Terms You Should Know In Tokenomics 101

Blocksurvey blog author
Written by Priya M
Jan 18, 2023 · 15 mins read
Terms You Should Know In Tokenomics 101

Introduction

If you are a newbie in the Tokenomics space, you probably want to know where to start?

In this article, I have compiled the most important terms that are related to Tokenomics for you to flaunt in your next meeting. If you can’t speak the language you’re going to have a hard time getting around.

1. Airdrop

An airdrop is a marketing strategy used by blockchain based projects to distribute free tokens en masse to their communities in a bid to encourage adoption. This will be a part of a broader promotional initiative and a limited time event. It generates buzz and interest in particular platforms or networks and a way of promotion. It is a way of rewarding individuals who are participating in or supporting the platform in some way. Individuals who are eligible for an airdrop will need to take certain steps, such as holding a certain number of tokens or completing certain tasks, in order to receive the airdropped tokens.

2. Asset Backed Model

It is a way of designing and implementing the use of tokens within a larger system or platform. In this model, the tokens represent a specific asset or set of assets within the system, and it can be bought, sold, or traded based on the value of those assets. The value of the tokens is directly tied to the value of the underlying assets, that include things like physical goods, services, or other forms of value within the system. It is often used in cases where the goal is to create a decentralized market for a particular asset or set of assets, and to allow for the seamless and transparent exchange of those assets among users of the system.

3. Automated Market Maker

Automated market makers are autonomous trading mechanisms that eliminate the need for centralised exchanges and related market-making techniques. It is a system that automatically facilitates buy and sell orders on decentralised exchange. It use mathematical formulas and rules to automatically set the prices for tokens based on supply and demand, and to match buyers and sellers in a way that ensures that trades can be made efficiently and fairly.

4. Bounty

Bounty is a reward offered to individuals or groups who perform specific tasks or achieve certain objectives within a particular platform or network. These tasks or objectives can vary widely, but they often involve promoting the platform or network, finding and reporting bugs or vulnerabilities, or contributing to the development or growth of the platform in some way. These are typically paid in the form of the platform's native tokens, and they can be a useful way of incentivizing and rewarding participation within the platform or network.

5. Burning

“Burning” crypto means permanently removing a number of tokens from circulation. This is typically done by transferring the tokens in question to a burn address or eater address, i.e. a wallet from which they cannot ever be retrieved. This is often described as destroying tokens. It can be done for a variety of reasons, such as to reduce the overall supply of tokens and increase their value, to demonstrate the project's commitment to maintaining the value of their tokens, or to reward token holders.

6. Circulating Supply

Circulating supply refers to the total number of tokens that are currently in circulation and available for trading or use on a particular platform or network. This number is an important metric when it comes to evaluating the potential value of a token, as it can help to indicate the relative scarcity of the token and its potential demand. It can change over time as new tokens are created or destroyed, and it is often used in conjunction with other metrics, such as the total supply and market capitalization, to evaluate the overall health and potential value of a token.

Circulating supply = Total number of tokens created (-) No. of tokens permanently   destroyed or not available for trading.

7. Coin

Coin is used to refer to a type of digital asset that is created and issued on a blockchain-based platform. These are typically used as a means of exchange within a specific blockchain network, and it can be traded for other tokens or cryptocurrencies. They have their own independent blockchain as against tokens are built on top of existing blockchain platforms. Coins are an important part of the token economy, as they provide the underlying infrastructure for many decentralized applications and platforms.

8. Consensus Algorithm

Consensus algorithm is a mathematical process or set of rules that is used to achieve consensus among the members of a distributed network. It is used to ensure that all members of the network agree on the current state of the network and on any changes that need to be made, and they can help to prevent conflicts and ensure the integrity of the network. It helps to ensure the security and integrity of any transactions that take place on the network. Different platforms and networks may use different types of consensus algorithms, and the specific algorithm used can have a significant impact on the overall tokenomics of the platform.

9. Deflationary Method

A deflationary method is a way of designing and implementing the use of tokens within a larger system or platform in such a way that the total supply of tokens decreases over time. This can be achieved in a variety of ways, such as by permanently destroying a certain number of tokens on a regular basis, or by implementing a system that automatically reduces the supply of tokens based on certain conditions or triggers. This can help to prevent inflation and maintain the value of the tokens over time, and it can also incentivize holders of the tokens to hold onto them rather than selling them.

