If you’ve been following the world of cryptocurrency, you’ve undoubtedly heard the term tokenomics thrown around quite a bit in discussions about different projects. In essence, tokenomics is the study of tokens—i.e., tokens as an economic entity—and how they relate to the project that issues them as part of its operational model or business plan. But what is tokenomics, and what does that really mean?
Tokenomics is one of the most exciting new approaches to investing that has come about thanks to blockchain technology. What used to be a slow and tedious process with limited potential returns is now a highly efficient process with seemingly limitless returns.
It’s not just great news for investors, but it’s also great news for entrepreneurs and tech companies alike because it means brand new opportunities are opening up to them.
Tokenomics explained to a Layman.
A token is a unit of cryptocurrency that acts as an asset and not as a currency. In other words, if you’re holding one (or more) of these tokens, you aren’t holding a dollar bill or some kind of paper ticket to your next movie. Instead, you’re holding something that represents something else—for example, gold in Fort Knox or U.S. dollars in a bank account—but isn’t itself an actual physical good or paper-based currency. Because these assets are electronic and not tangible (they exist only on computers).
You might be wondering what that has to do with cryptocurrency. The answer is a lot. Tokenomics, for those unfamiliar with that term, refers to how a cryptocurrency token works as an asset versus how it works as a currency (itself).
In other words, how does one go about buying or selling these tokens so they can gain value over time? What kind of market manipulation exists surrounding them? And what factors determine their value in relation to other things (like fiat currency)?
How do Tokenomics work? Let’s tear it down.
It’s a simple concept. Tokenomics is the science of finding and investing in the best tokens in the right place at the right time. Tokens are digital assets, like stocks or currencies, that can be traded on an exchange just like any other asset. They are created by blockchain-based companies (or sometimes by individuals) and represent a share of their company’s revenue or profit.
When you buy tokens, you’re buying a share of revenue or profit that will be generated in the future. The question then becomes: what is the best token to invest in? This is where tokenomics comes into play because it helps you choose which tokens will generate the most value over time.
The first thing you have to do is understand where the supply and demand for a token lie. That involves looking at the company behind it and its potential growth over time (both in terms of revenue and in terms of adoption).
In short, a token’s value is dependent on its utility. If a token can only be used for purchasing physical goods in an online store, there’s little reason to buy that token since you can purchase items directly with USD/EUR/etc.
Tokenomics models – A basic understanding
Tokenomics is a model that tries to predict the value of a token-based on four variables:
Supply refers to the total number of coins in existence at any given moment.
Demand is how many people are buying those coins at any given moment.
Price/value and Technology
The price/value and technology variables refer to how much value each token should generate in the long run compared with other similar tokens (or “comps”) on the market. This is where it gets interesting because this is precisely where tokenomics comes into play and helps you choose which tokens will generate the most value over time.
Let’s have a look at a Tokenomics example:
Let’s say there are 5 ICOs out there, and their total supply is 1 billion tokens each. If demand for these 5 tokens comes from everyday investors, their combined value would be $5 billion (5 x $1 billion).
However, if all 5 companies were tech startups with no information about their business plans or products yet, you’d have to consider more factors such as Technology, competition, and demand. The whole point of tokenomics is to consider all these factors and then use them to predict which tokens will generate the most value in the long run.
Here is an Example of How Tokenomics can be a wonder for you
Okay, So Let’s say you are trying to decide between buying the current crypto-champion, Bitcoin (BTC), and buying a smaller market-cap token, Revenue Coin (RVC).
Let us simplify the numbers for this example for you.
Bitcoin tokenomics has a growing supply due to the miners, yet there is a hard-cap at 21 million Bitcoin. There is a big demand for it, with a market cap of 800B USD. If all the Bitcoin was on the market, that would mean the current price is about 40k USD.
Revenue Coin has a total supply of 2B RVC tokens. The demand is growing, but low compared to BTC (You know the time difference), with a market cap of 10M USD, making the price of the token 0.005 USD.
The model of the RVC token is to be deflationary, which means the supply will be going down constantly. If the supply halves and the market cap stays the same, that means the price per token will have doubled.
Bitcoin has a proven network effect making it very powerful, but growing the market cap even 50M wouldn’t do much for the price, while the price of RVC would be 6x from the current point with 50M in growth market cap.
Yet, this also means that if 5M USD is sold, you would hardly notice that in the price of BTC, while the RVC investment dropped 50%.
Bitcoin is often used for speculation, while because of the model of RVC funding companies, almost all investors are in it for the long term. On the other hand, also a big percentage of BTC holders are long-term holders, so both would be considered long-term investments.
