Tokenomics is an umbrella term used to describe how a token is used within a project ecosystem and/or how a token follows a monetary policy as the project grows over time. Harvard psychologist Burrhus Frederic Skinner first introduced the idea of tokenomics in 1972 in a video titled: "Token Economy: Behaviorism Applied." Tokenomics is therefore the set of rules that define the monetary policy of a crypto asset. This includes information about token issuance and burning, if any. If you're considering investing in a new cryptocurrency or establishing a decentralized autonomous organization (DAO), it's prudent to delve further into the topic. Tokenomics is the study of what gives a cryptocurrency its value and whether that value is expected to remain steady, rise, or fall.
Game theory is used to create incentives to reward good actors and punish bad actors within the project ecosystem. Tokenomics also defines the role the token plays in the ecosystem and how it gains value over time. In a well-designed tokenomics model, all costs and benefits are internalized (no externalities), so there is no way to manipulate the ecosystem from the outside. The four key components of tokenomics for any crypto project are:
(a) The aggregate supply and its demand for tokens.
(b) The initial allocation of tokens.
(c) The distribution of tokens
(d) The value creation of tokens.
Read more about the theory and examples token economics on our blog:
Tokenomics 1/2: The Basics of Token Economics
Tokenomics 2/2: Game Theory, Examples and Token Types