The second thing to watch out for when it comes to tokenomics is inflation/deflation mechanisms and total supply. Considering fiat, Inflation is the reason why your grandmother paid less for a dozen eggs than you do (printing too much money does the job).
Nevertheless, this is not the case for cryptocurrencies. There is a capping limit of tokens that ever to be created (max supply). Inflationary uncapped cryptos, just like your beloved Dogecoin, without max supply will continue “printing” their coins until the end of time, just like fiat currencies. In this case, you might find your tokens suddenly losing value as additional coins start to flood the market to drown out demand.
However, inflation is not necessarily an issue, as long as it's low (just in the case of Ethereum) and so long as you aren't planning on waiting to sell when you retire. It is also important to mention that inflation is used by many projects to incentivize network participation. In general, inflation is used by Proof of Stake (POS) cryptos to incentivize validators and delegators on their network. Inflation is used to reward liquidity providers and yield farmers with DeFi tokens.
However, the sort of aggressive token inflation that is used to pay liquidity providers in many Defi protocols will probably cause several issues in the first place. With these tokens, it is best to follow the wise words of finance's creator: “do not buy it, earn it”.
On the other side of the fence, so as to battle the inflation problem that wrecks fiat currencies as well, the implementation of deflationary economic models / Burning mechanisms is vital. Inducing scarcity by reducing the number of available coins in market through burning or reducing of the rate of produced coins, is helpful driving up the value of the token assuming that demand stays constant. By the way, thanks to Bitcoin, people all over the world are talking about what inflation really means.
Regarding the inflationary plan of Bitcoin :
In Bitcoin, all the coins in existence have been issued via the block rewards, where the mining reward or else the amount of BTC produced decreases in half every 210k blocks, roughly every 4 years on average.
It is speculated that until the end of 2140, Bitcoin’s inflation will reach 0%.
It is worth mentioning that all previous halvings (where inflation rate reduction takes place) have correlated with intense boom and bust cycles that have ended with higher prices than prior to the event.
Therefore, even if in the case that the demand for Bitcoin does not increase (quite unlikely for the digital gold), the price eventually will go up as the supply continues to decrease. And even worse, how many private keys and hence BTC have become unrecoverable? Therefore, how many people are encouraged to hold their BTC instead of spending it?
Now, let’s play the devil’s advocate. In the case of a continuously limited production in the number of tokens, users are encouraged to hoard coins, not spend them. Wait a minute, is it really a currency or a commodity? When we are talking about Bitcoin as a payment asset, yes, it is somewhat a problem.
But the real problem does not lie here. In Proof of Work cryptocurrencies, such as Bitcoin, miners are paid through the inflation process of mining. However, as it was previously mentioned, the inflation rate and hence the BTC rewards decrease over time, so miners will be less encouraged to participate in the network as the rewards will consist entirely of transaction fees (much smaller than the block reward for the time being), making eventually mining unsustainable. In the worst case, the situation of Tragedy of Commons emerges, where miners are acting on their economic interest, in a way that does not benefit the network as a whole. . This kind of selfish act could be done as follows:
Miners would stop mining altogether, something that would destroy the networks efficiency.
With fewer miners to participate, the art of decentralization is fading while the network is vulnerable to 51% attacks. A 51 percent attack happens when a miner or mining pool takes control of 51 percent of the network's computing power and uses it to create illegitimate blocks of transactions while invalidating the transactions of others.
To compensate for the decreasing block reward, miners may demand higher transaction fees from users. This is expected, but it may increase the cost of transactions on the Bitcoin network compared to alternatives that have similar features, leading more network users to leave.
Nevertheless, the PoS cryptocurrencies avoid such tragedy. However, in a future scenario where Bitcoin would have gained much higher adoption (which is quite likely), the transaction volumes would be much greater, hence the cumulative rewards from the transaction fees wouldn’t be any tempting for mining?
