Tokenomics is the topic of understanding the supply and demand characteristics of cryptocurrencies.
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A Breakdown of Tokenomics
Tokenomics — the topic of understanding the supply and demand characteristics of cryptocurrency.
In the traditional economy, economists monitor the issuance of a currency using official money supply data. The numbers they report are generally called M1, M2 and — depending upon the country — M3 or M4 as well. An in-depth explanation of the four M categories is beyond this tokenomics analysis: just know that M1 is a measurement of the most liquid monies, M2 is less liquid, and so on. These numbers help to enable transparency and monitoring of different aspects of the supply of a currency.
These numbers are important because throughout history, kings, queens and governments have had a habit of creating additional money in their country. It turns out that running a country or fighting a war can be very expensive, and it was not always easy to raise revenues or balance a budget, which meant that it was often politically expedient to simply create more currency.
In the modern world, things like bank bailouts and pandemic responses have required governments around the world to create substantial amounts of new currency very quickly.
While governments oversee this process, creating additional currency can cause a slow, or sometimes fast, reduction in the value of the existing money. We call this reduction “inflation” and it is most visible when the prices of the things we buy increase year after year.
What Is a Token?
Before diving into tokenomics, let's take a look at what a token means. A token is a digital unit of a cryptocurrency that are used as a specific asset or to represent a particular use on the blockchain. Tokens have multiple use cases, but the most common are as security, utility and governance tokens.
Cryptocurrencies and tokens built on blockchain have pre-set, algorithmically created, issuance schedules. This means that we can predict with quite some accuracy how many coins will have been created by a certain date in time. Though it is possible for most cryptoassets to have this issuance schedule altered, it will normally require the agreement of many people and is very difficult to implement. This provides some comfort and security for owners, because they know the tokenomics and what degree their asset will be created in a way that is much more predictable than governments creating money.
What Is The Total Bitcoin Supply?
In total, there will be just 21 million Bitcoin produced. The total Bitcoin supply will be reached around 2140. Until then, the number of new coins that are created via the mining process will decrease by half, roughly every four years. This is known as the Bitcoin halving and was designed to create what economists call scarcity, therefore providing upwards pressure on prices.
While 21 million of total Bitcoin supply may sound like a very large number, when compared to the 8 billion or so people on earth, it is obviously incredibly small. It is this imbalance that leads many people to compare Bitcoin to gold and think of it as “hard” money.
As the first crypto to be created, the issuance process and schedule of Bitcoin has led the way for others. For example, Bitcoin Cash, Bitcoin SV and Zcash also have a hard cap of 21 million coins. Others, such as Litecoin, use the same framework but have a larger overall number.
Dogecoin and Grin Circulating Supply
However, there are coins whose schedule is very different. For example, both Dogecoin and Grin have issuance that is identical for every new block created forever, which means that their token supply is essentially unlimited.
Dogecoin circulating supply is currently 131.13 billion as of September 2021, with no fixed maximum supply. It has an inflationary supply, instead of a deflationary one like Bitcoin. Proponents of Dogecoin, which include high profile billionaires, argue that this tokenomics is what makes it a usable currency.
The founders of Grin hoped that this feature would make it easier to maintain a stable price and thus become a more usable currency. It took several years to understand whether this would actually happen and it seems that the Grin tokenomics experiment failed.
In between these two positions are plenty of coins and a lot of tokens — many operating on Ethereum — that have a maximum issuance in place, but that number is very high. For example, Tron has a total supply capped at more than 100 billion.
There are also situations where the number of coins or tokens will reduce. Some projects have created rules in which a certain number will be burned — which means that they will be transferred into a wallet that cannot be recovered — at set intervals. Burning usually relates to operating fees, so that the more an asset is used, the faster its tokens are burned.
Why Is Tokenomics Important When Investing in Cryptocurrency?
In his famous investment book, Margin of Safety, value investing legend Seth Klarman explains that, “In the short run supply and demand alone determine market prices.” If we believe that to be true and that it applies to cryptoassets using blockchain technology as well as the stock market, then understanding the factors that will impact either supply or demand are of vital importance to both speculators and investors.
In which case, there are a number of factors to consider when looking at crypto tokenomics. Perhaps the most important is to understand how the digital currency will be used. Is there a clear link between usage of the platform or service being built and the asset? If there is, there is a strong chance that a growing service will require purchases and usage that ultimately helps to increase the price. If there is not, what can the token be used for?
Other important questions to answer include the following:
- How many coins or tokens currently exist?
- How many will exist in the future and when will they be created?
- Who owns the coins? Are there some set aside to be released in the future to developers?
- Is there any information to suggest that a large number of coins has been lost, burned, deleted or are somehow unusable?
