How to issue a token to solve your business need

What is Tokenomics?

Tokenomics is a blended word made up of ‘token’ referring to the crypto token, and ‘economics’.

The concept of tokenomics revolves around the economics of a crypto token and how this is integrated into the economic ecosystem. The token economy addresses all the qualities of a crypto token that make it attractive to investors. The term has become highly trendy in recent years and deals with the mathematics and benefits of managing crypto assets.

How does The Token Economy fit into the world of Blockchain and Crypto?

Besides looking at how the asset works, Tokenomics also considers the psychological or behavioral forces that could impact the value of the asset in the long term. Before launching a digital asset, it is necessary to outline some important core characteristics of the token economy. These aspects can directly impact the way the asset might organically evolve through the community as well as the ability to further integrate it into businesses and products.

Projects with a well-planned and designed token economy have a higher chance of succeeding in the long term because they do a great job of incentivizing people to buy and keep their tokens. On the other hand, businesses with weak tokenomics are doomed to fail as people sell their tokens at the first sign of strain.

Incentivization in the Token Economy

As humans, we are all driven by incentives. Children attend school because it provides them with learning opportunities and the chance of having a better future. The world of crypto is also full of incentives. While crypto assets have captivated the world with promises of economic opportunities, they are still not tangible.

To give a better example of tokenomics and the incentives behind them, take The Stellar Network’s token, Lumens. These are used to make trading on the blockchain-based distributed ledger easier as Lumens are traded at a fraction of a dollar cent and with great efficiency, meaning at a lower carbon footprint. Some of the network’s users have been incentivized to utilize it for sustainability initiatives, such as investing in renewable energy.

The core aspects of your digital assets: Establishing control over the asset and the market

Each asset has different levels of authorization set for it. These levels of authorization hinge on the intended application and the selected blockchain network. The choice falls between tight control over an asset, or else allowing the users of a blockchain platform to independently manage the blockchain process themselves. The latter would mean having full trust in their ability as asset holders and allowing them the freedom to manage transactions and have control of the balance of the asset on the account.

For example, in the Stellar network, the person launching the asset may configure it to maintain tight control over it. This means that they might individually approve each transaction and even carry out clawback operations to enforce regulation and safety.

On the other hand, there is also the choice of having the users on a blockchain platform interact with the asset themselves. In this way, they also control the mechanisms built to support it. This means that they are working together towards a common goal, which is of sustaining themselves as asset holders. It allows users full independence of the economy on the blockchain platform.

How should the supply be managed?

The initial supply varies according to the choice of application and the strategy intended for an asset. The supply of the digital asset can be fixed or locked once it is launched. Or else, it can be managed through the burning or minting of assets concerning product supply.

In the case of the locked digital asset, which is also known as a stable token, the value of the cryptocurrencies is pegged to more stable assets, such as fiat currencies. Fiat refers to the government-issued currency we all use on a day-to-day basis, like dollars or euros. Generally, with regards to stable tokens, a ‘reserve’ is set up securely by a transparent audited account. Thus, the asset or basket of assets supporting the stable coin will be securely stored in this reserve.

How do assets inflate and deflate in Tokenomics?

In the open market, the price of the asset will fluctuate according to the way it is used by the community. Certain projects keep a steady rate when launching new assets. These are then distributed according to the rules set in the project. Consecutively, they may have an inflationary effect on the price of the digital asset.

Another way of managing supply is through the minting and burning of assets, which can be used to control inflation and deflation of assets.

The way burning and minting of assets work concerning product supply, are thus:

• - The more tokens are burned, there is an increase in demand.
• - The more tokens are minted, there is increase in supply.

Some business applications tie their product operations to minting or burning actions. This pushes the asset/assets to fluctuate depending on the way their products are used.

How to Issue Your Assets: Initial markets and Distribution

When launching an asset that is authorized for a transaction, this should align with the decisions taken by the users of the community on the blockchain platform. You need to define beforehand whether all markets should organically grow through the community, or if you will be controlling the initial offer and the pricing when launching the asset.

Here are some ways you could approach market distribution:

• - Controlling the initial distribution of the market. This can be done by controlling the way users can purchase and consume the asset together with the price and value. The one launching the asset can control the initial distribution via an app, service, or interface. Trading the assets for goods is another option.

• - Issuing ‘an early adopters’ program as a means of pre-distribution. This could be utilized via airdrops, which involves sending free tokens or coins to wallet addresses in exchange for a small service, such as tweeting a post promoting the company issuing the currency. Or else, by launching ICOs.

• - Setting up an initial market with a liquidity pool or more. Liquidity pools are virtual trading places where tokens are purchased and sold. A liquidity pool refers to a basket of tokens locked in a smart contract. The pool allows cryptocurrency trading by providing users with liquidity. Liquidity refers to the ease with which a token can be swapped with another. The pricing margin depends on the liquidity added. For smaller markets with high demand, this margin can grow bigger.

Which networks to use?

The choice of the network will have a direct impact on several aspects of the token and the way it is used. Let’s look at these:

• - User-friendly networks: In a developed ecosystem, there are more sources and tools for users in the community to avail of, and directly interact with the blockchain.

• - Cost to transact: Each network might apply a different method to charge for transaction costs. The Ethereum blockchain can charge highly per transaction during peak times. This occurs because the transaction cost is directly affected by the amount and complexity of smart contracts. So, these smart contracts are operating in addition to these regular transactions.

• - The programming of assets: Networks like Ethereum or BSC use scripted smart contracts. These allow for various codes and applications in the blockchain. The stellar network operates differently. To ensure stable and efficient performance, it diffuses complexity and allows for a simpler implementation of codes and asset management by the users.

• - How elaborate is the implementation process? You should consider the level of complexity involved in product integration into the network. It is also important to think of the level of control a company has over its assets and the markets.

The Regulations Involved

All aspects of the token economy and mechanisms built to integrate it into a product or business must be in accordance with local regulations. In the US, this would be federal and state governments. Crypto is relatively still a new technology, which is evolving at a fast pace. Therefore, it is necessary to ascertain that business operations are updated with the latest legal requirements.