What is Tokenomics? – Guide on Crypto & Tokens

If you’re familiar with the world of cryptocurrency, you may have heard the term tokenomics the broad term in the world of crypto and tokens.

You may even know what it means, but if not, you’re not alone. Tokenomics is the study of the factors that impact the demand and supply of tokens, or cryptocurrencies.

It has to do with all the ways crypto tokens are made and distributed, as well as what’s done with them once they’re out in the world.

What is Tokenomics?

The economics of crypto tokens can be difficult to understand, given that there are a number of supply and demand factors involved.

There are four main parts to tokenomics, including quality, distribution, production, and impact.

Each part of tokenomics impacts how valuable or viable a token will be over time. A high-quality token should have many benefits for holders.

A widely distributed token ensures it’s accessible for anyone who wants to get in on what it has to offer.

Production refers to its ability to generate new blocks and rewards through mining, and an impact factor simply refers to its place in any markets it seeks to disrupt.

Economics of Crypto Tokens

In economics, we have supply and demand theory. According to Wikipedia, the law of demand states that ceteris paribus, as the price of a good increase, consumers will buy less of it. (ceteris paribus meaning other things remain equal).

This is considered an economic law because it doesn’t always apply to every situation.

We can use it as a model for tokenomics because crypto tokens are consumer goods and their value will depend on supply and demand factors.

When talking about tokenomics we must also talk about the distribution of cryptos and quality.

Tokens can be distributed in different ways but these distribution methods impact their price in different ways.

For example, Bitcoin prices are significantly higher than Ether prices due to more direct distribution methods used by Bitcoin such as mining.

When comparing cryptocurrencies based on the quality you have to examine various factors such as governance and community participation which affect if people believe a cryptocurrency has room for growth or not.

Related Article: What is an Alt Coin? -Beginner Guide for Alt-Coins

Basic Principles in Tokens & Cryptocurrency

Demand, Supply, and Growth are the crucial factor in any Cryptocurrency and all the principles of crypto depend on these 3 factors.

The demand for a cryptocurrency depends on its usability as a currency or as an asset.

A cryptocurrency with lesser supply but higher demand would attract higher prices while less supply with lower demand will result in a lesser price.

An increase in demand for a coin results in an increased price while decreased demand causes prices to fall and A reduction in price leads to an expansion in demand and vice versa.

Demand and Supply of Tokenomics

The supply part of tokenomics involves creating or mining tokens. If there are no limits on how many can be created, then it could cause a high supply and drive down prices for token owners.

The opposite holds true if there is a limited supply of tokens; like gold and silver, demand will increase accordingly.

Cryptocurrencies are no different, except that they use decentralized software to mint new coins that are shared by all holders of cryptocurrency in their network like Bitcoin’s block reward.

Demand-Supply Curve of Tokenomics

Source: medium

The demand-supply curve illustrates how much of a good or service consumers are willing to buy at any given price.

As price decreases, consumers become willing to purchase more and more of that product until a point where they’re willing to buy it no matter what its price.

This determines a good’s equilibrium point, where supply meets demand.

On a demand-supply curve, price represents quantity demanded and quantity represents a price.

Factors Affecting Demand and Supply of Tokenomics

For a Crypto Token to be successful, it needs to have demand and supply, The factors that can affect a crypto token’s demand and supply are as follows

There are certain circumstances under which either demand or supply of tokenized currency goes up or down.

For example, if there is an increase in volume for online retail business, then more cryptocurrencies would be required.

If people buy gold in high volume then its price will increase; similarly when people sell more cryptocurrency for USD then the price of the cryptocurrency will fall down.

In addition to these macro-level causes, we can also look at micro-economic reasons like users creating wealth by mining new tokens may decrease token prices.

When someone holds a large number of tokens and wants his return on investment he might need to sell them at lower prices than others who don’t have so many tokens but still want their own share from investments.

Impact on Market Value of Tokenization of Assets

There are three main factors that impact how well an asset will be able to tokenized.

1. There’s whether or not you can tokenize it at all and whether or not you’ll have buyers on the other side of your transaction.

2. There’s demand for your tokens, in both liquidity and the number of buyers.

3. There’s supply in other words, how many tokens you plan to sell out of a given population.

Good tokenization increases your potential customer base by providing more ways for potential investors to purchase tokens, it also improves liquidity since you can move assets into and out of crypto easily.

You should always aim high when considering your market caps: there are far more buyers than sellers right now, so try to guess what portion of that group might invest in your projects.

If you overestimate, great All else being equal, though, smaller populations tend to offer higher ROIs because they allow less price volatility.

Advantages of Tokenomics

The concept of tokenomics can be a very important component in the success of any startup.

The idea of tokenomics is mainly used for raising funds for a certain project via ICOs.

It helps to provide some benefits to both investors and contributors by creating an incentive mechanism.

To get more from your contribution, you need to support your preferred ICO and make efforts in helping it succeed.

This can also help in gaining the trust of people as they will see that there are definite perks or bonuses to earn or gain through their participation.

This will encourage them to participate and contribute more effectively. At times, these tokens may be exchanged for some other product related to cryptocurrencies in the future.

Disadvantages of Tokenomics

With tokenomics, it is possible for a single entity to exert control over a particular crypto asset.

This may be detrimental to its value. For example, in case an ICO (Initial Coin Offering) token has been sold at a discount, there is always a chance that it could be dumped on exchanges to take advantage of such deals.

Another disadvantage of tokenomics is that factors like bitcoin mining, proof-of-stake, and emission models can all affect cryptocurrency market valuations.

These are concepts that require expert understanding before they can be applied effectively.

However, many people do not have access to experts who could assist them with their investments.

As a result, these people are left exposed to losing their money if they invest without proper knowledge about how crypto assets operate under different conditions.

Losing money is something no one wants and hence it’s important for new investors to understand how tokenomics work so as not to get into trouble when investing in cryptocurrencies or tokens.

Related Article: Proof of Work and Proof of Stake: What is the Difference?

Applications of Tokenomics

As mentioned earlier, tokenomics deals with many aspects related to crypto tokens.

Security Tokens: A security token is defined as an asset whose value depends on an external tradable asset. They represent ownership rights such as shares in a company or shareholder’s debt and can be considered a financial instrument used in investment vehicles and crowdfunding activities.

Capped Coin Offerings: In capped coin offerings, only a finite number of coins will be issued upon completion of the fundraising period.

Conclusion

For a successful token launch, all of these criteria must be taken into account. First and foremost, your team has to bring value to your project by being experts in blockchain development, crypto-economics, smart contracts, and/or software development.

In addition to ensuring your expertise is demonstrated on paper and in person for potential investors during meetups or interviews, it’s also important to ensure you have an actual business plan.

Related Article: Smart Contract Security in Blockchain and DeFi

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