10. ERC-721

ERC-721 is a technical standard used for non-fungible tokens on the Ethereum blockchain. Unlike most cryptocurrencies, which are interchangeable and identical to each other (i.e. they are "fungible"), non-fungible tokens (NFTs) are unique and cannot be directly exchanged with each other in the same way. ERC-721 is a set of rules and standards that ensures that NFTs on the Ethereum blockchain can be easily exchanged and managed.

11. Farming

Farming is the practice of lending and staking your crypto assets to earn higher returns. In Farming the assets are deposited into the platform’s smart contract, which in turn allows borrowers to use these assets for various DeFi activities. Borrowers pay an interest, while lenders receive interest. This practice is similar to the concept of "staking" in the world of cryptocurrencies, where users hold onto a certain number of tokens and receive rewards for doing so. Farming is often used as a way of incentivizing users to hold onto a particular token, and can help to create a more stable and liquid market for the token. It is also sometimes used as a way of distributing new tokens to users who are actively participating in a particular platform or network.

12. Fully Diluted Market Cap

It is the total value of the token at today’s price if all tokens are in circulation. This helps the investors to assess if the current price of the token is sustainable into the future or if it is currently selling above its deal value.

Fully diluted market cap = Maximum supply of a token * current price per token

13. Gas

Gas is a unit of measurement used on the Ethereum blockchain. It represents the amount of computational effort required to execute a transaction or smart contract. In Ethereum, all transactions and smart contracts require gas to be executed, and the cost of gas is paid in Ether (ETH), the native cryptocurrency of the Ethereum network. The amount of gas required for a transaction or smart contract depends on a number of factors, such as the complexity of the operation and the amount of data involved. The use of gas helps to prevent spam and other malicious activity on the Ethereum network by making it costly for attackers to perform large numbers of transactions. In tokenomics, gas can be an important consideration when designing and implementing token systems on the Ethereum blockchain.

14. Governance Token

Governance token gives its holders the right to participate in the decision-making process of a decentralized network or organization. Governance tokens are often issued by decentralized autonomous organizations (DAOs), which are decentralized networks that are run by a set of rules encoded into smart contracts on a blockchain. Holders of governance tokens can use them to vote on proposals, make decisions about the direction of the network, or elect members of the organization's governing body. It provides an important mechanism for aligning the interests of the network's participants and ensuring that the network is run in a decentralized and transparent manner.

15. HODL

Commonly known as “hold on for dear life” among crypto investors. It is used in the crypto ecosystem to refer to a strategy of holding onto bitcoin holdings through its various price fluctuations and volatility. The term originated as a misspelling of the word "hold" in a 2013 Bitcoin forum post, and it has since become a popular slang term among cryptocurrency enthusiasts. It is often seen as a long-term investment strategy, where the individual or entity believes that the value of the cryptocurrency will increase over time and therefore wants to hold onto it rather than selling it. It can help to create a more stable and liquid market for a particular cryptocurrency, and can also potentially lead to significant returns if the value of the cryptocurrency increases.

16. Halving

Halving, or halving events, refer to a process that denotes the rate at which new coins are created is reduced by half. This typically happens every four years as in the case of Bitcoin, or after a certain number of blocks have been mined on the blockchain. Firstly they help to control the supply of new coins and prevent inflation. Second, they can act as a catalyst for price increases, as the reduced supply of new coins can lead to increased demand and a higher price. It is an important factor to consider when evaluating the potential value and price dynamics of a cryptocurrency.

17. Hard Cap

Hard cap is a term used in the context of initial coin offerings (ICOs) and other fundraising events in the cryptocurrency and blockchain industry. It is the maximum amount of funds that a project is seeking to raise during its fundraising event. Once this maximum amount is reached, the fundraising event will end and no further investments will be accepted. It provides a clear and defined limit on the total amount of funds that can be raised, and can help to ensure that the project's fundraising goals are met without over-extending itself. It is an important factor for both investors and project teams, as it sets the upper limit on the potential size of the project and its potential returns.

18. Layer 1

Layer 1 refers to the underlying infrastructure of a blockchain network. This is the foundational layer in which all other elements of the network are built, and it typically consists of the protocols, consensus mechanisms, and network rules that govern the operation of the blockchain. They are typically considered to be the core infrastructure that supports the creation and exchange of tokens on a blockchain network. This can include things like the smart contract platform, the consensus mechanism, and the cryptographic algorithms used to secure the network.

