The crypto industry is evolving widely, with many coins entering the market daily. The value of one cryptocurrency is different from another, and what makes us understand the worth of a coin is its tokenomics, or we can say the economy of the token. Though tokenomics are common term for experienced players, it may not be known for one who is new to the crypto market, and this article is for them. In this article, we’ll help beginners to understand what is tokenomics, including its working and importance.
What is Tokenomics?
Tokenomics can be referred to as the economic structure of a cryptocurrency, providing information on the value of a crypto enabling users to make a quick investment decision. The term tokenomics is derived from two words, ‘token’ and economics, simply the economy of a token. Tokenomics showcases the entire life cycle of a crypto coin, from issuance to operation, and to utility, every data is covered. Apart from tokenomics, market sentiment, regulatory changes, adoption rates, etc, play a major role in determining the value of a token.
Key Attributes of Tokenomics
Tokenomics helps investors determine how tokens are distributed and how their utility impacts their value. The key attributes of tokenomics are given below.
1. Mining or Staking
Most cryptocurrencies utilize proof of stake (PoS) or proof of work (PoW) consensus to validate new blocks. Proof of work consensus generates new coins through staking while proof of stake consensus offers token holders an opportunity to earn additional tokens as rewards. Understanding how the coins are generated is important as it determines their circulation.
2. Token Supply
Token supply refers to the number of crypto available during a certain period, allowing investors to evaluate the value and availability of the cryptocurrency. Token supply are subcategorized into maximum supply, circulating supply, and fixed supply.
- Maximum supply: Maximum supply is the total number of tokens that exist. Generally, most cryptocurrencies have a fixed supply, which reduces over time. The higher the availability of tokens, the lower the demand, and the value.
- Circulating supply: Circulating supply is the number of coins that are available in the market for trade at any given time. The circulating tokens are either traded or actively utilized in the crypto market. Circulating supply is an important attribute of tokenomics, as it is used to determine the market capitalization of a cryptocurrency.
- Fixed supply: Some cryptos have a fixed supply, which means all the tokens are mined or minted before the launch. This means once the tokens’ supply is over, they can’t be created again. A portion of these tokens are used for fundraising, campaigns, and rewarding early investors.
3. Token Burning
Token burning is the process of permanently removing a certain number of tokens from circulation. This process increases scarcity and enhances the demand and price.
4. Token Distribution
Token distribution refers to the number of cryptocurrencies allocated to certain stakeholders of the project contributing to the development. The token distribution generally involves the number of tokens and the percentage distributed among early investors, developers, etc.
5. Token Utility
Token utility describes the purpose of the tokens or the ways in which the tokens can be utilized on the blockchain. The common utilities of a token include the medium of exchange, governance rights, staking, and yield farming. Token utility often plays a crucial role in the long-term success and adoption of a crypto coin.
6. Token Security
Token security includes the key technologies utilized to secure the network from fraudulent activities and scams. Integrating robust security features ensures a transparent and trusted environment and attracts more investors.
7. Token Sustainability
The sustainability of a token ensures that the value of the token doesn’t go below a certain point in the future. The developers must abide by sustainability while designing the tokenomics.
The Mechanics of Tokenomics
As we discussed above, tokenomics includes numerous attributes, and these collective data allow investors to make an informed investment decision, whether to buy, hold, or sell crypto. Tokenomics determines the value of a token; if the token has limited supply, strong utility, and high demand, its value will rise, making it a good investment. On the other hand, if tokenomics shows an oversaturated supply, weak utility, and decreased demand, the token’s value is likely to decrease, making it better to sell off the asset than hold or buy.
Tokenomics Example: Avalanche
Below we provide you the detailed tokenomics of Avalanche, a blockchain platform that eases the process of crypto transactions for your easy understanding of the tokenomics concept.
Avalanche is a blockchain platform utilizing proof of stake (PoS) consensus to validate transactions. AVAX, the native token of the Avalanche network is used to facilitate the network transactions.
- Maximum supply: 715.74 million AVAX
- Circulating supply: 411.59 million AVAX
- Utility: Medium of exchange within the network and used as transaction fee.
Token distribution:
| Allocated Area | Allocated Percentage |
|---|---|
| Staking rewards | 50% |
| Team | 10% |
| Foundation | 9.26% |
| Public sale option A2 | 8.30% |
| Community and development endowment | 7% |
| Strategic partners | 5% |
Security: Avalanche are independent and interconnected blockchains, validated and secured by a dynamic subset of validators.
How Tokenomics Become Important?
The information included in tokenomics gives investors an insight into the token’s future, allowing them to decide to buy or sell a token. It offers investors information related to the potential risks of holding the token during a volatile market condition. The total supply of tokens shows the potential for increasing or decreasing demand and the price, if the total number of tokens is high, the demand is less and hence the price. The circulating supply shows the number of tokens available in the market, which can be used to determine the market capitalization. The token distribution allows investors to evaluate the arena in which most tokens are distributed, in some cryptos, a large number of tokens are distributed during the pre-sale or airdrop, where early investors can make maximum profit. The token utility shows the practical applications of the token within the blockchain network, the holders can earn governance rights and stake them for additional tokens, increasing the potential returns.
Final Thoughts
Evaluating the tokenomics of crypto is important and necessary before making an investment decision. It allows investors to get a brief idea of the token including its maximum supply, circulating supply, token distribution, security, and more. These data are important for analyzing the utility and scope of a crypto coin, and to decide whether it is ideal to buy, hold, or sell the crypto. Remember, buying a crypto coin only by evaluating the tokenomics is not a good idea, evaluating the market sentiments, regulations, and adoption rates enhances the value of investment decisions.