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According to coinmarketcap, there are more than 10,000 crypto assets actively trading on exchanges across the world. Some have vaporized into non-existence while others are making progress in this rapidly evolving market. Though the success of a crypto asset depends on a myriad of factors, tokenomics play a major role. In today’s article, we will explain the definition of tokenomics and the frameworks required for analyzing tokenomics of a crypto project.
As the name suggests, it is the economics of a crypto token (similar to a monetary policy followed by central banks). Tokenomics defines the supply and demand characteristics of a crypto token. It covers all aspects involving a token’s creation, management and removal. Basically, the team behind a crypto asset devises the rules of how the tokens are created as well as how they are distributed to the network users or removed from the network. Some tokens like Binance Coin (BNB) choose to have removal mechanisms (like auto-burn) while tokens like Dogecoin (DOGE) have infinite supply. It all depends on how the crypto asset founders want their network to be incentivized with the tokens.
Frameworks (defined metrics) can be used to judge whether a particular token’s economics can lead to its success. Success can be defined as continued increase in the price of the token over the years. Let’s look at the supply metrics that will be useful for creating a simple yet powerful framework.
The above three metrics can aid in grasping a token’s supply characteristics and take action accordingly. For example, if a token’s supply is deflationary or reduced by 25%, then one can assume that the demand for the token (if other fundamentals aspects like utility, community etc stay strong) will shoot up in the future. By simply digging a little with these numbers, one can perceive the overall market perception and expectations of how investors are going to behave at any point of time. As a general thumb rule, scarcity adds value. Lesser the amount of tokens available for buying in the market, higher the demand.
Another factor that plays a major role in tokenomics is inflation. For calculating, let’s look at market cap (MC) which is attained by multiplying current price by circulating supply and fully diluted market cap (FDMC) which is current price multiplied by maximum supply. A simple ratio to check inflation is to divide MC by FDMC. It indicates how abundant the future supply will be for the current market demand to absorb.
If the ratio is close to 1, then maximum supply has almost entered the market. So, inflation is going to be very low favoring the token’s potential to surge in price. On the other hand, if it's close to 0, then supply has not entered the market yet and there’s going to be high inflation (incoming dump) which doesn’t augur well with token’s price.
To summarize, supply metrics can be used in conjunction with inflation (MC/FDMC) to determine the quality of the tokenomics.
Below are two examples of tokenomics that are viewed from the above perspective. Investors are advised to do their own research while doing so as network upgrades can quickly change the tokenomics.
Bitcoin - inflationary but the supply is fixed (21 million) which means there can never be more bitcoins than 21 million. This is a good scenario to have.
Dogecoin - inflationary with no limitation on supply. 5 billion DOGE will be added to the network every year. This is not a good scenario to have.
Overall, tokenomics is one of the key things an investor should look out for before investing in a token. The other key factors are its use cases and its adoption.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.