What is Tokonomics?

Tokonomics is a core part of any Web3 project that is based on Crypto/Blockchain. It is a combination of two different words, i.e., Token and Economics: 

Tokenomics is defined as
“the practice of designing the economics of a crypto token so that users/holders of tokens can get the value associated with these tokens.”

Tokenomics has become the backbone of almost all the Web3 and blockchain projects because these projects need an economic value to their tokens to survive and thrive. Tokenomics therefore, is the process that helps a project to identify the way it can transfer the economic value of a token to its holder. At the core, a token exists to provide its holders the ability to get the value it has such as: 

“Bitcoin is used as a cryptocurrency with real value in fiat currencies to pay miners for running the bitcoin network”
“ETH is used to pay for minting (creating) NFTs on OpenSea.io and to pay for any transaction fees on the Ethereum network”
“OCEAN can be used to get access to the data available on Ocean Protocol’s big-data repositories”
Since all businesses are creating their own micro economies on the blockchains, they need to launch their crypto tokens to be able to execute different tasks and to enable transactions on their platforms and to let their users perform actions. It also helps in creating an incentivization structure for stakeholders.

An example of such a micro-economy is Axie Infinity, a blockchain based play-to-earn game. Axie Infinity has created a micro-economy with the use of AXS and SLP tokens. AXS token is used as a governance token to participate in voting for strategic decisions of Axie Infinity while SLP is used as a utility token. SLP is awarded to players when they play the game and it can be converted into fiat currency. This creates a micro-economy where people can play an online game and earn real money.

Why is Tokenomics Important?

To understand why Tokenomics is important for businesses in Web3, lets first look at how traditional businesses operate? You visit a clothing store and choose a dress you like. You pay cash to the shop and buy the dress. The economic transaction here is that you purchased the clothes you like, and the seller received cash in exchange. The economic value you get is the clothes which you will wear and feel better about yourself and improve your appearance.

Likewise, businesses in blockchain industry provide some value to their users which can only be accessed by using the crypto tokens of these businesses. The users have to use the project’s tokens to get the associated value that the project offers. For example, if you want to play Axie Infinity game, you have to buy its NFTs (Axies) which are in-game characters. By using these Axies, you can play the game and earn rewards in SLP tokens.

Without a token, it is difficult for blockchain based businesses to provide the intended value to its users and create an incentivization structure. Therefore, a well-thought Tokenomics strategy is necessary to get the flywheel going for the project.

Blockchain technology needs to be adopted by businesses fast. This can be compared to ERP implementation back in the years – ring any bells? SAP, Oracle; the sooner businesses adopted these systems – the sooner they improved their businesses and became more efficient.

According to Blockdata’s research:
“81 of the world’s top 100 public companies use blockchain technology, with 27 of them having fully functioning products.”
Many conventional businesses are acquiring or partnering with blockchain based businesses to transform from Web 2 to Web3 or simply to participate in the fast-growing blockchain technology. One such example is Microsoft partnering with ConsenSys’s Quorum Blockchain Service to offer services to their clients. Similarly, Energy Web, a blockchain based project working in clean energy solutions has well-known partners such as Shell, Vodafone, Google, and Volkswagen.

All the businesses exploring blockchain technology need to launch their token to exploit the full potential. Therefore, a Tokenomics design strategy is of high importance in this industry.