Club Card Holders Challenge #2

Feb 14

A Crypto Witch Club Introduction to Tokenomics

As requested by our incredible community of web3 witches, welcome to our Crypto Witch Club Introduction to Tokenomics — the content sidekick to our second Crypto Witch Club Card challenge. Club Card Holders — don’t forget to go to our ✨Open Challenges ✨community room to take the quiz and claim your sticker after you study up!)

In this piece, we’re demystifying what tokenomics is, how it’s similar and different to fiat currency and traditional economics, and how consensus mechanisms and other factors contribute to each token’s economy. We’ll also break down inflationary tokens versus deflationary tokens, incentive mechanisms, and actionable items to look for when considering a token to invest in.

How it Works:

1. Read through this piece then head over to our Club Card Challenge #2 Quiz in our ✨Open Challenges ✨community room to see how much you’ve learned.

2. At the end of the quiz, you’ll have the opportunity to provide your wallet address for the sticker drop. Make sure you provide the same wallet address that holds your Club Card or your sticker drop will not be received.

3. Club Card holders have 4 weeks to complete the challenge. The 2nd Club Card sticker will drop to your Club Card on March 17th After that date, you will no longer be able to claim that sticker and you will have to wait for Challenge #3 (launching April 3rd) to claim your next sticker.

4. If you don’t hold a Club Card, learn more about the program and mint your Club Card here to become a holder, get access to the quiz, and receive the sticker drop.

5. A glossary of all the stickers you can earn will be added to our NFT page March 2023. Additional special stickers will be sporadically released to Club Card holders for high scores, event attendance, and community contributions.

Crypto Witch Club is an inclusive, equitable space for all to learn about blockchain technology, cryptocurrencies, tokens, DAOs, NFT’s, the Metaverse, and more. For those who don’t hold the Club Card but are interested in participating, join our community to meet Club Card members or follow us on Instagram and Twitter. Learn more about The Crypto Witch Club Card, rewards, perks, voting rights and more here.

What’s Tokenomics and How Does it Relate to web3?

Tokenomics refers to the economics of a cryptocurrency token, including how it’s created, distributed, managed, and valued. This includes factors that you should be able to find in a project’s whitepaper or roadmap — such as max supply, circulation, ownership distribution, and processes used to incentive holders such as staking and operating nodes. It also includes factors such as if a token is inflationary — like BTC — or deflationary — like ETH. (More on how that works below!)

An easy way to think of tokenomics is that it’s simply how different factors make a project sustainable for long-term investing. Understanding a project’s tokenomics is important because it allows you to analyze public data to determine if a project has long-term potential for growth and if it’s a good investment for you.

But what about coins?

At Crypto Witch Club, we talk a lot about the difference between coins and tokens. When we are discussing tokenomics, a token is considered any digital unit of a cryptocurrency or can be used to represent a specific asset, such as an NFT or DAO ownership. Both coins (that run on their own blockchain like BTC and ETH), and tokens (that run on another project’s blockchain like MATIC and LINK) fall under the tokenomics umbrella. Moving forward in the article, we’ll be referring to all these assets as ‘tokens.

How does this relate to FIAT currency?

We’ve heard about inflation and deflation in traditional finance. Fiat currency is money issued by a country’s government or governing body. In the US, the Federal Reserve measures USD data such as currency in circulation, reserve balances, borrowings, and makes that data available to the public. You can learn more about how the federal reserve measures USD here. Factors that can affect country’s supply of currency include bailouts, pandemic responses, wars, and other impactful events.

With cryptocurrencies, NFTs, and DAOs, this information is controlled by code and is transparent on the blockchain — so there is no governing body needed to provide this information to the public.

10 Different Aspects of Tokenomics

Here are 10 factors that create a token’s economy that you should know before investing. We’ll dig into some of these more in-depth following this list.

1. Token supply: The total number of tokens that will be in circulation, and the rate at which new tokens are created or distributed.

2. Token distribution: How tokens are distributed initially and ongoing, such as through mining, staking, airdrops, or other mechanisms.

3. Token utility: The ways in which tokens can be used within the ecosystem, such as for paying fees, accessing features, or participating in governance.

4. Token governance: How decisions are made about the direction and development of the network, including the role of token holders in voting and decision-making.

5. Token security: The measures taken to protect the network against attacks, fraud, and other security risks.

6. Token value: How the value of tokens is determined, and the factors that affect their price and market demand.

7. Token velocity: The rate at which tokens are circulated and exchanged, which can affect their value and liquidity.

8. Token burn: The process of intentionally destroying a portion of the token supply in order to increase scarcity and potentially increase value.