19. Layer 2

Layer 2 refers to solutions that are built on top of the underlying layer 1 infrastructure of a blockchain network. These solutions are designed to enhance the functionality of the network, by providing additional features or capabilities that are not natively supported by the layer 1 infrastructure. They can be an important consideration for projects that need to support large numbers of transactions or complex token structures, as they can provide the necessary infrastructure to support these requirements.

20. Liquidity Pool

A liquidity pool is a crowdsourced pool of cryptocurrencies or tokens locked in a smart contract that is used to facilitate trades between the assets on a decentralized exchange (DEX). Liquidity pools are often used in decentralized finance (DeFi) platforms, where they can help to facilitate the exchange of tokens and other assets in a decentralized and trustless manner. By providing a readily available source of assets for trading, liquidity pools can help to reduce volatility and increase the overall liquidity of a market. This can be beneficial for both market participants and for the platform or network as a whole.

21. Liquidity Provider

Liquidity provider refers to an entity that offers to buy or sell tokens on a cryptocurrency exchange or other trading platform. By offering to buy or sell tokens, the liquidity provider helps to ensure that there is always someone on the other side of a trade, which helps to maintain a healthy and active market for the tokens. This can be especially important for smaller or less liquid markets, where the lack of liquidity can make it difficult for buyers and sellers to find each other and complete trades. Liquidity providers can play a crucial role in providing the necessary liquidity to support the growth and development of a token economy.

22. Liquidity Taker

Liquidity taker refers to an entity that buys or sells tokens on a cryptocurrency exchange or other trading platform. By taking liquidity from the market, the liquidity taker helps to maintain a healthy and active market for the tokens. This can be especially important for smaller or less liquid markets, where the lack of liquidity can make it difficult for buyers and sellers to find each other and complete trades. Liquidity takers can play a crucial role in providing the necessary demand for tokens, which can help to support the growth and development of a token economy.

23. Market Capitalization

Market capitalization refers to the value of a cryptocurrency or token. Market cap is calculated by multiplying the total supply of a token by its current price. It provides an indication of the size and potential value of a particular cryptocurrency or token. This is often used to compare the relative value of different cryptocurrencies and tokens, and can be a useful tool for investors looking to make informed decisions about which assets to buy or sell.

Market capitalization = Total supply of a token * current price per token

24. Maximum Supply

Maximum supply is the total number of coins or tokens that will ever be created. It is typically set at the time of a cryptocurrency's creation, and it cannot be changed unless there is a hard fork or other major change to the underlying blockchain. It is a useful metric for investors and other market participants to consider when evaluating the potential value and scarcity of a cryptocurrency. In general, it is considered that a project with a lower maximum supply may be considered more scarce and potentially more valuable than those with a higher maximum supply.

25. Mining

Mining is the process where specialized computers also known as nodes or mining rigs, validate blockchain transactions for a specific cryptocoin and, in turn, receive a mining reward for their computational effort. This is usually done by individuals or groups of individuals known as miners. This process helps to ensure the security and integrity of the blockchain, and it also helps to support the overall functioning of the network.

26. Minting

Minting is the process of generating new coins by authenticating data, creating new blocks, and recording the information onto the blockchain through a “proof of stake” protocol. It determines the rate at which new tokens are introduced into the market and the overall supply of tokens that will be available. The minting process can have a significant impact on the value and scarcity of a token, and it is often carefully designed and controlled to ensure the stability and growth of the token economy. Both new units of a cryptocurrency and Non-Fungible Tokens (NFTs) can be minted this way.

27. NFT

NFT stands for non-fungible token. It is a type of digital asset that represents ownership of a unique item or piece of content. NFTs are often used to certify ownership of digital art or collectibles, and they are stored on a blockchain. This means that they are verifiable, secure, and cannot be replicated. Because of their unique nature, NFTs are often bought and sold for high prices.

28. P2P

P2P stands for peer-to-peer, and it refers to a decentralized network in which participants can interact directly with each other, exchange tokens between users without the need for intermediaries or central authority. This can help to increase the security and efficiency of transactions, as well as give users more control over their assets.

