Tokenomics: Find Out How to Issue a Digital Token to Solve Your Business Needs

If you’ve ever considered issuing a crypto token to help reach your business goals, you may have found yourself navigating the complex world of tokenomics.

Learning your way around the digital token space is no easy task.

But that’s why we’re here to help!

At Cheesecake Labs, we have a proven process to help clients launch digital tokens, and in this post, we’re going to guide you through this world. Now you’ll understand the tokenomics meaning and how it works.

What is Tokenomics?

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

Tokenomics is all about how a crypto token is integrated into the economy. The token economy addresses all the qualities of a crypto token that make it attractive to investors.

The term has become trendy in recent years and addresses 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 asset’s value in the long term.

These aspects can directly impact the way assets organically evolve and how you can integrate tokens 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 incentivize people to buy and keep their tokens.

On the other hand, businesses with weak tokenomics will struggle because people often sell their tokens at the first sign of trouble.

Incentivization in the Token Economy

We all are driven by incentives. Children attend school because it provides learning opportunities and a better future.

The world of crypto is full of incentives.

While crypto assets have captivated the world with promises of economic opportunity, those opportunities still aren’t completely tangible.

Let’s look at The Stellar Network’s token, Lumens, as an example.

Lumens are used to make trading on the blockchain-based distributed ledger easier. You can efficiently trade Lumens at a fraction of a dollar cent which lowers their carbon footprint.

That smaller carbon footprint incentivizes some users to choose Lumens for their transactions over other options.

Defining the core aspects of your digital asset

When preparing to launch a digital asset, there are a handful of questions you need to ask yourself (or your blockchain development partner) to help further define the asset.

Let’s take a look at some of the things you need to consider. 

1) Decide how much control you want over the asset and the market

Different assets have different levels of authorization. These authorization levels are dictated by the asset’s intended application and the blockchain network you’re using. Tokens can be tightly controlled, or you can allow users to independently manage blockchain processes themselves. 

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

On the other hand, you can let users interact with the asset themselves. With this option, users also control the mechanisms built to support it. This means that they work together towards a common goal — sustaining themselves as asset holders. 

2) How should the supply be managed?

Depending on your use case, you can launch an asset with a fixed limited supply or a dynamic supply. Fixed supplies give you a clear idea of asset scarcity.p

With a dynamic supply, you can control the circulation of your token depending on your strategy. You can mint new tokens to increase supply or burn tokens to remove supply from circulation.

Stablecoins tie the value of the cryptocurrency to more stable assets, like fiat currencies. With stable tokens, a ‘reserve’ is set up securely by a transparent audited account.

The asset or basket of assets supporting the stable coin is stored securely in this reserve. 

Let’s look at the USD Coin as an example. USD Coin or USDC is a stable coin that is a tokenized version of the US Dollar. Here’s how it works:

• Users send US dollars to the coin issuer’s bank account
• The issuer then uses a USD Coin smart contract to create (or mint) the same amount of USDC
• These minted UDS Coins are sent to the user, and the fiat currency they sent in is held in a reserve

3) How do assets inflate and deflate in Tokenomics?

In the open market, asset prices fluctuate according to their use. Certain projects keep a steady rate when launching new assets. They are distributed according to the rules set in the project.

Or you can manage supply through burning and minting, which you can then use to control the inflation and deflation of assets.

Here’s how burning and minting work:

• Demand increases when you burn (or use) tokens
• Supply increases when you mint (or create) tokens

So, burning and minting create a simple supply and demand relationship — if you want to control the inflation of your asset, you want more tokens to be burned or used. If you’re going to deflate your asset, you want to create or mint new tokens. Asset

4) How to issue your assets: initial markets and distribution

When you launch a crypto asset you need to decide beforehand if you’ll let your asset grow organically or if you want to control the initial offering and price at launch.

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 asset creator can control the initial distribution via an app, service, or smart contract. Trading assets for goods is another option.
• Creating an “early adopters” program as a means of pre-distribution. This could be done via airdrops, which involves sending free tokens or coins to wallet addresses in exchange for a small service, like tweeting a post promoting the company issuing the currency, or by launching ICOs or Initial Coin Offerings.
• 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 an easy way to swap tokens with each other. 

5) Which networks should you use?

The blockchain network you choose will have a direct impact on your token and how it’s used. Here are a few things to consider when choosing a network.

• How user-friendly is the network? In a developed ecosystem, there are more sources and tools for users if they ever get stuck and need some help.
• What is the cost to transact? Each network has a different way they charge for transactions. For example, the Ethereum blockchain can have high transaction fees during peak times. This happens because each transaction cost is directly affected by the amount and complexity of its smart contracts. So, these smart contracts are operating in addition to these regular transactions.
• How can you program assets? Each blockchain will handle programming assets differently. Networks like Ethereum or BSC use scripted smart contracts. These allow you to create complex codes and applications in the blockchain. The Stellar network operates differently. Stellar focuses on being a payment system that keeps transaction costs low and allows users to implement light core behaviors for stable and quick performance. The network you choose should help you program assets in a way that works best for you.
• How elaborate is the implementation process? You should consider the level of complexity involved in integrating a product integration into the network. It is also important to consider the level of control a company has over its assets and markets. 

6) Stay on top of regulations

All aspects of the token economy must be in accordance with local regulations. In the US, this means complying with federal and state laws.

Crypto is still a relatively new technology — but it’s evolving at a fast pace.

As cryptocurrency becomes more popular, legal requirements are bound to change, so it’s important to keep up to date on the latest regulations. 

Partner with Cheesecake Labs for all things blockchain

Now that you know the basics of the token economy and the process of issuing your own token, you’re ready to take the next step.

If you’re looking for a partner in all things blockchain development, the Cheesecake Labs team of experts is ready to help!

Get in touch with us to learn more about how we can help you launch your own digital asset.