Tokenomics or token economics is a key concept for creating successful businesses with NFTs. Basically, it refers to building a sustainable economic ecosystem for both NFT (Non-fungible tokens) projects and utility-type tokens. Through the token economy, projects seek to create a functional economic base that allows them to evolve and sustain over time. So that all participants and stakeholders in the project are motivated to participate, through rewards or the revaluation of their participation in the project.
Tokenomics and NFTs
What elements can we see in a tokenomics? Let’s think quite basically and take Bitcoin as an example. When we refer to the currency, bitcoin is a medium of exchange, but its existence and operation is only possible thanks to the miners and nodes that are part of the network. Satoshi Nakamoto understood that the computational work of the miners was hard work and should be rewarded. This gave rise to the coinbase transaction, which is responsible for the generation of new coins and allows miners to collect the commissions that people pay for their transactions on the network.
Satoshi Nakamoto created a double action mechanism:
- The coinbase transaction facilitates the generation of new coins that allow the Bitcoin supply to grow from zero to its maximum, over a long period of time and following well-established rules.
- A reward and economic mobilization mechanism that starts from the miners to the rest of the actors in the Bitcoin network.
The first tokenomics of the crypto world
This simple but effective system is the first tokenomics in the crypto world. As we have seen, it is designed to attract miners (incentivized by earning new coins and network commissions) and, at the same time, make the currency initiate an economic dynamic that includes all the actors in the network. Although running a Bitcoin node offers no profit, people have the incentive to use them to secure direct access to the network. But in the case of miners, their reward becomes not only the money they earn for participating in the network, but when they spend those BTC, they begin to mobilize throughout the network, energizing it.
We see this very clearly in the BTC bear and bull markets. When we are in a bear market, BTC miners tend to hoard their BTCs waiting for better prices. The drop in BTC liquidity tends to stabilize the price of BTC and at a certain point, a rally begins that ends the bear market, starting a new bull market cycle. At that point, miners begin to sell, the BTC price stabilizes at its maximum, and the next bear market cycle begins. A dynamic that has been with us since the birth of Bitcoin and that is also part of Nakamoto’s tokenomics vision when creating BTC.
A universe of possibilities
We have already explained the idea of tokenomics in cryptocurrencies and utility tokens, but what about NFTs? Well, the situation repeats itself with some differences. When we talk about NFTs or projects revolving around NFTs, the possibilities for creating and applying tokenomics expand. This is because the utility or objectives of these projects are completely different and there is a universe of possibilities. For example, the tokenocmis of NFTs within an Axie Infinity style game is completely different from what can be applied to an art NFTs project.
In this sense, the development of tokenomics can be applied to any type of token, understanding that the objective of this element is to develop the project and make it sustainable over time. In this sense, tokenomics must consider certain elements in its construction:
Development of a strong community
- Developing a community is the first step in building a token economy. The community around the project is vital to support the principles and goals of such development. We can see this in projects such as the famous Bored Ape Yacht Club (BAYC). Its creators have built a cohesive community, where its holders have developed a series of functions that can only be enjoyed by the holders of these NFTs. The idea is to create a community that keeps the project running, developing and evolving.
- The distribution of tokens is fundamental to promote the acquisition and use of tokens among the community. The distribution can be done through campaigns in NFT marketplaces, purchase of utility tokens (to boost them) or other means to be devised by the developers of the project.
- Provide means to stabilize NFT prices. One of the biggest challenges in the token economy is to achieve stability in token prices. In NFTs markets this is a serious problem, because prices tend to vary unsustainably. In fact, the current downturn in NFTs markets has a lot to do with this situation, something that should be kept very much in mind in the generation of tokenomics for NFTs. NFT developments have learned and generate mechanisms that help to solve this situation. For example, integrating NFTs into other platforms to obtain access or special functions.
Economic dynamics. It includes the generation of economic utility schemes, such as DeFi or GameFi. An example can be seen in the use of NFT tokens to acquire loans in DeFi platforms, which undoubtedly helps to develop the ecosystem around these NFTs. At this point, integration with NFTs marketplaces, payment systems and gateways to access them must be thought of. Also, royalties, cost of deployment and data/metadata storage in blockchain, depending on the nature of the NFTs, must be considered.
Governance. Another important aspect in the token economy in governance and community participation in NFT project development decisions.
Real-world utility. A very important aspect of token economics is the utility that the token has. A project that brings real-world value is a project worth investing in: fans, loyalty, use in the metaverse, royalty/reward generation or interest in secondary markets.
Although the tokenomics of NFTs is very similar to what we can see in utility tokens, there are several elements to take care of, as each NFT project is different. In any case, the generation of tokenomics according to the project will have an enormous weight in the good development of the project, so it is something that must be thought very clearly, to develop a successful strategy for each project.
NFTs have revolutionized the way creators get paid and the way fans engage with their favorite teams or singers. This has enabled the expansion of NFTs applications to many industries. Depending on the use case, there are different technologies, platforms, and mechanisms to design an NFTs tokenomics. This situation leads us to evaluate other risks before starting an NFT business, especially everything that has to do with the local regulatory framework.
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