Money has a significant role to play in every individual’s life and every sector of business. From buying products for your daily necessities to paying medical bills, money profoundly influences every aspect of your life. On the other hand, industries use capital for business transactions that are crucial for their work. But even though money is such an influential component in every individual’s life, it has been liable to be controlled by central institutions such as banks and governments. This means that the government has a considerable part to play in your daily activities and income, whether you like it or not.
However, this has been changing in the past few years. The introduction of cryptocurrency, blockchain systems and tokenomics has entirely changed the world’s perception of financial systems. Tokenomics has materialized as the acceptable alternative for associating monetary policy to blockchain networks. The term sounds new and has recently made serious strides in shifting the traditional standards of economics based on cryptocurrency.
So it is not a shock if most of you are not familiar with what exactly tokenomics is and how it will affect you.
But fret not. We are here to help. All you have to do is read on.
What is Tokenomics?
Tokenomics (token economics or crypto-economics) refers to the study of the economic foundations and policies of the distribution and generation of goods and services that have been tokenized. Blockchain technology has become the pioneering force of invention on the internet. Such growth has mobilized economic transactions that rely on tokens and do not require centralized intermediaries like banks, big enterprises, or even the government. The nature of these commercial systems differs from traditional industrial economics. The characteristics are decentralized, requires minimum capital to scale, and offers substantial security of transactions.
So now you might ask what exactly this token is that we are rambling about? Well, tokens, in the general sense of the term, are units of value published by an organization, but in the context of tokenomics, it is more specifically built on top of an existing blockchain. Tokens have been rebranded with the advent of blockchain, but if you notice, tokens have always been around.
From concert tickets to gym membership cards and drivers, licenses are all examples of tokens representing value with a more specific use case than currency. This value may be in the form of access to a service, rights over an asset, ownership of an organization, etc. Tokens can fulfil different roles in any given native ecosystem by codifying all kinds of values. In our case, these tokens are cryptocurrencies.
Why Is Tokenomics Important In Cryptocurrency Investment?
In his book’ Margins of Safety’, Seth Klarman, an American investor and book author, said that “in the short-run supply and demand alone determine market prices.” If we go by this statement and believe that it also applies to crypto assets using blockchain technology and the stock market, then comprehending the factors that will impact supply or demand are crucial to speculators and investors.
In which case, there are several factors to be considered when looking at crypto tokenomics. Perhaps the most crucial is to understand how the digital currency will be used.
Is there an obvious link between usage of the platform or service being built and the asset?
If the answer is yes, then there is a strong chance that a growing service will require purchases and usage that eventually helps to boost the price.
If the answer is no, what can the token be used for?
Tokenomics comes to your aid in answering all these questions. It is also helpful as guidance to understand how much an asset might be worth in the future.
Factors that are Included in Cryptocurrency Tokenomics
To put it simply, any factor that even remotely concerns the value of a crypto token should be taken into consideration while looking into its tokenomics. Here are a few to help you get started
#1 The Allocation And Distribution
You need to be mindful of how a token is being distributed. Most crypto tokens are generated in two fundamental ways- they’re either pre-mined or released through a fair launch.
Let’s start by understanding fair launch.
A fair launch is a process when a cryptocurrency is mined, acquired, possessed, and regulated by the entire community. There’s no early access to the token or private allocations before making them public. In other words, there are no reservations in this type of distribution. Bitcoin, Dogecoin, and YFI are good representations of this. On the contrary, pre-mining is when a certain quantity of the crypto tokens are generated and distributed first among some exclusive addresses (usually project developers, other team members, and early investors) before they are made accessible to the public.
Most crypto projects these days come with pre-mined tokens, so you must not be sceptical of a project solely because some tokens were minted before it went live.
However, survey if there’s any wallet that keeps accumulating a substantial percentage of the circulating token supply since this implies that there’s a huge risk of the whale dumping their holding – which will result in dropping the price of the token in an instant.
#2 The Supply
Primarily, there are three types of supply you should check for when it comes to crypto. There’s the circulating supply, the total supply, and the max supply.
Starting with the circulating supply, it refers to the number of tokens that have been issued so far and are currently in circulation. The total token supply is the number of tokens that exist at present, excluding any that might have gotten burned.
And finally, the maximum supply of a token is the maximum number of tokens that can ever be generated. For some tokens, there’s no determining max supply.
#3 The Token Model
It would be good for you to make sure that you know if the token is inflationary or deflationary. An inflationary token (for instance, take fiat money) doesn’t have any maximum supply and will go on to be produced again and again as time goes on. A deflationary token model is the opposite of this, where there’s a maximum supply that the token is capped at, like for Bitcoin – it is 21 million. Most proof-of-stake tokens like ETH are inflationary.
This is done to reward the validators and delegators in the network. It is worth noting that some crypto tokens also have a dual token model (like MakerDAO’s MKR and DAI), where one token is utilized for funding within the ecosystem, and the other is a utility token.
Tokenomicks is an extremely important concept for you to understand if you are willing to invest in cryptocurrency. Crypto is a highly volatile market, and anything that gives a sense of direction in this market is of huge help, an attribute that tokenomics certainly fulfils.
To get started, you can use leading exchange platforms like WazirX and determine for yourself the value of the crypto you want to invest in.Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.