By Introduction
Hello and welcome back to Fun with Tokenomics: A Beginner’s Guide. You’ve made it this far, which means you’re serious about understanding the nuts and bolts of the crypto world. We’ve laid the groundwork, defining what tokenomics is and why it serves as the invisible hand guiding every blockchain project.
Now, let’s take a deep dive into one of the most fundamental and impactful categories of digital assets: Layer 1 tokens.
In the modern digital economy, Layer 1 tokens are not just pieces of code — they are the foundations or the native cryptocurrencies of a blockchain network. Think Bitcoin (BTC), Ethereum (ETH), Solana (SOL), Cardano (ADA), Polkadot (DOT), Avalanche (AVAX), and many more.
What Are Layer 1 Tokens in Blockchain?
A Layer 1 token serves as the native cryptocurrency of its blockchain. Its economics are crucial because the success of the entire ecosystem depends on its design and value.
Functions of Layer 1 Tokens
1. Network Security (Consensus Mechanism)
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Proof of Work (PoW): Miners expend computational power to secure the network and are rewarded (e.g., Bitcoin).
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Proof of Stake (PoS): Validators stake native tokens as collateral to validate transactions and earn rewards (e.g., Ethereum 2.0, Solana, Cardano).
This directly ties token value to network security.
2. Gas and Transaction Fees
Every transaction or smart contract requires a gas fee, paid in the native token. This creates constant demand: more usage → more demand.
3. Governance Rights
Holding the token may grant voting power on upgrades, treasury allocations, or protocol changes, decentralizing decision-making.
4. Store of Value and Collateral
Many Layer 1 tokens double as a digital store of value and can also be used as collateral in DeFi protocols.
Key Economic Principles of Layer 1 Tokenomics
Supply Dynamics: Scarcity vs. Inflation
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Fixed Cap (Deflationary): Bitcoin with 21M supply.
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Algorithmic Inflation (Controlled Supply): PoS systems mint new tokens sustainably.
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Unlock Schedules: Vesting periods and cliff unlocks affect price and circulating supply.
Why People Hold Layer 1 Tokens
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Utility as “digital oil” for transactions
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Staking rewards & yields
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Governance participation
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Ecosystem growth (DeFi, NFTs, gaming)
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Speculation & investment potential
Balancing Inflationary & Deflationary Forces
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Issuance (Inflation): New tokens reward miners/validators.
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Burning (Deflation): Some systems burn fees (e.g., Ethereum’s EIP-1559).
This creates a balancing act between inflation and deflation, depending on network activity.
The Interplay: Security, Decentralization, and Value
The tokenomics of a Layer 1 coin aim to achieve three goals:
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Security – Incentivizing validators and miners.
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Decentralization – Spreading token ownership and governance.
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Value Appreciation – Encouraging long-term holding and adoption.
A strong tokenomics design creates a positive feedback loop: more value → more stakers/miners → stronger security → more dApps and users → more demand.
Ultimately, the economics of a Layer 1 token are not just technical—they’re philosophical, reflecting our vision of financial systems built on reason, rights, and uncoerced exchange of value.