Crypto

Tokenomics: The Economics of a Cryptocurrency Token

The emergence of cryptocurrencies has led to the emergence of a new form of economy called tokenomics. It is defined as the economy of tokens or cryptocurrencies.

This is indeed quite a broad topic, below are some of the economic models, others are emerging in this new digital era of finance. Since memetics, the economics of meme-driven markets separated from fundamental value, was launched by TikTok WallStreetBets/Gamestop in Dogecoin into the stratosphere in a matter of days, Dogecoin has become an asset that has completely separated from more traditional fundamentals. Ponzinomics is the economics of Ponzi schemes that has dominated the ICO and DeFi space since 2017. The last is the belief in the success of a non-existent business, which is supported by paying early investors a quick return on money invested by subsequent investors.

Cryptocurrencies can be designed to conform to a set of pre-defined (or changing) rules that ultimately shape and define the value proposition of a coin. How the room is managed is perhaps one of the most important factors. Why ? This is because management determines if the room rules can be changed. The more decentralized governance, the less likely it is that the rules of the game will change. In the case of Bitcoin, its rules are considered to be set in stone. Bitcoin’s rule change will require hundreds of thousands of participants to embrace and embrace the change at the same time.

Factors affecting the value proposition

Simply put, it all depends on the supply and demand of the token. As with any free market asset, an increase in aggregate demand will naturally drive up the price. Therefore, it is one of the first things any wise investor looks at before deciding to invest their money in a project or company. The goal of any good token-based project is twofold. Firstly, the token should have a high value and bring good profits to investors. Second, to ensure that these good returns are stable and sustainable over the years. Now, while these two goals seem to be at odds, effective token management and a dynamic team response make this possible.

If a token is generated steadily over time and nothing can reduce its growing supply, it will depreciate over time. For example, if a token is worth $1 with a total supply of 100, it will be worth $0.10 if the supply increases to 1,000, assuming the demand stays the same. In order to reduce the supply, there must be use cases where the token will be burned. In terms of demand, people selling their tokens will drive the price down. Demand for a token can either be driven by strong use cases or by people buying because they believe the price of the token will rise in the future.

The supply as a whole and how new supply is created are obviously the supply and demand factors that ultimately determine the price. If you can change the offer, you can control the price. This is what happens when one organization has a monopoly on something.

burning

Burning cryptocurrency tokens simply means that a certain number of tokens are permanently taken out of circulation. This reduces supply, which increases scarcity, which theoretically increases demand in the market as people value rarer cryptocurrencies. It also actually encourages hodling (HODLing) of the perceived future value of the coin. Thus, it strengthens the monetary base of any cryptocurrency.

Factors to consider

Perhaps most important is understanding how the digital currency will be used. Is there a clear link between the use of the platform or service being created and the asset? If this is the case, it is likely that the growing service will require purchases and usage, which will eventually drive up the price. If not, what can the token be used for? How many coins or tokens are there currently? How many will there be in the future and when will they be created? Who owns the coins? Is there anything that will be delayed for developers in the future? Is there any information to suggest that a large number of parts were lost, burned, removed, or otherwise unusable?

These are all questions if you decide to invest in cryptocurrencies.

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