Tokenomics Explained: What is Tokenomics and How Does it Work?
First, you should understand what a token is. The earliest mentions of token-based economic models date back to the 1970s with the studies from B.F. Skinner, a Harvard psychologist. What you need to understand is that in the same way that a bit is a unit of data, a token is a unit of value.
Let’s imagine a situation in which you want to watch a rocket launch at NASA’s Kennedy Space Center. To see the launch, you need to buy a ticket. What has happened here is that you have transferred monetary value to a piece of paper that gives you something that you want.
In this case, the ticket acts as a token, it stores the value “right to attend the rocket launch” and now is yours. Rocket launch tickets are scarce, and if you don’t manage to buy one, you cannot arrive at the base and try to pay in fiat money. You will simply be sent away.
Fiat currency can be–and in fact is–printed at the will of the government, as if it were possible to create value out of nothing. What happens is, you already know: the money loses value and inflation occurs.
Therefore, a token is not only limited to the status of currency, it goes far beyond this. A token can represent governance power in a voting system, shares in a company or project, and a unique digital asset as in the case of NFTs, among others.
In the context of blockchain, the most common use cases for tokens are security, utility, and governance tokens. They are also distributed in Layer 1 and Layer 2 on a given blockchain.
To better understand this, let’s take the Binance Smart Chain as an example of a blockchain. It has a native token used to power all services within it. The Binance Coin (BNB) is the BSC’s Layer 1 token.
However, within BSC, we still have numerous tokens, one of which is our beloved Empire Token (EMPIRE). EMPIRE is used to create effective use cases in the format of decentralized applications on top of BSC Layer 1. Therefore, EMPIRE is a Layer 2 token in the BSC.
Tokenomics: The Science of Token Economy
A science emerged to deal with the distribution of tokens in a given ecosystem, tokenomics is how projects distribute their tokens in their network.
For blockchain-based projects to succeed, there must be a way to create a self-sustaining micro-economy. For this, there are several tokenomics models, but there is not one that fits all cases.
So often, each project must figure out the best tokenomics for itself, based on its goals and utility. A good tokenomics creates a stable and healthy platform.
Inflationary vs. Deflationary Tokenomics
While there are many tokenomics models, when it comes to how the token supply behaves over time, they can be classified into inflationary or deflationary.
Inflationary Tokenomics Model
In inflationary tokenomics models, more tokens are added to the supply as the network evolves. To encourage participation in the environment, tokens can be generated to benefit users who confirm the veracity of a block on the blockchain.
With most proof-of-stake tokens, such as Ether (ETH), and even proof-of-work tokens, such as Bitcoin (BTC), tokens are created to reward validators on the network. In this way, if there is not a supply limit, value can be lost due to hyperinflation.
Deflationary Tokenomics Model
In the deflationary model, tokens start with the maximum supply and are removed from circulation over time. The process of token removal occurs through a burning mechanism, where tokens are sent to a dead wallet never to be used again.
EMPIRE is a deflationary token, periodically a given percentage of the total supply is burned. This leads to an appreciation of the token over time, as each time a deflation occurs, EMPIRE becomes more scarce.
Incentives in Tokenomics
Human beings are driven by interest so there must be incentives to participate and help maintain a network. This is achieved by incentives, among which the two most used are mining rewards and transaction fees.
Since we have already talked about mining rewards, which apply only to Layer 1 tokens on a given blockchain, let’s move on to transaction fees. Layer 2 tokens can stimulate their users to interact with the network by giving them a portion of each transaction fee.
EMPIRE has a transaction fee of 10%, this means that to buy, sell or trade EMPIRE, as well as to transfer it between different wallets, a 10% fee will be charged. But where do these tokens go?
Here’s what happens to the 10% tax fees collected:
● 2% is automatically redistributed among EMPIRE holders via Reflections. This is a great incentive to maintain a stable ecosystem. The more EMPIRE you hold, the more reflections you earn.
● 4.5% goes directly into the Liquidity Pool. This is essential for ensuring a healthy liquidity of EMPIRE, giving more stability to the price.
● 2.5% is distributed to Marketing and Development. Even the best project in the world would be nothing without visibility and major developments. Therefore, to keep a high rate for ambitious projects like Empire — with its several use cases including Goosebumps DEX and Portfolio Tracker, Empire NFT Marketplace, and Empire NFT Launchpad — funding for marketing and development must be supported.
● 1% is distributed to the Empire Team. This portion serves to keep such a large team engaged in so many places around the world, constantly working and helping the Empire project grow and be successful in the long run.
EMPIRE’s Tokenomics was developed to create an ecosystem where Empire Token is the unit of value to be used for blockchain-based products and services developed by Empire Token. Likewise, it is an effective strategy to make the Empire ecosystem sustainable.
Keep learning, Keep Climbing!