It is advised that you conduct a cryptocurrency analysis before investing in it in order to limit the risk of your investment. Such an examination necessitates a close examination of the cryptocurrency’s primary characteristics. Investors can, however, invest not just in cryptocurrency coins, but also in tokens. These tokens are also valuable. Tokenomics is when you undertake an analysis to determine whether or not you should invest in a token.
Tokenomics combines the words “token” with “economics,” and it refers to the study of why a token has worth and why it has achieved the price that it has. Tokenomics presents an answer to the economizing difficulties of tokens and their usefulness in blockchain technology by looking at numerous aspects that shape the world of cryptocurrency.
What is a Token?
Tokens are multipurpose financial units that may be exchanged for other goods or used to pay for a football game. They are also present in cryptocurrencies, such as Ethereum, which was the first blockchain platform to provide decentralized services other than transactions. These decentralized services, known as ERC-20 tokens, require tokens in the same way that transactions require money to be completed. With the development of Ethereum, the notion of tokens in cryptocurrencies grew.
Tokens are categorized into two types: Layer 1 and Layer 2. Layer 1 tokens are native to a blockchain and can fuel all services within it, like Ether (ETH) on the Ethereum network and BNB in the Binance chain. Layer 2 tokens are used for decentralized applications within a network, like OMG tokens for OmiseGO on the Ethereum network. There are also security and utility tokens based on their usage.
Security tokens are investment contracts that demand a financial investment, profitability, and common business, and are generated by the computing work of others. They pass the Howey Test, so becoming security tokens. Siafunds (SF) on the Sia network is one example. Utility tokens provide network funding and are often allocated through initial coin offers (ICOs) to support project development. Basic Attention Token (BAT), for example, was first issued through an ICO and is currently used in decentralized advertising on the Ethereum network’s Brave browser. Tokens can be fungible or non-fungible, with fungible tokens having the same value and replicating, allowing ETH to be replaced with another token.
Non-fungible tokens (NFTs) on the other hand, do not have the same value because each NFT is unique. NFTs are often tokenized assets like as photographs, artworks, antiques, and real estate, among others. Because NFTs are one-of-a-kind, they cannot be duplicated. This can raise their worth over that of fungible tokens.
Coins vs. Tokens
So, in the realm of cryptocurrencies, what are the similarities and differences between coins and tokens?
Similarities
- Decentralized
Coins and tokens are both decentralized under blockchain technology. This means that employing tokens or coins in cryptocurrencies eliminates the need for third parties or central bodies to regulate these services.
- Value
Tokens and coins both have potential worth. Coins and tokens may have different pricing variables, but they may both be bought or sold for the necessary amount.
Differences
- Independence
With an independent blockchain, coins may be utilized. The benefit that coins have comes from their operability.
- Change in value
The price of a coin is influenced by several outside influences. The fluctuation in the value of the cryptocurrency on which a token is based, however, has a significant impact on how much a token’s value changes.
- Purpose
As their name implies, coins are made to serve as a symbol of worth in money. On the other hand, tokens might be produced with the intention of powering additional blockchain services.
What Exactly Is Tokenomics?
Tokenomics is the study of tokens, including how they function, what purpose(s) they serve, and what considerations should be considered before investing in cryptocurrencies. This is how it got its name.
Tokenomics, in general, refers to everything that can impact the value of a token, including the token itself.
Which Tokenomics Factors Should You Consider Before Investing?
There are several elements that might influence the price of a token or cryptocurrency. However, some of these characteristics are critical to consider if you wish to invest.
Total Supply and Market Cap
When evaluating a cryptocurrency, it is critical to consider the total quantity of coins. Typically, cryptocurrencies with a restricted total supply may increase in value in the future. This occurs because scarcity generates a market shortage. In order to achieve equilibrium, a price rise is required.
On the other hand, if supply is unrestricted, future prices may not rise as much as they would if supply was constrained.
The supply of a cryptocurrency is highly correlated with its market capitalisation. The market cap is calculated by multiplying the entire circulating supply by the current price of one token. The completely diluted market cap is a fictitious estimate of a cryptocurrency’s market capitalisation if its whole supply is in circulation.
