Tokenomics and Governance Tokens in DeFi Protocols

Blockchain technology initiated a type of decentralized economy, where tokenomics describes the economic workings of protocol tokens. There are different types of tokens, but the most common were initially Utility tokens and Security tokens.

Soon after, with DeFi, the new challenge was to decentralize not only the economics of a protocol but also its decision-making power and, thus, its governance.

In ordinary projects, the company or developers decide what changes and upgrades to make. Indeed in DeFi protocols, a model is created to give this task to the governance token holders, which can usually be earned using the protocols.

Folks Finance is responding to the DeFi challenge with its Algorand Standard Asset (ASA) governance token, FOLKS.

The protocol is currently in its security audit phase on Folks Finance’s smart contracts after successfully completing a protocol design review with Runtime Verification.

To understand tokenomics, let’s use a definition given by CoinMarketCap:

“Tokenomics is the topic of understanding the supply and demand characteristics of cryptocurrency.[..] A token is a digital unit of a cryptocurrency that is used as a specific asset or to represent a particular use on the blockchain.”

In general, tokenomics are pre-established cryptocurrency and token issuance programs that are algorithmically created. Here are some key points on which it is based:

  • The nature of the token is understood as the primary function or purpose of the token. The most common are Security, Utility, and Governance;
  • Monetary Policy recognized as the issuance and distribution of the token over time;
  • Usability and Incentives, related to the use cases of the token and how the reward mechanism is designed to encourage its adoption;
  • Governance represents the decision-making power and how holders can express it.

With this data, it is possible to understand the initial intention of a project and future purposes.

For example, analyzing monetary policy makes it easy to understand whether the reference token is inflationary, non-inflationary, or deflationary, based on the maximum supply of tokens and the buyback, burn, or halving processes.

Bitcoin has a maximum supply of 21 million BTC and adopts the halving process (every four years, the number of bitcoins issued is reduced) and, thanks also to the number of keys and wallets lost over time, make it an even scarcer asset. On the other hand, Dogecoin has an unlimited maximum supply of DOGE, making it an inflationary asset.

In the DeFi market, projects that issue governance tokens are increasingly growing and appreciated.

One of the four key points of tokenomics is governance, where the level of decentralization of the protocol defines who and how can influence decisions regarding the project.

Depending on the project’s tokenomics, in some cases, changes decided by governance token holders can be implemented automatically through smart contracts. In others, however, the changes to be made can only be voted on and then implemented by the team managing the project.

Reducing the field to the DeFi Lending Protocol market, where AAVE and COMP are the most famous, the new Folks Finance (FOLKS) governance token is coming.

Intending to outline community-centric governance, the ASA-token FOLKS offers its holders the participation in decision-making power, an incentive and staking strategy, and much more.

By anticipating its publication, Folks Finance’s tokenomics describes the intention of implementing a non-inflationary monetary policy with a maximum fixed supply of FOLKS.

FOLKS holders can participate in the governance system, weighing on key parameters of the protocol and the overall future direction of the project. Also, FOLKS holders are responsible for helping establish and guide the protocol’s economic parameters. Moreover, FOLKS holders will be able to earn from the protocol incomes.

The capital markets protocol for borrowing and lending built on top of the Algorand blockchain