29. Pre-mining

It is the way of rewarding the developers, early investors and founders for their contribution to launch cryptocurrency. It is similar to a company selling its stake to its employees before it holds an IPO and goes public. It could be done for a variety of reasons, such as to fund the development of the project, to reward early adopters or supporters, or to give the creators of the project a stake in the token. It is a controversial practice because it can be used to unfairly benefit certain individuals or groups, and it can also be used to manipulate the market for the token.

30. Proof of Burn

Proof of burn uses tokens that are permanently removed from circulation, known as "burning," in order to achieve distributed consensus. In this system, miners show proof that they have burned a certain number of tokens, and the more tokens they burn, the higher their chances of mining a new block and earning rewards. This creates a scarce resource, as the tokens are no longer available for use, which can then be used to achieve consensus in a decentralized network.

31. Proof of Stake

Proof of stake is a type of algorithm used to achieve distributed consensus. In proof of stake, the creator of a new block of transactions is chosen based on their stake in the network, which is typically represented by the number of tokens they hold. Proof of stake is often seen as a more energy-efficient and environmentally-friendly alternative to proof of work, as it does not require miners to perform computationally-intensive tasks in order to create new blocks.

32. Proof of Work

Proof of work is a type of algorithm used to achieve distributed consensus. In proof of work, the creator of a new block of transactions is chosen based on their ability to solve a computationally difficult problem. This process, known as mining, requires miners to perform a large number of calculations in order to create a new block and earn a reward. Proof of work is a widely-used consensus algorithm, but it has been criticized for its high energy consumption and potential for centralization.

33. Pump and dump scheme

A pump and dump scheme a group of individuals or organizations coordinate to artificially inflate the price of a token or other asset, typically through misleading or false information. It is a type of market manipulation. After the price has been pumped up, the individuals or organizations involved in the scheme will sell their tokens at the inflated price, resulting in a sharp drop in value and leaving other investors with tokens that are worth less than they paid for them. This is illegal in most countries, and they can be difficult to detect and prevent.

34. Reward Token

A reward token is a type of cryptocurrency that is used to incentivize certain behaviours within a blockchain network. For example, a reward token might be distributed to users who contribute their computing power to help maintain the network, or to users who help to verify transactions on the network. These tokens can be traded or used to access certain features within the network. Overall, the use of reward tokens is intended to help create a sustainable ecosystem within the blockchain network by aligning the interests of different participants.

35. Rug Pull

A rug pull is a situation where the creators of a blockchain project or token suddenly "pull the rug" out from under its investors by disappearing and taking all the funds raised through the project with them. This is typically done through an exit scam, where the creators of the project will either suddenly shut down the project and disappear, or will deliberately devalue the token by flooding the market with it, causing a huge change in the price.

36. Soft Cap

Soft cap is the minimum amount of funds that a blockchain project or initial coin offering (ICO) intends to raise to continue its operations. It is typically set by the creators of the project and is announced before the ICO begins. It is used as a way to gauge the level of interest in the project and to ensure that it will have sufficient funds to continue its operations. If the project does not raise at least the amount of the soft cap, it may be considered a failure and the funds that were raised may be returned to investors.

37. Staking

Staking refers to the holding of your crypto funds in a wallet and hence supporting the functionality of a blockchain system. The cryptos are being locked in their wallets by the stakeholders. They are then rewarded by the network in return thus providing a source of income. It is typically done through a process known as proof-of-stake, where users are chosen to validate transactions on the network based on the amount of tokens they have staked.

38. Swap

Swap is a type of transaction in which one cryptocurrency is exchanged for another. This can be done through a cryptocurrency exchange or through a direct peer-to-peer transaction. This technique is used by traders and investors as a way to diversify their portfolios or to take advantage of price discrepancies between different cryptocurrencies. Few exchanges offer swap services that allow users to exchange multiple cryptocurrencies at once, without having to go through the process of converting them to a single intermediate currency first.

39. Token

A digital asset that represents a unit of value on a blockchain network. Tokens can be used for a variety of purposes, such as representing a unit of a cryptocurrency, a share in a company, or a vote in a decentralized governance system.

40. Token Allocation

Token allocation refers to the distribution of tokens within a cryptocurrency or blockchain project. This can include the allocation of tokens to the creators of the project, to early investors, to the project's development team, and to other stakeholders. This is typically outlined in the project's white paper or other funding documents, and can have a significant impact on the success of the project. A well-designed token allocation plan can help to ensure that tokens are distributed in a fair and transparent manner, and can help to align the interests of different stakeholders.

