Tokenomics: What Is It? Importance of Tokenomics

Money has been used for ages as a means of payment. People have been using it to buy products and services, to perform transfers, and similar. Fiat money is controlled by governments and financial institutions. These bodies are responsible for fraud prevention and the compliance of financial operations with valid legislation.

With the arrival of cryptocurrency, the situation has changed. Cryptocurrency is decentralized. It is not controlled or regulated by any public or private institution. That’s why it is important to understand what to check when we want to invest in a specific coin or token. Here is when tokenomics comes into the game.

Tokenomics in Cryptocurrency

Tokenomics – the term is made from two words: token and economics. Tokenomics helps investors and users to determine what tokens are worth investing in. To understand tokenomics better, let us give some examples.

Fiat currency and its value

The most popular fiat currency is the US dollar. So, let us have a look at where it derives its value.

For more than 200 years, the USA currency was backed with gold. Every dollar could be redeemed for a specific amount of precious metal. In 1941, this system officially ended its existence. However, experts believe that in reality, it stopped working much earlier.

How is the US dollar backed now? It is difficult to explain because many factors impact the USD value. However, the US government insists that the currency is worth what it costs. So, it is one of the main currencies used to back other currencies. For example, the Japanese Yen derives some of its value from how many USD the financial institutions of the country hold.

Much of the dollar value derives from trade. That’s why it is important for the USA to keep dominance in trade, and similar.

A similar approach is valid for other fiat currencies, too. However, in the case of cryptocurrency, it doesn’t work.

Cryptocurrency and its value

The approach that applies to USD doesn’t work for cryptocurrencies. Crypto isn’t regulated or controlled by any government. Therefore, no government can order to mine more crypto or to forbid crypto.

Normally, cryptocurrency is not backed up by tangible assets. Even though there are some newer projects that issue backed tokens, the majority of crypto types are not backed by anything tangible. That’s why it is difficult to decide what crypto is the best for investment. To choose crypto to invest in, you’d have to perform thorough research. And here is when tokenomics can help you.

What Is Tokenomics for a Crypto Token?

Tokenomics can be defined as the economy of a token. It refers to those token qualities that make the token appealing to investors. Tokenomics includes many factors. Here, we will discuss just the main of them.

Factors Included in Tokenomics

Token allocation and distribution

Check how the token is generated:

It can be pre-mined – a specific number of tokens is mined and distributed to specific addresses. Those addresses can belong to developers, early investors, team members, or somebody who for one or another reason has access to pre-mined tokens). Only after that, tokens go public.
It can be released through a fair launch – it is when crypto is mined, earned, and owned by the entire community. There is no access to tokens before they go public. Bitcoin and Dogecoin are examples of crypto distributed in this way.

Now, many projects use pre-mined tokens or crypto coins. So, there is no major concern if some tokens were mined before they went public. But you shall be careful if there is a wallet holding the major part of the tokens. If this is the case, there is a risk that once the token price surges, that wallet’s owner sells all their tokens. It will cause the value to plunge, and you might lose a significant part of the invested funds.

Token supply

There are three supply types of a token:

The total supply – the number of existing tokens, excluding those that are burnt.
The circulating supply – the number of tokens that are in circulation.
The maximum supply – the number of tokens that can be generated. This value is not specified for some cryptocurrencies.

Here, everything depends on a cryptocurrency and the monetary policy it pursues. So, Bitcoin has a limited maximum supply. This coin is known as crypto–gold, and its scarcity is one of the reasons why it is valued. Bitcoin’s main role is a store of value.

On the other hand, Ethereum doesn’t have a maximum supply. But its policy and the services the Ethereum blockchain offers are completely different. Ether, a cryptocurrency that powers the Ethereum network, is used to pay fees. So, its main role is the medium of exchange, and the exponentially increasing number of Ethers helps to maintain a constantly growing Ethereum ecosystem.

Market capitalization

The market capitalization shows how many funds are invested in the project. The higher the market cap is and the lower the circulating supply is, the higher is the possibility that the token value will be growing.

The token model

Tokens can be inflationary and deflationary.

Inflationary tokens do not have the maximum supply. Over time, more tokens can be produced. Ether is the best example of an inflationary token. As many Ethers can be produced as it is needed for the network to comply with the requirements of its users.

Deflationary tokens are limited in supply. For example, the maximum supply of Bitcoin is 21,000,000. Bitcoin is used as money, that’s why its deflationary nature makes the coin price grow.

Tokenomics Importance

Now, you know why it is important to understand tokenomics if you want to invest profitably. Along with tokenomics, be ready to also research such details as a team behind the selected project, token use cases, and token utility. Then, you will be able to make a profitable investment.

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