Are you planning to buy a new crypto token? Stop! and read this before – Tokenomics Explained.
Introduction:
planning to invest your money in a new token, it’s important to become familiar with the term ‘tokenomics’.
The world of cryptocurrency is broader, and with every passing day, it’s becoming more and more diverse. More than 100 million entrepreneurs and business personnel are into a crypto investment, but many fail to make a successful investment. Why?
The reason is mainly the lack of tokenomics knowledge and poor project analysis. This article will cover everything you need to know about tokenomics in detail so you can make informed decisions.
A Deep Look into Tokenomics:
Tokenomics is all about dealing with the economics of crypto tokens, their value, supply, distribution, and other features. The term is a combination of two words, “token” and “economics”, used for cryptocurrency analysis and to define its characteristics.
You might be familiar with the fact that cryptocurrency is a digital currency with the difference in its use case and availability. To run this digital system of decentralization, experts have developed a system with the name tokenomics that holds the main principles of this digital currency. Enlisted below are some characteristics that are examined under the tokenomics:
- The issuance of crypto tokens.
- Attributes of crypto tokens.
- Distribution of crypto tokens.
- Supply of tokens.
- The demand for crypto tokens.
In a nutshell, you can examine the value and exchange rate of the crypto tokens with the knowledge of tokenomics. For instance, you can get an idea of the history, total revenue, raising value, market price, mining power, and other token details in an instant.
The Role of Tokenomics in the Crypto World:
Cryptocurrency projects are decentralized means the chain and supply are under the supervision of blockchain technology.
This way, you can get a clear idea of which crypto token is performing well in the industry and which is not. However, here are some factors that affect and widely influence tokenomics in certain aspects.
1. Supply of the Token
When determining a coin’s value and distribution, it is important to deeply analyze its supply. This is because a token’s supply and demand highly influence its market value and size. In the world of crypto tokens, there are generally two kinds of supply used in the market:
- Maximum Supply – In crypto, maximum supply means the maximum number of tokens created and available for circulation. This alternatively means no more tokens will be available for exchange after the maximum supply limit is reached.
- Circulating Supply – Unlike maximum supply, circulating supply means the number of tokens in circulation. This indicates the number of tokens that are currently available for trade. Here are some examples of tokens with their maximum supply:
2. Use Case of the Token
The second important factor that affects tokenomics is the utility or simply the use case of the crypto token. Take BNB as an example. You can use it to pay transaction fees, on international platforms, or trade fee discounts. Along with these platforms, you can use BNB tokens to purchase different products online.
3. Mining and Staking
To validate transactions, tokens such as Bitcoin and Ethereum are released to incentivize miners. In general, you can call it a POW (Proof of Work) process that uses the miner’s power to add new blocks to the blockchain. On the other hand, when you’re staking the token, you get rewards depending on the number of coins in your portfolio.
4. Token Burn
Token burn is simply removing the coins from the crypto supply. This is done when the circulation supply reduces so the price can be settled. For instance, Binance burns its native token BNB quarterly. Similarly, Ethereum burned its tokens last year to increase their prices.
5. Token Distribution
Like demand and supply, token distribution also plays a vital role in determining the coin’s value. Large companies and investors deeply analyze the token distribution and then trade it accordingly. If a token has a fair launch before distributing to the public, it shows how the token will be distributed in the market.
Depending on the type of distribution, you can estimate the risk factors and success rate of the token in your portfolio. Hence, it helps provide a clear idea about the coin’s price and stake value.
Token distribution usually happens during Initial Coin Offering (ICO), where tokens are sold to investors in exchange for funding. For example, a certain number of coins are allocated for public sale, and the rest of them are distributed among stakeholders, teams, fundraising, and rewards. It depends on the founders how they would like to distribute the tokens.
What are Good Tokenomics?
At this point, you are familiar with the fact that the use of tokenomics is essential for understanding the token value However, there are some different terms used under the category of tokenomics: good tokenomics and other tokenomics. The difference between the two lies in the following things:
1. Vesting Period and Token Allocation
When launching a new token, the founders allocate a specific number of coins to stakeholders, but these aren’t released immediately. It is common to keep a vesting period to establish the credibility of the project in the market.
Vesting means ownership, and the vesting period is the time during which tokens invested by venture capitalists and developers are locked to avoid fraudulent schemes.
Before investing in any crypto tokens, you should know about their vesting period. A token with a high vesting period will have a long success rate in the future. Similarly, a token with a low vesting period will suffer in terms of progress and growth rate in the industry.
2. Sustainability
Good tokenomics are stable and have a sustainable rate in the market. Compared to bad tokenomics, they have a high demand and supply and thus perform better in terms of circulation. However, a higher supply than usual can negatively impact a crypto token’s overall performance.
3. ROI
In Finance, ROI stands for Return On Investment, and the same applies in the crypto world. If the investors can get a good ROI by holding their tokens for a long period of time, it will be considered good tokenomics. Without any inherent ROI, people will get no benefit from holding it, which will not make it a good investment.
4. Price Evaluation
Undoubtedly, investing in cryptocurrency and digital tokens is a big threat. Therefore, it is wise to keep yourself up to date with the latest price values of every token. The prices keep on fluctuating.
Besides these major factors, good tokenomics have the following properties:
- It has diverse usability in blockchain technology.
- It provides value to the product and service.
- It has a safe and scalable ecosystem for its holders.
- Among exchange platforms, it has high liquidity.
Hence, considering these factors, you can evaluate which ones are good tokenomics and which are not.
Final Verdict
The list of crypto tokens is wide, and you cannot deny the usability of digital tokens in these modern days of technology. Therefore, having a deep knowledge of tokenomics is highly beneficial when choosing the best crypto token to start your investment journey.
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