Why tokenomics is key to creating successful businesses with NFTs
Source: Observatorioblockchain / Jose Maldonado
Tokenomics or token economy is a key concept to create successful businesses with NFTs. Basically, it refers to the construction of a sustainable economic ecosystem, both for NFT projects and utility-type tokens. Through the token economy, the projects seek to create a functional economic base that allows them to evolve and maintain themselves over time. So that all the participants and those interested in the project are motivated to participate, through rewards or the revaluation of their participation in it.
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Tokenomics and NFTs
What elements can we see in a tokenomics? Let’s think pretty basic and take Bitcoin as an example. When we refer to currency, bitcoin is a means 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 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.
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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 mechanism of reward and economic mobilization that starts from the miners towards the rest of the actors in the Bitcoin network.
The first tokenomics in 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 to earn new coins and network fees) and, at the same time, make the coin start an economic dynamic that includes all actors in the network. Although running a Bitcoin node offers no profit, people have an 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 move throughout the network, making it more dynamic.
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We see the latter very clearly in the BTC bear and bull markets. When we are in a bear market, BTC miners tend to hoard their BTCs hoping for better prices. The decrease in the liquidity of BTC tends to stabilize the price of BTC and at a point, a rise begins that ends the bear market, starting a new bull market cycle. At that point, miners start selling, the BTC price stabilizes at its high, and the next bearish cycle begins. A dynamic that has accompanied us and been fulfilled since the birth of Bitcoin and that is also part of Nakamoto’s tokenomics vision when creating BTC.
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A universe of possibilities
We have already explained the idea of tokenomics in cryptocurrencies and utility tokens, but what about NFTs? Well, the situation is repeated with some differences. When we talk about NFTs or projects that revolve around them, the possibilities to create and apply tokenomics expand. This is because the utility or objectives of these projects is completely different and there is a universe of possibilities. For example, the tokenization of NFTs within an Axie Infinity-style game is completely different from what can be applied to an art NFT project.
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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 that sense, tokenomics must take into account certain elements in their construction:
Building a strong community
- Building 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 essential to promote the acquisition and use of them among said community. Distribution can be done through campaigns in NFT marketplaces, purchase of utility tokens (to boost them) or other means that are devised by its developers.
- Provide means to stabilize the prices of NFTs. One of the biggest challenges of the token economy is to achieve stability in their prices. In NFT markets this is a serious problem, because prices tend to fluctuate unsustainably. In fact, the current fall in the NFT markets has a lot to do with this situation, something that must be taken into account in the generation of tokenomics for NFTs. The developments of NFTs have learned and generate mechanisms that help to solve this situation. For example, integrating NFTs into other platforms to gain access or special features.
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4. 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 as a means to acquire loans on DeFi platforms, which undoubtedly helps to develop the ecosystem around these NFTs. At this point, integration with the NFT markets, systems and payment gateways to access them must be considered. It is also necessary to take into account the royalties, the cost of deployment and storage of data / metadata in the blockchain, depending on the nature of the NFTs.
5. Governance. Another important aspect in the economy of the token in the governance and the participation of the community in the development decisions of the NFT project.
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6. Utility in the real world. A very important aspect of the token economy is the utility that said token has in reality. A project that adds value to the real world is a project worth investing in: fans, loyalty, use in the metaverse, generation of royalties/rewards, 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 that should be taken care of, since each NFT project is different. In any case, the generation of a tokenomics according to the project will have an enormous weight in its proper development, so it is something that must be thought very clearly, in order to develop a successful strategy for each project.
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NFTs have revolutionized the way creators get paid and the way fans engage with their favorite teams or singers. This has allowed the expansion of the applications of NFTs to many industries. Depending on the use case, there are different technologies, platforms and mechanisms to design an NFT 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.