> For the complete documentation index, see [llms.txt](https://qualitax.gitbook.io/qx-defi-risks-101/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://qualitax.gitbook.io/qx-defi-risks-101/unsystematic-risks/economic-financial-risks/tokenomics-risk/defining-tokenomics-risks.md).

# Defining Tokenomics Risks

Tokenomics refers to the economic policies and strategies that govern the issuance, distribution, and management of a cryptocurrency or DeFi protocol's tokens.  It is the design and implementation of the cryptoeconomics surrounding a DeFi Protocol token. It includes factors like:

* **Token distribution** - How the tokens are distributed and to whom. A fair and wide distribution is generally desirable.
* **Token utility** - The functions and uses of the token within the DeFi protocol. Greater utility tends to increase demand.
* **Token supply mechanics** - Factors controlling token circulation amounts, like inflation and burning. This impacts the token's scarcity.
* I**ncentives -** How token distribution and utility create incentives for various network participants and behaviors.

Tokenomics risks for a DeFi protocol include:

* **poor incentive alignment and/or flaws in incentive designs**, which may lead to adverse behaviors (e.g., excessive speculation, pump and dump schemes), 
* **liquidity problems** if tokens are not adequately distributed or utilized, 
* **and inflationary pressures from excessive token supply,** undermining the token's value and the protocol's financial stability.
* **Concentrated token ownershi**p by a few, leading to centralization risk.
* **Changes in tokenomics parameters over time** that negatively alter expected incentive models.

Careful tokenomics design and modeling is crucial for the long-term sustainability and decentralization of a DeFi protocol. 

<https://www.bitget.com/research/articles/12560603805658>

<https://www.coingecko.com/en/coins/uniswap/tokenomics>

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