41. Token Distribution

The process of distributing tokens to the various participants and stakeholders on a blockchain network. This can include the initial distribution of tokens to investors and founders, as well as the ongoing distribution of tokens to network participants who contribute their resources to the network.

42. Token Issuance

The process of creating and distributing tokens on a blockchain network. This can involve conducting an initial coin offering (ICO) or initial token offering (ITO) to raise funds for the development of the network, or it can involve distributing tokens as rewards to network participants who contribute their resources (e.g. computing power, storage, etc.) to the network.

43. Token Economics

The study of the incentives and mechanisms that govern the supply and demand of tokens on a blockchain network. This can include factors such as the total number of tokens in circulation, the rate at which new tokens are created and distributed, and the mechanisms by which tokens are exchanged and valued on the network.

44. Token Listing Price

Token listing price refers to the initial price at which a token is made available for purchase in a secondary market. It has a significant impact on the token's initial adoption and trading activity on the exchange. Price is determined by the market forces of supply and demand, as well as factors such as the perceived value and potential future growth of the token. Some exchanges may have a minimum listing price requirement to ensure that only high-quality and legitimate tokens are listed on their platform. The listing price is important because it can.

45. Token Velocity

The rate at which tokens are exchanged or used on a blockchain network. High token velocity can indicate a healthy and active network, while low token velocity can indicate a lack of interest or adoption of the network.

46. Token Vesting

Token vesting is a concept in the world of cryptocurrency and tokenomics that refers to the release of tokens over time, rather than all at once. This is used as a way to align the interests of token holders and project creators, by ensuring that the creators have a vested interest in the long-term success of the project. In a token vesting arrangement, tokens are typically released to the creators of a project over a set period of time, such as monthly or quarterly. This can help to prevent the creators from dumping their tokens on the market all at once, which could cause the price to crash. It can also provide an incentive for the creators to continue working on the project and to deliver value to token holders over time.

47. Total Supply

Total supply refers to the total number of tokens that will be created and issued within a specific blockchain-based network or platform. This is typically fixed at the time of its creation, and cannot be changed unless there is a hard fork or other major change to the network. It determines the maximum potential value of the tokens, as well as the potential for price appreciation or depreciation over time.

48. Unlock Schedule

An unlock schedule is a plan for releasing tokens over time, as part of a token vesting arrangement. In a typical unlock schedule, tokens are released to the creators of a project or to investors over a set period of time, such as monthly or quarterly. It helps to ensure that tokens are distributed in a fair and transparent manner, and can prevent the creators from dumping all of their tokens on the market at once, which could cause the price to crash. Unlock schedules are often used in initial coin offerings (ICOs) and other crowdfunding campaigns as a way to align the interests of token holders and project creators.

49. Ve Tokens

Vote escrowed (Ve) tokens allow the token holders to select a lock-up period for their tokens until a specific event occurs. The longer you elect to lock-up your tokens, the more weight your tokens may get in for governance voting, earning staking rewards, voting on boosts to certain pools.

50. Wallet

Wallet refers to a digital storage platform that allows individuals to securely store and manage their digital assets, viz., cryptocurrencies and tokens. A wallet typically includes a unique address that can be used to receive and send tokens, as well as a private key that is used to access and manage the tokens in the wallet. There are many different types of wallets available, including online wallets, mobile wallets, desktop wallets, and hardware wallets, each with its own set of features and security measures. A good wallet is essential for anyone looking to participate in the token economy, as it provides a safe and secure way to store and manage digital assets.

51. Whale

A whale refers to a large holder of a particular token or cryptocurrency. This could be an individual or an institution that has a significant amount of a specific token, often acquired through large-scale purchases or mining operations. Whales are known to have a significant influence on the market, as their buying and selling activity can cause significant price fluctuations. Whales are often closely watched by other market participants, and their actions can have a significant impact on the price of a token.

On the road to expertise

With these frequently searched terms fresh in your mind, you are ready to tackle Tokenomics head-on and continue your knowledge exploration adventure. The subject is community driven and new words get coined in the social context or in social media. Stay tuned to know more about the resources available in the internet on Tokenomics.

If you have any query, feel free to drop a line at [email protected]

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blog author description

Priya M

Priya is the CFO of BlockSurvey. A year ago she made a career change and left the traditional finance world as a Chartered Accountant to work full time at BlockSurvey. She is specializing in “Tokenomics” in Web 3 space.

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