Tokenomics in Determining Cryptocurrency Value
Tokenomics is also helpful as guidance to understand how much an asset might be worth in the future. For example, many people new to crypto will think something like, “If this coin becomes as valuable as Bitcoin, then one day…” while in reality it might never be possible. As an example, let’s think of two coins mentioned above, Bitcoin Cash and Tron. Bitcoin Cash has the same total supply as Bitcoin, so thinking that one may become as valuable as the other in time has some legitimacy — it is possible. However, with more than 100 billion Tron existing, for one coin to be valued in the thousands of dollars, Tron would need to become the most valuable business in the history of the world — how likely is that to happen?
While these questions may seem to require complex answers, they will provide an extra way to view cryptoassets and help to understand whether one asset is more likely to have a great future than another.
Since this article was first written, tokenomics has evolved substantially and become a critical part of the design or use of a token or NFT collection. Below I explain some of these innovations and how they are implemented to add value to a project.
Advanced Token Utility Models
Governance Participation
In many decentralized projects, tokens have evolved into instruments of governance, giving holders a direct voice in decision-making processes. This model empowers the community to vote on crucial aspects of a protocol’s future, including software upgrades, changes to tokenomics, and the allocation of treasury funds. Governance tokens are often used within decentralized autonomous organizations (DAOs), where they serve as a form of digital representation for stakeholder influence. The more tokens a user holds, the greater their voting power—although many projects are now experimenting with quadratic voting and delegation to prevent wealth concentration from dominating proposals. This utility enhances decentralization, aligns incentives, and increases user commitment to the long-term success of a project.
Staking and Yield Farming
Staking has become a core utility for many tokens, especially in proof-of-stake and layer-1 blockchain ecosystems. Users lock up their tokens for a defined period to help secure the network, validate transactions, or provide liquidity, in exchange for rewards often paid in the same or another token. Yield farming, a related concept, allows users to maximize returns by moving tokens between protocols offering the highest annual percentage yield (APY). These mechanisms create strong demand by offering financial incentives for holding rather than selling, reducing circulating supply and encouraging user participation. Additionally, they enhance network resilience and liquidity availability, both of which are critical for scaling decentralized ecosystems.
Access to Services
Another key evolution in token utility is their function as access keys to specific products, services, or features within a blockchain ecosystem. For example, holding a platform’s native token might allow users to unlock premium content, participate in exclusive NFT drops, access specialized trading tools, or gain entry to token-gated communities. This utility model borrows from traditional membership systems but decentralizes the control and value distribution. As Web3 adoption grows, more projects use tokens as mechanisms for permission management, identity verification, and content monetization. This utility not only drives token demand but also helps build more engaged and active communities within each platform.
Evolving Token Distribution Strategies
Dynamic Vesting Schedules
To foster long-term commitment and minimize the risk of early token dumps by insiders, many crypto projects now implement dynamic vesting schedules. These schedules determine how and when allocated tokens become available to investors, team members, and advisors. Unlike traditional fixed vesting periods, dynamic models can adjust based on milestones, market conditions, or governance decisions. For instance, if a project meets a certain growth target or successfully launches a product, token unlocks may accelerate. Conversely, if key deliverables are delayed, vesting can be paused or extended. This approach aligns incentives more effectively between stakeholders and the health of the ecosystem, encouraging long-term value creation rather than short-term speculation.
Community Incentives
Modern tokenomics places a much stronger emphasis on incentivizing community engagement through mechanisms like airdrops, contributor rewards, referral programs, and retroactive grants. These tools are used not just to market the token but to create a sense of ownership and participation. For example, early users who test a protocol or provide feedback may later be rewarded with tokens in retroactive airdrops—an increasingly common practice among DeFi and layer-2 projects. By directing tokens toward active users rather than passive investors, projects cultivate more loyal and involved communities. This grassroots-oriented distribution builds network effects organically, helping projects scale while staying aligned with decentralization ideals.
Ecosystem Development Funds
In 2025, many projects reserve a significant portion of their token supply for ecosystem development funds—treasuries specifically earmarked to fuel the growth of the broader ecosystem. These funds are used to provide grants, bootstrap partnerships, support developers, and incentivize new use cases built on top of the core protocol. Decisions around how these tokens are allocated are often governed by DAOs or community-led councils, ensuring transparent and decentralized capital deployment. By sustaining innovation and incentivizing third-party builders, these funds play a critical role in expanding the utility and reach of the token, making it an essential pillar of modern tokenomic design.
Integration of Real World Assets
Real Estate and Commodities
Tokenizing real-world assets (RWAs) like real estate, commodities, or collectibles has become one of the most promising frontiers in crypto. Through tokenization, traditionally illiquid assets such as buildings, farmland, gold, or fine art can be fractionalized and represented as digital tokens on a blockchain. This democratizes access to investments previously limited to institutional players or high-net-worth individuals, while also increasing liquidity in markets that are typically slow-moving. A tokenized real estate project, for example, can allow global investors to purchase and trade fractional ownership of properties without intermediaries. This enhances transparency, reduces settlement time, and unlocks new ways of portfolio diversification for both retail and institutional investors.
