Tokenomics can be understood as an ecosystem created for a specific purpose, which can differ from product to product and person to person. Hence, there is no singular definition of Tokenomics. In simple words, a token is considered as a digital asset that represents anything of value. If a person needs to create a program or app and does not have enough funds to do so, he can seek the help of ICO. And for the purpose of funding the particular project, a specific token can be created. The creation of token must follow a set of rules or fulfill certain characteristics. By eliminating the need for Venture Capitalists, the creator can directly seek the help of investors. They are in turn paid with dividends in terms of tokens. Hence, an ecosystem is formed.
A token is used to facilitate functions like raising of funds and exchange of digitalized assets. Most of the time, a new token is created for every new task. This is to ensure that the token encompasses all the necessary characteristics required to carry on easy transactions among developer and investor. There are two types of tokens, namely Security Token and Utility token. A security token is used for the purpose of investment while the Utility token is used for the purpose of payment for different expenses. A utility token cannot be used to make investments.
There are a few things to be kept in mind while creating a token. The token created must be acceptable to the people within the ecosystem. While raising an ICO, this includes both the investors and the startup. The token must have the ability to resist any kind of inflation. Token burning can be done at the end of the program, which helps clear out any unused tokens. Understanding the purpose of creation of a token is primary. We have to scrutinize as to what transactions the token is used in. The most important point to be kept in mind is that the new token must follow the ERC-20 for it to be standardized.
The inception of the idea of Tokenomics can be attributed to ICO. Crowdfunding has always been the biggest and most easily available source for startups to raise funds. Through ICO, the need for venture capitalists is nullified. The startups directly ask for funds and interested investors come forward for the purpose. Tokens are created keeping in mind the needs of the program and the convenience of both parties. Even though there are no venture capitals, the presence of an Escrow is necessary. It may be a person or a group, with the purpose of preserving the funds. The hard cap and soft cap amount must also be determined beforehand. In the end, tokens are distributed according to the business model made in the beginning.