Even if one cryptocurrency has a greater supply than another, this does not always imply that the market supply is larger. The same may be said of bitcoin prices. A higher price does not always imply that a cryptocurrency’s market cap is greater than that of others.
Before you invest, you should think about the market cap. A smaller market valuation may indicate that the cryptocurrency has more room to expand. This is true for small-cap cryptocurrencies (those having a market valuation of less than $1 billion). Large-cap cryptocurrencies (market caps more than $10 billion) may be a safer bet, but their growth potential is often lower.
Allocation and Distribution
Prior to the introduction of a cryptocurrency, tokens can be allocated via fair launch or premining.
A fair launch is the systematic distribution of a cryptocurrency once it has been issued. Tokens are distributed through mining, and the quantity of mining is often determined by the processing capacity of the blockchain’s nodes.
The allotment of a cryptocurrency prior to its introduction, on the other hand, is known as premining. This is accomplished through an ICO, which secures funds for the cryptocurrency’s development.
These two theories have a significant influence on token distribution.
When a cryptocurrency is released fairly, the distribution is more concentrated on nodes with better computing powers, so they can mine more tokens. It is said to be “fair” since those who spend more in mining are paid more than those who invest less.
If a cryptocurrency is premined, the tokens offered during an ICO are often sold to institutional investors and the coin’s development team, rather than regular investors. As a result, when institutional investors possess a bigger percentage of the entire supply, token distribution is unbalanced. As a result, by selling the tokens all at once, such investors can substantially influence the price of a cryptocurrency.
Vesting and Inflation
When a cryptocurrency is premined, its operators have the option of locking up the available supply and releasing tokens gradually over time. This gives small-scale investors peace of mind that institutional investors won’t suddenly acquire all of their tokens and disrupt the market’s equilibrium. Token distribution should be done in a rational manner, which means that little quantities should be distributed over time.
After a large number of tokens are released all at once, there is a shift in the value of the existing tokens known as inflation. There would be a surplus if there were a large quantity of tokens. Additionally, anytime there is a surplus, prices drop. Contrarily, deflation is the reverse of inflation, which occurs when there is a risk that the amount of tokens in circulation may decrease, leading to an increase in their price.
Staking and Utility
Staking is the process of locking tokens for a predetermined amount of time (depending on the cryptocurrency) in exchange for a network reward or passive revenue. The drawback of staking is that tokens staked during a period cannot be transferred until the end of that time. The supply will be more constrained during the staking phase if more tokens are staked. The price of a coin may be impacted by this. Some cryptocurrencies don’t require any staking at all or have staking requirements that are far lower. Due to the easiness with which individuals may buy or sell tokens, significant price spikes or decreases may not take place.
The use of the tokens is referred to as utility. To put it simply, a token’s usefulness is what encourages individuals to purchase additional tokens, which raises the price of a cryptocurrency.
Everything involving a token in cryptocurrency is referred to as tokenomics. Before making a cryptocurrency investment, it is important to thoroughly consider each Tokenomics component.
Although it is still a young subject of research, tokenomics has the potential to grow into one of the most important economic subfields.
Tokenomics FAQs
What exchange should I list on: DEX or CEX?
– Both have advantages and disadvantages, and a separate article would be necessary to cover them all. To determine what is ideal for your specific situation, speak with your tokenomics adviser, but as a general guideline, consider “What are the users of my projects most likely to be comfortable with?”
Do I need a market maker?
– It is advised to have one if you are listed on a CEX. There are other choices if you are on a DEX, such as a public Liquidity Provider program.
Also keep in mind that different Market Makers may not all be appropriate for your situation due to their varied attitudes and tactics for delivering liquidity.
How do you calculate a token’s worth?
– We do not currently have a very strong framework for analyzing cryptocurrencies because they have only been around for a relatively little time. As a good substitute for value, there are a number of experimental ones as well as a number that are leftovers from conventional financial modeling. These contain:
- Network value to transactions
- Financial multiples
- Discounted cashflow analysis
- Quantity theory of money
- Benchmark projects
- Full economy simulations
