Fiat currency is governed and regulated by the government. They can decide to hold or pump money into the economy. Such actions, however, have a lot of economic implications. 

For crypto, the creator designs rules which govern how assets are supplied, distributed, and consumed. Tokenomics. A good design makes crypto assets profitable in the long run. Well, a poor design doesn’t.

We are going to discuss Tokenomics in detail. We will see its importance and how you can use it to evaluate crypto before investing. The goal? To avoid speculations and reduce risk. 

Let’s get right to it.

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What is Tokenomics?

Tokenomics is a combination of two words, Token and Economics. A token is a cryptocurrency asset. Bitcoin, Ethereum, Polkadot, Solana, and Tether, just to name a few. Economics is the supply and demand of goods and services and how they influence humans to allocate resources. It covers the production, distribution, and consumption of goods and services.

Tokenomics is the analysis of the supply and demand of crypto assets. Some of the elements covered include the creation, distribution, and circulation of tokens. 

The point of this analysis is to determine the value of an asset. The demand and supply of crypto assets, Tokenomics, affects its value. Let’s see how exactly it works.

How Tokenomics works

A good business would need a well-thought-out and achievable business plan. Similarly, the creators of most crypto come up with a Tokenomics design of the crypto asset.

A Tokenomic design is a plan that involves some aspects of mathematics, human behavior, and the interest of all investors to get a balanced economic model.

Blockchains use tokenomics to regulate user actions. An increase in money supply in the traditional economy with the same output will just cause the goods and services to be more expensive. Tokenomics helps to balance the supply and demand of crypto assets. 

How exactly does this happen? Unlike traditional economics, Tokenomic designs are codes written in the cryptocurrency blockchain. 

The codes are written inside the Smart contract making it difficult to change. Therefore, the creators should be certain about the design before adding the crypto to the network.

A solid business plan will help the owner get investors on board. Likewise, Tokenomics will help you decide whether to buy a crypto asset or not. 

Do all crypto have pre-designed Tokenomics? No. Does that mean you cannot still analyze the crypto asset? No. Therefore, we will take a look at the elements that would help you in the analysis and decision on whether to invest or not. 

The elements of Tokenomics 

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Token Supply

The supply of goods and services may have an impact on their prices. When the demand is higher than the supply, the price will increase. The same is true about crypto assets. The creators need to determine the number of crypto tokens present in a blockchain. 

The total number of tokens the creators decide to code to exist in the lifetime of crypto is called the maximum supply. A good example is Bitcoin, which has a supply of 21 million tokens in its lifetime. Other cryptocurrencies like Dogecoin do not have a limit to their supply.

The other category of supply is circulating supply. It represents the total amount of tokens available for circulation in the blockchain. Circulation supply just makes a small amount of the maximum supply. Multiplying the market price by the circulation supply gives you the market capitalization or market cap.

Tokenomics design determines which tokens are added or removed from circulation after a given period. The former is a deflationary design, while the latter is an inflationary design.

Sometimes, tokens are removed from the system. The process is called token burning. The burning controls their supply.

Token Utility

The term utility, in economics, refers to the satisfaction of using a product. The token utility refers to the problem the crypto token solves. 

A token’s utility determines its purpose. Stablecoins, for instance, solve the volatility problem in crypto. They provide a safe parking space when prices fluctuate.

Token Distribution

Try to find out how the crypto distributes tokens to consumers before you settle to buy. There are two options when it comes to token distribution.

The first one is a fair launch. Everyone has an equal chance of mining and owning assets. 

The second option is where assets are pre-mined and distributed to a few individuals before the public gets access. It allows investors to come on board through an Initial Coin Offering to get resources.

There have been a few cases of investors holding assets until they increase in value and later dumping them. Such cryptocurrencies are riskier to invest in the long term. However, crypto in which stakeholders have a good amount of crypto tokens may be considered a safer investment.

Token Incentive

An incentive is an act that would encourage people to prefer investing in some cryptocurrencies over others. Some cryptos may provide cheaper transaction or trading fees to attract more investors. After all, the action would benefit them if it attracts more profits.

Other cryptocurrencies allow users to lend out their assets to earn interest. Mechanisms like proof of stake require users to validate the transaction. The users get rewards after complete validation.

Why is Tokenomics important in evaluating the market?

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Tokenomics can help you analyze different assets in the market before deciding to invest. Apart from that, you get a good understanding of how crypto assets work in their various blockchains.

It helps you understand the short-term performance of a crypto asset. It allows you to speculate how an investment could perform in the future. 

The analysis of demand and supply helps to reduce speculation that is often associated with cryptocurrency. People have lost their money because of rushing to an investment they don’t know about. Insufficient information leads to high risk and incorrect speculation.

FAQs

1. What is Tokenomics design?

It is a plan that involves some aspects of mathematics, human behavior, and the interest of all investors to get a balanced economic model.

2. What is ICO?

Initial Coin Offering is a method used by start-ups to raise money. The investors receive tokens in exchange for their money.

3. Which crypto has well-designed Tokenomics?

Polkadots gives incentives to both developers and regular users. Developers can submit their products to the Polkadot Parachain when they buy DOT tokens. The users get incentives from staking, voting and when they fund crowdfund loans.