by Jake Wengroff
As its name implies, tokenomics is the economics of crypto tokens. It refers to all the qualities of a crypto token that make it appealing to investors, including pricing, market capitalization, business model (or token model) and other factors. Let’s have a look.
Factors Comprising Tokenomics
The following four main factors make up tokenomics, and should serve as guidance when investors are curious about trading in a particular token.
Allocation and Distribution
Most crypto tokens are generated in one of two ways: premined or released through a fair launch. According to Finextra, a fair launch is when a cryptocurrency is mined, earned, owned and governed by the entire community. There’s no early access to the token or private allocations before it becomes public. This is why it is called a fair launch: everyone has equal access.
Premining, on the other hand, occurs when a number of the crypto tokens are generated and distributed among insiders — usually project developers, other team members and early investors — before it goes public.
Most crypto projects nowadays come with premined tokens, so it is not an indicator that insiders are the only ones who stand to profit. To guard against any potential “pump and dump” scenario, investors curious about a new, premined token can check the holdings of that token among various exchanges to determine whether there is a wider distribution insulating against the risk that a single investor or a small group could flood the market with the token, instantly dropping the price.
In general, the more widely distributed the token or project, the more legitimate the project and the more likely the original investors and developers are to seek wider participation.
As with any asset, supply is important because it affects the price. In tokenomics, there are three types of supply: circulating supply, total supply and max supply.
The circulating supply of a token is the number of tokens that have been issued so far and are held by investors. The total supply is the number of tokens that exist at present, which is usually higher than the circulating supply. Finally, the max supply is the maximum number of tokens that can ever be generated or mined.
As with the law of supply and demand, the more tokens that are released by a developer team, the more the price will go down.
Similar to the market capitalization of a stock, the market cap of a token is the entire amount that has been invested in the crypto project so far. Another important metric is the fully diluted market cap, which is the theoretical market cap if the max supply of the token were already in circulation. This helps investors get an idea of what the total valuation of the token would be.
The higher a token’s market cap and the lower its circulating supply, the more valuable it could be in the future.
The two basic token models are inflationary and deflationary. Similar to supply, the token model tells an investor about how much supply there might be now and into the future. An inflationary token is like fiat currency, such as the dollar or euro, which does not have a maximum supply and can be produced into the future. When governments increase the money supply, inflation usually occurs.
A deflationary token model is the opposite, where the token supply is capped, such as Bitcoin, which is capped at 21 million. Most proof-of-stake tokens like Ethereum are inflationary, in an effort to reward the validators and delegators in the network.
Stronger Infrastructure, Regulation and Tokenomics
Several factors go into the pricing and availability of crypto token projects. These factors can affect investors’ access to the tokens as well as the potential for profitability.Crypto regulation continues to evolve, stepping in to support investors against price fixing and other risks.
As investors buy, trade and hold crypto assets, and as interest in newer tokens increases, investors need market-driven solutions to support their increased usage and drive value to the overall market.
TransitNet is creating the industry’s first third-party title registry, to add a layer of protection for cryptocurrency assets by providing proof of ownership. This supports investors across a range of transaction types, adding security and peace of mind as crypto assets move from platform to platform.
Join the forefront of the new crypto infrastructure. Request an exclusive registration for TransitNet’s title registry when it launches today.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce and IoT.
Finextra – Understanding Tokenomics: The Real Value of Crypto
CoinMarketCap – What is Tokenomics?