Tokenomics: The Real Value of Cryptocurrency

Year 2020 witnessed manifold growth in Cryptocurrency, as a large number of new investors got introduced to cryptocurrency as a profitable alternative investment during the year.?Now in 2021, as new DeFi projects keep arriving within the crypto sector every day, it might be difficult for a new investor in the crypto space to discern which? cryptocurrency to invest in.

Well, a crypto’s tokenomics can give investor a pretty good idea of whether one should consider investing in it or not.

A crypto token is essentially a crypto coin based on a blockchain platform that can be exchanged with another blockchain, and that provides many incentives to the holders of said token.?

Tokenomics refers to all the qualities of a crypto token that makes it appealing to investors. The tokenomics for a particular crypto token is usually thoroughly discussed in the project whitepaper, and it should help the investor to grasp the functionality, objective, allocation policy, and more of the crypto token.????

Factors included in Crypto Tokenomics :

To put it simply, any factor that even remotely concerns the value of a crypto token should be taken into account when considering its tokenomics. Notably, most of the factors that make up a crypto’s tokenomics are usually found in websites like CoinMarketCap and CoinGecko, but still investor should verify with the project white-paper to be sure of their precision.??

1. The Allocation and Distribution of Tokens:?

There are two basic ways most crypto tokens are generated- they’re either pre-mined or released through a fair launch.

• A fair launch is when a cryptocurrency is mined, earned, owned, and governed by the entire community. There’s no early access to the token or private allocations before making them public. Bitcoin, Dogecoin, and YFI are good examples of this.
• On the contrary, pre-mining is when a number of the crypto tokens are generated and distributed among some exclusive addresses (usually project developers, other team members, and early investors) before going public.?
• Most crypto projects these days come with pre-mined tokens, so one must not be wary of a project simply because some tokens were minted before it went live. However, check if there’s any wallet that keeps hoarding a significant percentage of the circulating token supply, since this means there’s a huge risk of the whale dumping their holding and dropping the price of the token in an instant.?
• On the other hand, if the project is distributing their tokens to as many participants as possible, you can assume the project is a legitimate one, and genuinely cares about further development.

2. The Supply of the Token:

A primary component of a crypto’s tokenomics is the supply of it. Now, there are three types of supply you should check for when it comes to crypto. There’s the circulating supply, the total supply, and the max supply.?

• The circulating supply of a token is the number of tokens that have been issued so far and are currently in circulation.
• The total token supply is the number of tokens that exist at present, excluding any that might have gotten burned.
• And finally, the max supply of a token is the maximum number of tokens that can ever be generated. For some tokens, there’s no determined max supply.?

If you notice the circulating supply of a particular token has been regularly increased by the project developers over time, you can assume that the value of the token will be going up in the future. On the other hand, if there’s too many tokens being released at once or too frequently, the value of the token might go down.

3. Market Capitalization:

The market capitalization of a token shows the entire amount of funds that have been?invested in the crypto ?project so far. Along with market cap, one can also check the fully diluted market cap of a project, which is the theoretical market cap if the max supply of the token was already in circulation. This would give a good idea of how one should value a token.?

The higher a token’s market cap and lower its circulating supply, the more valuable it could be in the future.

4. The Token Model:?

One should know if the token is inflationary or deflationary.

• An inflationary token (like fiat money) doesn’t have a max supply and will continue to be produced as time goes on.
• A deflationary token model is simply the opposite, where there’s a max supply the token is capped at, like Bitcoin’s 21 million.?Most proof-of-stake?tokens like ETH are inflationary so as to reward the validators and delegators in the network.

It’s notable that some crypto tokens also have a dual token model (like MakerDAO’s MKR and DAI) where one token is used for funding within the ecosystem and the other is a utility token.?

Tokenomics is an incredibly important concept for the investor to understand when he is trying to decide which crypto to invest in, since the factors included will definitely affect your investment. But do keep in mind that one should also seek answers to some other questions while trying to value a crypto.

For instance, investor should look for details regarding the project’s team and the team members’ backgrounds (look for them on social media), the token’s historical performance, its use cases, and if possible, data gained from technical analysis.?

( Excerpts from various research reports and articles on Tokenomics )