Believe us when we say this that all the cryptocurrencies in your portfolio or on your watchlist have gained popularity in the market because of the tokenomics they follow.
Made up of two different words viz “Token” and “Economics.”Tokenomics can be termed as the backbone of all cryptocurrencies and this is what makes a particular cryptocurrency valuable and interesting for all its investors.
Before launching a cryptocurrency, the tokenomics of that particular token are outlined on a paper which has detailed information on how the cryptocurrency will work and how the technology backing it up will process in the future.
We have been talking a lot about the overview of tokenomics. Let us dive deeper into how tokenomics help cryptocurrencies gain their value in the market and the investors gain more profits.
When we say Tokenomics is the backbone of cryptocurrency it is because when a project has smart and well-managed objectives to buy and hold tokens for a long period of time, the project is more likely to do better than a project which has not built a positive ecosystem around its token.
To understand the tokenomics of a cryptocurrency we can take the example of any Fiat currency governed by a central bank. Just like the central bank manages the printing of fiat currencies and then implements various monetary policies around it to ensure proper spending or lending of the particular currency, similarly, tokenomics governs all these things for a cryptocurrency. The only difference between these two is that, unlike monetary policies, tokenomics are executed through various codes uploaded over the blockchain network.
Tokenomics is basically responsible for structuring two things in a project-
1: How will the token be distributed and what amount will be available to invest
2: The utility of a token which would leverage its demand
Every founding member of a project needs to keep an eye on the tokenomics of their respective cryptocurrency if they want their tokens to be successful and worth investing in.
As mentioned above, tokenomics guides the two most important aspects of a token. Let us discuss these important aspects in detail.
There will only be 21 Million Bitcoins. We all know this and this fact is backed by the tokenomics of Bitcoin. On the other hand, Ethereum has no supply cap, there can be unlimited mining of Eth tokens but its issuance is capped each year.
The tokenomics laid by the developing member of any token or project is what signifies the actual worth of that particular coin in the market. Thus, it becomes very important for all the founding members to lay a very strong and bound tokenomics for pushing the prices of their respective cryptocurrencies upwards.
There are various projects whose tokenomics include burning tokens for maintaining scarcity and pushing the price upwards. To understand this, we can take the example of Ethereum. In August 2021, when the developers saw a decent rise in the transactions of Ethereum, they decided to burn a fixed quantity of tokens as transaction fees in order to maintain the scarcity of the project.
To incentivize the transaction and to keep the network robust, many developers include “The Proof of Stake” mechanism in their tokenomics. This mechanism allows the users to lock their tokens to validate the payments (the higher number of tokens locked means higher validation and higher chances of receiving tokens as rewards) and if any of the users try to harm the network, it’s the value of their token which is being placed at risk.
This lays the groundwork for all the tokenomics that cryptocurrencies follow. But that’s not all; blockchain technology has gone too far and with the arrival of NFTs, it has become a necessity to lay a strong tokenomics for that asset class as well.
To leverage the growing potential of NFTs all the developers need to set up a strong tokenomics that follows key decision-making processes. Tokenomics for NFTs is comparatively a newer concept and thus, to set up the perfect tokenomics which pushes the prices of an NFT upwards, the developers need to keep in mind a few things stated below:
NFT is quite a newer concept for investors and to lay out a good tokenomics for NFT, one needs to identify what that particular NFT will be used for. Based on its various uses, i.e. Fan Engagement, Authorisation, etc. developers can modify their tokenomics and make the NFT scarce, increasing their prices automatically.
NFTs can also be used as collateral for various loans executed over blockchain technology. The borrowers can give their owned NFTs as collateral and the lenders can then choose whichever NFT they want for the loan to be executed.
To make the concept easier, let us take an example of “The Bored Ape Yacht Club.” If you have been in the NFT space for quite some time you might be aware of the “Bored Ape” NFTs which have been ruling over the market. The culture of NFTs is quite new but, even in this short time these Bored Ape NFTs have managed to catch the attention of celebrities from Justin Bieber to Neymar Jr. entitling an estimated value collection of over $3 Billion!
It was the culture and narrative they set up around their NFTs which helped them to skyrocket their market value.
In the future, NFTs will change the way fan engagements take place and how any creator is being paid or the fans are getting engaged. With each passing day, there will be many more modifications which will take place in the tokenomics of various NFTs (Watch Out for those!)
Since the arrival of Blockchain technology and Bitcoin, tokenomics has evolved quite a lot and the developers have explored many new ways to refurbish their tokenomics and leverage the prices of various cryptocurrencies. There have been a lot of successful cryptocurrencies with better tokenomics that have performed better than those with a poor tokenomics design.
On the other hand, Non-Fungible Tokens provide a very different tokenomics model which is purely based on the level of scarcity. The incoming of NFTs and the tokenization of various assets like real estate and artwork would give a very new shape to tokenomics in the future.
If you are a new investor or have been investing for a long time, one major thing which you should be researching about before investing in any cryptocurrency should be the tokenomics backing it up.
To summarize the importance of tokenomics, it is the backbone of all crypto projects as it governs the supply of tokens to the investors and also regulates the burning of tokens from time to time. There have been many cryptocurrencies which made a great impact on the market at first but failed due to their poor tokenomics as they were not successful in maintaining the level of scarcity which simply gave ample token alternatives in the market for all the new investors joining in.
No comments yet