (popularized by the meme (3,3)), the most rational decision was to invest OHM in the automatic replenishment protocol of the protocol.
This was due to the tokenomics of the protocol; the use of OHM would strengthen the decentralized reserve currency and allow people to buy more bonds. If everyone were to sell OHMS, it would affect the price of the protocol and all holders would be affected. So you can see how the tokenomics of the protocol prompted people to buy and use the token.
Tokenomics do not always go according to plan. Ultimately, many people sold OHM after investors who used an OHM liquidity pool on a third-party platform were liquidated. This led to a dramatic price drop that deterred other investors from the token.
Loot, on the other hand, is an NFT project developed by Hofmann. Thanks to tokenomics, anyone could buy loot immediately after launch; the 10,000 character sheets, which listed items that the characters would use in a game still to be developed, were sold out almost immediately. The tokenomics of Hofmann’s game revolved around scarcity; as there were only 10,000 character arcs and these were hyped up on Twitter, they became immensely valuable.
Token Governance and decentralized Coordination
Governance plays a big role in tokenomics these days. Many tokens act as so-called governance tokens, which means that the holders are given a voting right to influence the future rules and decisions of a project. This is all done in the name of decentralization: instead of a centralized group of developers being in charge, token holders can vote on how the platform should be operated.
Think of the governance tokens as shares of a corporation, albeit without a CEO. DeFi platforms work via DAOs – this is the name of a governance system based on token governance. The owners can vote on anything.
Tokenomics is crucial for the success of projects
Tokenomics are crucial to the success of a project; just as a reckless CEO can drive a company to ruin, poor governance decisions can cause top DAF projects to fail. If all else fails, it is always possible to force a new Tokenomic schedule into existence by “hard forking” a cryptocurrency – a process of copying a blockchain’s codebase, making a few non–backward compatible changes, and migrating old cryptocurrencies and validators to the new network.
In our training program you will learn how tokenomics influences an altcoin project and how to analyze them correctly.
