What Is Tokenomics?
Tokenomics dictate the supply and demand characteristics of a cryptocurrency.
But before diving into tokenomics, let’s take a look at what a token means.
What Is a Token?
A token is a digital unit of a cryptocurrency that is either used as a specific asset, or represents a particular use on the blockchain. Tokens can have multiple use cases, but the most common ones are as security, utility, or governance tokens.
Cryptocurrencies and tokens built on blockchains have pre-set, algorithmically created, issuance schedules. This means that we can predict with quite some accuracy how many coins will have been created by a certain day and time.
Though it is possible for most cryptoassets to have this issuance schedule altered, it would require quite a bit of effort. Thus, changing this schedule is very difficult.
This provides some predictability and security for token holders, in a way that is much more predictable and stable than how governments create and issue their currencies.
Why Is Tokenomics Important When Investing in Cryptocurrency?
Understanding the factors that will impact either supply or demand are of vital importance to both speculators and investors.
Perhaps the most important factor is to understand how the digital currency will be used.
Is there a clear link between the platform or service being built, and the asset?
If so, there is a strong chance that a growing service will require purchases that increase usage and demand, thus increasing the price. If this is not the case, what can the token be used for?
Other important questions include:
How many coins or tokens currently exist?
How many will exist in the future and when will they be created?
Who owns the coins? Are there some set aside to be released in the future to developers?
Have a large number of coins been lost, burned, deleted or are somehow unusable?
Tokenomics is also helpful as guidance to understand how much an asset might be worth in the future.
For example, many people new to crypto might think that any coin could become as valuable as Bitcoin, even though tokenomics may prove this to be impossible.
As an example, let’s look at two coins, Bitcoin Cash and Tron. Bitcoin Cash has the same total supply as Bitcoin, so thinking that it may become as valuable as the world’s biggest cryptocurrency — might be possible.
However, with more than 100 billion Tron already created, in order to break a few thousand dollars per-coin, Tron would need to become the most valuable business in the history of the world. The odds of that happening may be a bit far off.
While these questions may seem to require complex answers, they provide an extra way to view cryptoassets and to help understand whether one asset is more likely to have a great value and future, than another.
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