Tokenomics: Understanding the Concepts of Tokens

Introduction

Tokenomics : Understanding tokens is a writing series where I deep dive into the world of tokenomics, from what it means, to how it operates, and finally, how the token economy will play out in our every day lives.

our key focus will be on understanding tokens, how they operate, how they are governed, how they are created and how they can be built, join me on this interesting journey, as I explore the world of #tokenomics

Token is a word we hear from time to time in our everyday life

But what really is a token?

A token is a symbol that represents a value or asset. which, when need can be exchanged back for that asset

we hear lovers say " take this as a token of my love"

In marriage ceremonies in Africa, a bride price is presented as a token to symbolize the agreement of marriage by both families. You'll hear the groom's family say something like ;

"we saw a flower in your garden and we have come to bring it and we have brought this as a token of our appreciation"

Tokens are also specific to a form of utility. when you purchase a gym membership card, that card is a token that represents the value you now have.

You may not be able to use a gym membership card to say, buy grocery 🛒, but it can definitely be used at a fitness centre with that brand anywhere in the world

What are Digital Tokens

we have seen how tokens operate in the real world, in the digital world, tokens are representation of digital assets.

When we talk of a token economy; we are referring to a world in which value are packaged in tradeable units of accounts called tokens or coins that can be exchanged digitally.

Before the invention of crypto tokens, physical tokens have always been in existence making room for an easier means of exchange. if this is so, why was there a need to create crypto tokens then?

P.S: Digital Tokens should not be confused with token in programming which are simply the smallest individual unit in a program

Why are Digital Tokens Important

Physical tokens present a unique challenge, since they are easy to make, they are also easy to counterfeit. even tokens that are created digitally face the problem of counterfeiting and double spending problem.

Crypto tokens makes it impossible to create a counterfeit token or spend the same token twice because it uses the blockchain technology.

This makes crypto tokens extremely valuable since they offer transparency to a utility that cannot be altered.. the creation of this utility and how it operates is what is called "tokenomics"

Tokenization, therefore is the process of turning goods and services into Tokens

Characteristics of a Token

Now, a token is a token regardless of whether it is a physical token or a crypto token, in all, there are qualities in an asset that points it out as a token, this is what you should look out for if you want to identify a token

1. it is a representation of a value
2. It's specific value has been agreed by all parties of a closed ecosystem.
3. It can be used as a means of exchange
4. Tokens have utility, value and use
5. They are usually issued by a private entity
6. They have no legal tender i.e you cant take them to the bank

Types of Crypto Tokens

Most tokens are digital assets that not only have monetary value but also have an objective for why they were created. That is, they are usually made with a specific use in mind.

Tokens are grouped based on their network design, function and uniqueness

According to network design

we have two types of crypto tokens when used in this context, layer 1 tokens and layer 2 tokens

Layer 1 tokens is what we'd call the runners they are mostly built on the blockchain rather than used to finance than a particular network or decentralised application. they are also used to finance activities in the ecosystem

Layer 2 tokens are mostly built on decentralised application om a particular network, they are more specific . Layer 2 tokens are built on existing blockchains

According to Function

They are broadly divided into security tokens, which are a form of assets legally recognized, and utility tokens which are specifically created around an ecosystem

According to Value

Fungible and non fungible tokens (NFTs), fungible tokens can be fractionalized and broken down into units, NFTs can not be broken down into bits because each token bears iis own unique value

What are Tokens Used For?

• they are used as incentives to motivate users to contribute positively
• to safeguard the blockchain and validate business transactions
• tokens are used to give members of an ecosystem the right to vote and be a part of the decision making process

In Conclusion

We can see how Crypto Tokens draws inspiration from tokens from the physical world, with the intension of making it better? Can you think of examples of tokens around you? Both physical and digital tokens that represent values you own?

In Our next article we will be talking about how tokenization works. we would understand how economic systems are important to tokens, and what the term "tokenomics" actually really mean

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