Here is a table to simplify things for you.
|Market cap USD||10.000.000||800.000.000.000|
|Network effect||To be determined||High|
|Speculation factor||Small / medium||Medium|
By analyzing variables like this, you can make a decision that best fits your investing strategy.
Deflationary Tokenomics Models
Deflationary tokenomics works by creating a fixed supply of coins. Eventually, over time, more tokens are going to be removed from the market, which will decrease the supply, causing its value to increase.
The opposite can be said for inflationary tokenomics: Here, new coins are periodically printed over time at different rates per project.
A project built on an inflationary model may see rapid growth initially, but in theory, its value should stabilize as its supply increases to meet demand.
Basic deflationary model
Under a deflationary currency model, as more coins are removed from circulation, their value increases due to supply-and-demand economics.
Burn on transaction
This is accomplished through a protocol that for example applies a tax on transactions and makes it equitable by distributing part of it to those who validate transactions on the network, while burning (destroying) the other part.
Buyback and burn
This protocol is to buy back or acquire a certain percentage of tokens from investors and then destroy them (also known as burning). If done on a large enough scale, buybacks positively affect token prices because fewer tokens exist within the marketplace.
Net deflationary model
A net deflationary model is one in which new tokens are issued over time as a reward for validating transactions. The percentage of total tokens in circulation decreases steadily until a fixed upper limit to its supply is reached—at which point inflation ceases. Tokens cease to be created once that cap has been reached, and no further mining or minting of new coins will occur. Many projects use net-deflationary models (also known as mineable), while others rely on full (100%) inflationary models.
Types of Tokens in Tokenomics
There are various types of tokens out there in the crypto world. They range from utility tokens to security tokens. However, not all of them are created equal. Some have specific characteristics over others that make their impact on a blockchain project stronger than others.
One type of tokenized currency is a tokenomic unit or what some may call an STO (security token offering). Security tokens are tokens that represent ownership of a real-world asset. This is essentially a special kind of token that operates between a cryptocurrency and asset-backed security.
It’s essentially secured debt that gives lenders capital if certain predetermined conditions are met. The most notable advantage of using STOs over other types of coins is that they offer more stability over other types, such as those based on speculation.
Security tokens examples
The most common type of security tokens are equity in the form of stock or debt, but other types of securities can be issued as security tokens.
This is a token representing ownership in a company.
This is a token representing the debt owed to the issuer. Debt tokens could be used to pay dividends or interest.
One of two types of tokens. Utility tokens are not designed as investments; they give holders access to a company’s product or service. These tokens must be used to interact with a protocol—for example, by paying miners for hashing power or staking to create a block.
In other words, you can use either as fuel for powering applications on Ethereum’s blockchain. They aren’t intended as speculative investments in themselves (although they have many attributes that make them attractive investments).
Utility Token Examples
For instance, a company called Civic sold its own digital tokens to investors as part of an Initial Coin Offering (ICO). Investors were buying Civic coins to allow them to use its identity verification software.
Companies that do an ICO typically retain ownership of the digital tokens to sell their services for those tokens. Instead of paying with dollars or some other fiat currency, companies can accept payments in crypto-tokens.
Why is tokenomics beneficial?
The benefits of tokenomics are manifold and include both financial and non-financial rewards. Investors who get involved in tokenomics will receive a piece of the pie and a share in the profits from any future growth potential that their chosen tokens have.
Once you invest in a token, you can be rest assured knowing that you’re going to make money and help drive up its value – just like Warren Buffet did with Apple stock or George Soros did with Facebook stock.
Bright Future of Tokenomics
One of the most exciting things about tokenomics is its potential to help us solve problems that have yet to be identified. While the past has shown us how financial systems can fail with devastating effects on society, tokenomics also involves understanding how a crypto token can help future challenges. The current state of the world—the looming climate crisis, conflict over dwindling resources, ideological division between cultures—has many in positions of power asking what comes next.
What if a crypto token could be created to enable us to share these resources more effectively? What if we could create a global identity for every person on earth. We can assign rights, entitlements, and properties that are guaranteed universally—and done so in an utterly immutable way so nobody can tamper with them or steal them.
At the end of this article you learned different dynamics and types of tokenomics, how it works and practical examples. Tokenomics has been a game-changer in the blockchain space, and it’s not slowing down anytime soon. It’s a new way of investing, building wealth, and it can be applied to any industry.
In the future, we will see this technology being used in unimaginable ways. The future is bright, and so are the opportunities.
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