UNDERSTANDING TOKENOMICS -

Increasing popularity of Cryptocurrency have attracted a lot of investors. But before we invest in any project, it is must to study the tokenomics of that particular asset. Understanding tokenomics would be of great benefit for new investors. In this blog we are gonna see what is tokenomics and what are the factors affecting value of crypto token.

WHAT IS TOKENOMICS?

Tokenomics is a combination of two words token and economics and it is also known as cryptonomics. Tokenomics is a way of looking at how a token creates and sustains its value in the blockchain ecosystem or Tokenomics can be defined as the quality of a token which will convince a user or an investor to adopt it and help build the ecosystem around underlying project of that token. Simply we can say that anything that impacts the token’s value is a part of tokenomics. Tokenomics is a broad subject and includes variety of components. Tokenomics consists of all the aspects of the economic study with reference to the tokens.

Before moving any further lets just see what are tokens.

WHAT ARE TOKENS?

In crypto world tokens can be defined as representation of asset or utility in its particular ecosystem. It can be value, stake, voting right, or anything. Note that a token is not limited to one specific role and can fulfill a lot of roles in its native ecosystem. Some of which are security, utility and governance tokens.

FACTORS AFFECTING VALUE OF CRYPTO TOKENS -

1. SUPPLY AND DEMAND OF TOKEN -

Supply and demand of token is one of the main parameter for the evaluation of price of a token. There are three main types of supply for Cryptocurrency tokens. These are total supply, maximum supply and circulating supply. Total supply refers to the total number of tokens that are currently existing excluding all the burned tokens. Maximum supply refers to the number of tokens that will ever be created. And circulating supply refers to the number of tokens that are currently available or in circulation. If the circulating supply of token keeps on increasing then we can expect the value of token to rise. But, if the supply becomes unlimited and unregulated the value of token may depriciate too. And we all know that if the demand of token rises it will ultimately leads to the increasing token price.

2. METHOD OF CREATION -

Another main factor that influences the value of token is the method by which it was created. The token may be entirely new or it can be a fork of an existing coin or it may be created on top of an existing blockchain. A brand new coin has a potential to be anything. With good team and good Marketing a lot of value can be hyped up around a project that is relatively new. Fork of an existing coin has the benefit of building off of an infrastructure and community that already exists.It may be good and it may attract a lot of users quickly. A coin built on top of an existing ecosystem like ethereum can leverage the same community and developers support and can attract users if they find it useful. The coins built on top of coins may face criticism and it’s difficult for them to grow beyond their parent currency. Hence, we can say that it is important to know the how the tokens are generated to determine their value.

3. TYPES OF TOKENS -

The another main factor of valuation is the type of token you generate. There are lot of different types of tokens. Let’s take a look at important ones.

One of the classification of tokens divide them into layer 1 and layer 2 tokens.

• Layer 1 tokens - layer 1 is the main or underlying blockchain and the token that powers this type of blockchain is called layer 1 token.
• Layer 2 token - layer 2 is decentralized app or ICOs built on the top of main underlying blockchain. And the token that powers this type of blockchain is called layer 2 token.

On the basis of usage of tokens these can be classified as security tokens and utility tokens.

• Utility tokens - utility tokens are also called user tokens. These are something that provides a user with a product or service.
• Security tokens - security tokens are similar to stocks or company shares whose value is derived from external and tradable asset. They are mainly designed for investment for users to have ownership to control the company’s decision making.

On the basis of fungibility tokens can be classified as fungible and non-fungible tokens.

• Fungible tokens - fungible tokens can facilitate the interchangibility of units of a commodity with other units of a same commodity like bitcoin and Ethereum.
• Non- fungible tokens - Non-fungible tokens are unique and thus can not be interchanged with one another. Like piece of art.

4. TOKEN VELOCITY -

Token velocity is how often your tokens are moved within the network. A high token velocity often results in driving down the value of a token as it is frequently being passed around and liquidated. And in contrast the token with low velocity will act as store of value like gold and results in increasing the value of token over time. Many projects often uses concepts like token burn and staking to lower their token velocity. Staking rewards users for putting their coins in a validation pool,this takes them out of day-to-day transaction pool and thus reduces the velocity. Token burn results in decreasing the supply of token,results in increasing value. So, token velocity is very important in determining the value of token.

5. TOKEN DISTRIBUTION -

Illustration of token distribution

Another major factor to influence the value of token is the overall distribution of token. A relatively healthy ecosystem have a lot of different token holders with relatively even distribution of the supply across them. If a large amount of token is held by a few people then those people holds the tremendous amount of power in determining its value. If the people holding majority token decides a huge sell off ,then your network’s value will depriciate. So, it is better that your token gets into as many hands as possible which will help in stabilization of your network.

HOW IS TOKENOMICS DIFFERENT FROM TRADITIONAL ECONOMICS ?

Each crypto project has its own economy surrounding its token. But unlike our regular economy where the rules are set by the government and central bankers crypto economies or tokenomics are completely controlled by code.These crypto projects are essentially creating their own micro economies with the goal of becoming self sustaining. This means that tokenomics are applicable in the digital world while the traditional economy is applied both the virtual and the physical world.

IMPORTANCE OF TOKENOMICS -

So, now we can say that tokenomics is very important for determining the value of token and also to know the potential of particular token. So, before investing in any project, it is recommended to study the Tokenomics, that would be useful for new investors in number of ways such as -

• It helps to understand the short-term performance of the crypto market.
• ‍Tokenomics also helps to estimate the future worth of an asset.
• It helps to chose the right project to invest in by providing an insight into the profitability of one crypto asset over the other in future.

There are variety of tokens listed on CoinDCX cryptocurrency exchange. Download CoinDCX to start your crypto journey (click here).

That’s all about Tokenomics and valuation of tokens from my side. I hope this blog helps you to understand Tokenomics and choose the right project to invest in.