The emergence of cryptocurrencies and tokenomics has drastically changed the world’s view of financial systems.
Money is used by almost everyone in almost every business and by almost every individual. Money is used to buy items and services for everyday use, but it is also employed for business operations by international companies. Despite the fact that money has such a strong impact on everyone’s life, it has always been under the jurisdiction of central entities like banks and governments. On the other hand, the emergence of cryptocurrencies and tokenomics drastically changed the world’s view of financial systems.
In this case, tokenomics emerged as a viable option for implementing monetary policy on blockchain networks. The word is unmistakably new, and it has recently made significant progress in challenging traditional economic standards centered on cryptocurrency.
What is Tokenomics?
The study of the economic structures and rules that regulate the exchange, production, and distribution of tokenized products and services is known as tokenomics (also known as token economics or crypto-economics). Blockchain technology has become the driving force of innovation on the internet.
As a result of these advancements, economic transactions based on tokens that do not require centralized intermediaries such as banks or large corporations have become more portable. These commercial systems differ from traditional industrial economies in that they are decentralized, scale with little capital, and offer high transaction security.
Economists use official money supply data to measure currency issues in a typical economy. M1, M2, and, depending on the country, M3 or M4 are the typical names for the numbers they report. The four M categories are not discussed in depth in this tokenomics analysis; only know that M1 is a measurement of the most liquid funds, M2 is less liquid, and so on. These figures aid in the transparency and monitoring of several aspects of a currency’s supply.
What is a Token?
Tokenomics defines crypto tokens (or simply tokens) as units of value established by blockchain-based projects on top of an existing blockchain. Crypto tokens are similar to cryptocurrencies in that they can be traded and have value, but they are a different form of digital asset. Tokens are value units issued by an organization in general, but they are built specifically on top of an existing blockchain in the context of tokenomics. Tokens have been rebranded with the arrival of blockchain, but tokens have always existed. Concert tickets, parking tokens, and driver’s licenses are all examples of tokens that show value yet are limited in scope.
How do Tokenomics play out?
It’s critical to learn more about tokens in order to have a better understanding of tokenomics and how it works. Tokens are simply units that serve a certain purpose while retaining value based on a variety of factors. Tokens are valuable assets that can be used for reasons other than monetary exchange.
The tokenomics paradigm is primarily reliant on cryptocurrencies as tokens. Tokens could be used in a network for a variety of uses other than trading assets. The concept of tokens with cryptocurrency received a huge boost with the introduction of Ethereum.
Factors comprising Tokenomics
- Allocation and Distribution
The majority of crypto coins are either premined or released through a fair launch. A fair launch, according to Finextra, is when the entire community mines, earns, owns, and governs a cryptocurrency. Before the coin is public, there is no early access or secret allocations. This is why it’s called a fair launch: everyone has the same opportunity to participate.
Premining, on the other hand, occurs when a large number of crypto tokens are created and distributed among insiders — usually project developers, other team members, and early investors — before the coin is released to the general public.
Premined tokens are common in today’s crypto projects, thus this isn’t always a sign that only insiders would profit. To avoid a “pump and dump” scenario, investors interested in a new, premined token can check the token’s holdings across various exchanges to see if there is a wider distribution, reducing the risk that a single investor or a small group will flood the market with the token, causing the price to plummet.
In general, the more broadly spread a token or project is, the more legitimate it is, and the more probable it is that the project’s original investors and developers will seek greater participation.
Supply is crucial in any asset since it determines the price. There are three categories of supply in tokenomics: circulating supply, total supply, and maximum supply.
The quantity of tokens that have been created and are owned by investors is known as the circulating supply of a token. The total supply refers to the total amount of tokens in circulation, which is frequently greater than the circulating supply. Finally, the maximum supply refers to the total number of tokens that can be generated or mined at any given time.
The law of supply and demand dictates that the more tokens distributed by a developer team, the lower the price will be.
- Market Capitalization
The market capitalization of a token is the total amount invested in the crypto project so far, similar to the market value of a stock. The fully diluted market cap, which is the possible market cap if the token’s maximum supply were already in circulation, is another essential indicator. This provides investors with a rough estimate of the token’s entire value.
The greater the market capitalization of a token and the lesser its circulating quantity, the more valuable it may become in the future.
Inflationary and deflationary token models are the two most common types. The token model, like supply, shows an investor how much supply there might be now and in the future. An inflationary token is similar to fiat currency like the dollar or euro in that it has no maximum supply and can be issued indefinitely. Inflation usually happens when governments raise the money supply.
A deflationary token model, on the other hand, is one in which the token supply is limited, such as Bitcoin, which has a limit of 21 million coins. In order to reward the validators and delegators in the network, most proof-of-stake coins, such as Ethereum, are inflationary.
Why is Tokenomics important when investing in Crypto?
When it comes to crypto tokenomics, there are several variables to consider. The ability to comprehend how the digital currency will be used is perhaps the most crucial. Is there a clear link between the asset and the platform or service that’s being built? If there is, there is a good likelihood that a developing service will necessitate purchases and usage, resulting in a price increase. What may the token be used for if there isn’t one?
Tokenomics in determining Crypto currency Value.
Tokenomics can help you figure out how much an asset will be worth in the future. Many newcomers to cryptocurrency may believe things like, “If this coin becomes as valuable as Bitcoin, then one day…”, but in reality, this may never be achievable. Consider the two cryptocurrencies Bitcoin Cash and Tron, which were stated earlier. Because Bitcoin Cash and Bitcoin have the same total supply, the idea that one could become as valuable as the other in the future seems plausible. However, with over 100 billion Tron in circulation, for one coin to be worth thousands of dollars, Tron would have to become the most valuable company in the world’s history – how feasible is that?
While the answers to these questions may appear difficult, they will provide an additional perspective on crypto assets and aid in determining whether one asset is more likely to have a bright future than another.