9. Token lock-up: Restrictions or conditions placed on the transfer or use of tokens for a certain period of time.

10. Token economics model: The specific parameters and incentives for how tokens are created, distributed, and used within the network.

Inflationary versus Deflationary Tokens

An inflationary cryptocurrency is one that has a protocol built into its design to increase the total supply of coins over time. This means that as more coins are mined or minted, the total supply of the cryptocurrency will increase, which can lead to a decrease in the value of each individual coin over time. Inflationary cryptocurrencies can be thought of as like traditional fiat currencies in that they are subject to the effects of inflation.

A deflationary cryptocurrency is one that has a protocol built into its design to decrease the total supply of coins over time. This means that as coins are used, lost or destroyed, the total supply of the cryptocurrency will decrease, which can lead to an increase in the value of each individual coin over time. Deflationary cryptocurrencies can be thought of as being similar to assets like gold in that they tend to appreciate in value over time.

Incentives Mechanisms

Incentive mechanisms are designed to motivate individuals to participate in a particular token’s network and perform specific tasks that help maintain and improve the network. In the context of tokens, some common incentive mechanisms are:

Mining rewards: In proof-of-work (PoW) based blockchain networks, miners are rewarded with newly minted tokens for solving complex mathematical problems that validate transactions on the network. The difficulty of these problems is designed to adjust based on the computational power of the network, ensuring that blocks are produced at a steady rate.

Staking rewards: In proof-of-stake (PoS) based blockchain networks, users can earn rewards for holding and staking their tokens to help validate transactions on the network. The more tokens a user stakes, the greater their chance of being selected to validate transactions and earn rewards.

Masternode rewards: Some cryptocurrencies have a layer of masternodes. Masternodes require a certain amount of cryptocurrency to be staked, and in return, their operators can earn a portion of the block rewards for helping to facilitate transactions and provide additional services to the network.

Airdrops: Airdrops are a marketing strategy used by some projects to distribute free tokens to users who meet certain criteria, such as holding a certain amount of a specific token or completing specific tasks related to the project.

Burning

Have you ever accidently thrown out money, washed a pair of jeans that had cash in it, or dropped a dollar bill down a subway grate? Burning tokens is not much different than that but rather than accidental, it’s intentional.

Burning, in the context of cryptocurrency, refers to the intentional destruction of a certain number of tokens or coins in circulation. The purpose of burning is to reduce the supply of tokens in circulation, which can have an impact on the total and circulating supply of the cryptocurrency in question. Here are some ways that burning can impact a cryptocurrency’s tokenomics:

Increased Scarcity: Burning reduces the supply of tokens in circulation, which increases the scarcity of the remaining tokens. This can (potentially) increase the value of each token since there are fewer of them available.

Lower Inflation: Burning reduces the overall supply of tokens, which can help reduce the rate of inflation. If the rate of token creation (such as mining or staking rewards) remains the same but the total supply of tokens is reduced, the rate of inflation decreases.

Increased Demand: If a cryptocurrency has a burning mechanism in place, it may incentivize users to hold onto their tokens for longer periods of time in order to benefit from the increased scarcity and potential price appreciation that comes with it. This increased demand for the token may help stabilize or increase its value.

It’s important to note that burning is not always a positive for a cryptocurrency’s tokenomics. If the burn is too aggressive and reduces the supply of tokens too quickly, it may have a negative impact on the overall health of the project’s tokenomics.

Actionable Ways to Determine Project Tokenomics

Check to see what the circulating, total, and max supply is. Some places to find information can be found on EtherScan, PolygonScan, and CoinMarketCap.
Read the whitepaper and roadmap to ensure it’s transparent, matches public data, and aligns with your personal investing goals and your best interest.
Know if your token offer incentives or rewards for holders and how you can become eligible for and receive those rewards.
Know how many holders of the token there are and how the tokens are distributed amongst those holders. (Is there a small group of wallets that holds the majority of tokens? Be wary.)

Quiz Time — Get Those Stickers!

Ok Club Card holders! Now that you have a head start, head to our open challenges room here and take the quiz to receive your sticker.

If you’re not a Club Card holder yet, you can mint the Club Card here to gain access to the Open Challenges Room and earn the sticker.

If you are a Club Card holder but cannot access the token-gated rooms, go to Geneva > settings > connected wallets > connect wallet. Ensure you connect the wallet your Club Card is held in for access to be granted.