Regulatory Compliance
As RWAs inherently tie into existing legal and financial frameworks, regulatory compliance has become a central concern in their tokenomic design. Projects operating in this space must navigate complex jurisdictional rules around securities law, investor accreditation, and asset custody. Consequently, compliance features are increasingly being embedded directly into tokens through mechanisms such as whitelist-based transfers, Know Your Customer (KYC) layers, and programmable restrictions to meet local laws. Many RWA tokens are issued as “security tokens,” which differ from typical utility tokens in that they are legally bound to provide rights to real-world income or ownership. This integration of regulation into tokenomics is essential for institutional adoption and long-term viability.
Bridging Traditional and Decentralized Finance
The rise of RWAs is catalyzing a new era of convergence between traditional finance (TradFi) and decentralized finance (DeFi). By bridging these two worlds, tokenized RWAs enable DeFi protocols to offer yield opportunities backed by tangible, off-chain value. For example, stablecoin protocols are beginning to use tokenized U.S. Treasury bills or invoices as collateral, adding stability to their reserves and reducing reliance on purely crypto-native assets. At the same time, traditional financial institutions are exploring blockchain rails to issue and settle assets faster and more efficiently. This growing intersection is reshaping tokenomics by embedding real-world utility, creditworthiness, and macroeconomic exposure into the fabric of blockchain-based ecosystems.
GameFi and Dual-Token Economies
Utility Tokens
In GameFi ecosystems, utility tokens serve as the backbone of in-game economies. These tokens are typically used for day-to-day transactions such as purchasing in-game assets, upgrading characters, or paying for game features. By tokenizing these functions, developers allow players to earn, trade, and spend value in a borderless and transparent manner. Crucially, utility tokens often have inflationary supply models to ensure broad accessibility and maintain active gameplay dynamics. However, many projects are now experimenting with mechanisms like token burns or fixed supply caps to manage long-term value. The goal is to strike a balance between player incentives and economic sustainability, avoiding hyperinflation while preserving engagement.
Governance Tokens
To empower players beyond the game itself, many GameFi platforms introduce a second, governance-focused token. These governance tokens are typically limited in supply and grant holders voting rights on key decisions such as game updates, reward schedules, and treasury spending. They transform players into stakeholders, allowing them to shape the evolution of the game. Often, governance tokens are harder to earn and may be distributed through staking, liquidity provision, or long-term participation. This separation of utility and governance helps isolate speculative dynamics from gameplay incentives, while also giving dedicated users a meaningful voice in project direction. In essence, it formalizes the concept of community-driven game development.
Balancing Dual-Token Models
The dual-token model—featuring both a utility and a governance token—has become a popular framework for balancing gameplay mechanics with broader ecosystem governance. However, implementing this structure requires careful tokenomic planning to prevent issues like runaway inflation, value leakage, or governance apathy. Projects must define clear roles and limits for each token, ensure fair distribution, and create mechanisms for long-term utility and demand. For instance, some games introduce token sinks (mechanisms that permanently remove tokens from circulation) or allow players to convert utility tokens into governance tokens under specific conditions. When executed well, dual-token models create more resilient and scalable economies that can adapt to both gaming dynamics and financial realities.
Decentralized Physical Infrastructure Networks (DePIN)
Incentivized Participation
Decentralized Physical Infrastructure Networks (DePIN) use blockchain technology and token incentives to coordinate real-world infrastructure deployment in a permissionless, bottom-up fashion. Participants contribute physical resources—such as wireless connectivity, storage space, compute power, or sensor data—and in return, earn tokens as compensation for their services. For example, projects like Helium incentivize individuals to operate wireless hotspots, while others reward users for contributing GPU cycles or data storage. These incentives align economic rewards with network growth, allowing DePIN ecosystems to scale faster and more efficiently than traditional infrastructure models. The key innovation is that anyone can become a micro-provider and be paid in real time based on validated performance.
Decentralized Management
DePIN projects often replace centralized management structures with community-driven governance models, enabled by on-chain coordination and token-based voting systems. Instead of being controlled by a single company, these networks evolve through proposals and decisions made by token holders—such as changes to reward distribution, hardware standards, or network rules. This decentralization fosters resilience, transparency, and global inclusivity, allowing infrastructure networks to self-govern while still adapting to local needs. Tokenomics in this context serves as a coordination layer, balancing economic incentives with network quality and sustainability. The shift from centralized to decentralized infrastructure management also opens the door for interoperable, composable systems that can integrate across multiple ecosystems.
