Crypto 101: What are token emissions and why do they matter?

What are token emissions?

Along with fundamentals like token utility, governance, and circulation, emissions are another core component of tokenomics. In short, this refers to the rate at which new tokens are created and released into circulation.

Generally speaking, new tokens are distributed as part of block rewards, which are given to miners or validators as a reward for helping to secure the blockchain. For example, when Bitcoin was first launched, miners received 50 BTC every ten minutes (or for each block they validated), resulting in an emission rate of around 7,200 BTC per day. However, due to a series of “halving events” in recent years, this rate has significantly decreased. As of May 11, 2020, the Bitcoin protocol generates around 6.25 BTC per block. While the next halving is expected to occur in 2024, this emission rate will not continue indefinitely. As the maximum supply of Bitcoin is set at 21 million coins, and as per the strict emission schedule, the last Bitcoin is expected to be mined in 2140.

Emission rates are important because they can affect a token’s future value. For example, if the rate is too high, the market could become oversaturated, and the token’s value could decrease. While it ultimately depends on the underlying eco and product, a well-designed token should have a steady, controlled increase in supply to maintain its value over time.

What are the different types?

There are several different types of token emissions, which can vary depending on the specific design of the token and the goals of the project. Some common types include:

Fixed emissions

This refers to a fixed rate that does not change over time. The token’s total supply is also fixed, and new tokens are released at a predetermined rate. As mentioned, an example of a fixed-emission token is Bitcoin, which has a maximum supply of 21 million coins and a predetermined emission rate that decreases over time.

Variable emissions

Variable emissions refer to a token emission rate that can change over time, typically based on specific triggers or conditions. We can see this evidenced variable-emission token is the stablecoin Tether (USDT), which can create new tokens as needed, typically whenever someone deposits $1 in reserve.

Burning or deflationary emissions

Some tokens are designed to have a deflationary emission rate, meaning that the total supply of the token decreases over time. This can be achieved through a process called “burning,” where tokens are permanently removed from circulation.

Deflationary emissions can be used to increase the value of a token by reducing its supply. One example of a deflationary token is BitTorrent Token (BTT) - the native token of the BitTorrent decentralized file-sharing platform. BTT tokens are burned every time they are used to purchase content or services on the BitTorrent platform, which reduces the total supply of BTT and increases its value over time.

Inflationary

Unlike the deflationary model, inflationary tokens are characterized by an increase in their total supply over time, which can lead to a decrease in their value if market demand is not upheld. They can also be contrasted with Fiat , which is also typically inflationary, as central banks can create new units of currency to meet the respective demand.

Doge is one example of an inflationary cryptocurrency. It has a fixed block reward of 10,000 Doge per block, with the block time set at 1 minute. This means that the emission rate of Doge is approximately 144 million DOGE per day. The maximum supply of Doge is not fixed, and it is estimated that it will reach around 129 billion Doge in 2033. It is worth noting that the rate of inflation for Dogecoin can change over time depending on the overall demand for the token.

Dynamic emissions

Dynamic emissions refer to an emissions design that can flexibly change over time. This is in contrast to fixed emissions, where the rate of token issuance is predetermined and does not change, or variable emissions, where the rate of token issuance can be adjusted manually. Dynamic emissions can be used to achieve a variety of goals, such as maintaining the value of the cryptocurrency, incentivizing desired behavior, or adapting to changing market conditions. For example, a cryptocurrency with dynamic emissions might increase the emission rate during times of low demand to stimulate adoption and increase the token’s value. Conversely, it might decrease the emission rate during times of high demand in order to reduce the risk of oversupply and maintain the value of the token.

Overall, dynamic emissions can be a valuable tool for managing the supply and demand of a cryptocurrency, but they can also be complex and difficult to implement. The success of a dynamic emission model depends on a variety of factors, including the specific triggers and conditions used to adjust the emission rate and the overall demand for the token.

One example of a decentralized finance (DeFi) project that uses a dynamic emission model is Compound (COMP). Compound is a protocol that allows users to earn interest on their tokens by lending them out to borrowers or borrowing from other users. Its native token, COMP, is used to govern the protocol and facilitate transactions on the platform.

The emission rate of COMP is adjusted based on several factors, including the total supply of COMP, the demand for COMP, and the overall utilization of the Compound protocol. For example, if the total supply of COMP is low and the demand for COMP is high, the emission rate of COMP may be increased to stimulate adoption and increase the token’s value. Conversely, if the total supply of COMP is high and the demand for COMP is low, the emission rate of COMP may be decreased to reduce the risk of oversupply and maintain the token’s value.

General principles to follow

Some principles to keep in mind when designing or analysing a token emission model include:

Align incentives with the goals of the project: The token emission model should be designed to align the incentives of stakeholders with the goals of the project. This helps ensure that all stakeholders are working towards the same objectives and that the value of the token is maintained over time.

Maintain the value of the token: The token emission model should be designed in a way that helps to maintain the value of the token over time. This can be achieved through a combination of factors, such as limiting the total supply of the token, controlling the rate of token issuance, and structuring pragmatic incentives.

Ensure network security: The token emission model should be designed in a way that encourages participation and cooperation among stakeholders while also addressing any potential attacks or malicious behavior. This can help to ensure the security and integrity of the network.

Be transparent and predictable: The token emission model should be transparent and predictable so that stakeholders can understand how the token is being issued and what factors influence its value. This can help to build trust and confidence in the asset.

Consider external factors: The token emission model should take into account external factors that can impact the value of the token, such as regulatory developments, market conditions, and technological advances.

Overall, the success of a token emission model depends on a variety of factors, and it is important to consider the specific goals and needs of the cryptocurrency project when designing the model.