How to study Token in the encrypted world?

From the investor’s point of view, one of the main concerns of judging an encryption project is the project’s token design model ; from the entrepreneur’s point of view, how to design the project’s token economic model is a matter of success or failure; The amount of money is endless, how to make an effective judgment on them? How to research a Token?

The purpose of this article is to provide you with an introductory Token-based research and judgment perspective. Decisions should still be made based on more information and known knowledge, which can reduce risks to a certain extent.

Let’s start with a set of data: As of 2022, there are about 6,000 cryptocurrencies (or more) on the market. This is certainly a big opportunity for investors. However, in 2021, investors encountered fraud in the Crypto project and lost $12 billion. Therefore, Token economics is a very important perspective on how to go beyond the surface and see the most essential things .

This article provides an introductory thinking framework for the research on Token Economics.

Token economics is a science that studies Token design, distribution, and supply and demand models. Token economics is mainly a discipline that studies Token, including the design of Token’s economic model, the distribution of Token among business stakeholders, and the conditions for Token to start trading. , and how transactions have evolved over time.

Token economics in a broad sense also includes design, token engineering, etc., which are not within the scope of this article.

How to study Token in the encrypted world?

background

First of all, it must be clear: what is the difference between Token and Coin in the encrypted world (English)?

Although the terms Token and Coin are often used as synonyms, it should be noted that the term Coin usually refers to the cryptocurrency running on the Layer 1 public chain. The term “token” has different meanings in different scenarios, and it sometimes refers to a cryptographic asset created at the Layer 2 protocol layer, which means it must obey the rules of the L1 blockchain it uses. For example, ERC20 Token, ERC721 NFT (Token) more broadly, most encrypted assets can also be called Token. Some Token functions include: voting rights, or digital ownership of real-world assets, and Tokens can sometimes be used as payment within the protocol.

The value of Token mainly depends on the overall performance of the project.

What is Token Economics in the Crypto World?

The term Token Economics mainly refers to the study of the economics of cryptocurrencies and Tokens, which allows investors to determine, to some extent, the quality and value of potential investments. Token economics is very important for the decision to buy and sell encrypted assets.

How to Study Token Economics: An Introductory Framework

Layers of Blockchain Research (Crypto Layers Explained)

First of all, we need to carefully study whether this blockchain belongs to Layer 1 or Layer 2. This is the foundation.

The first thing to be clear is whether this Coin or Token runs on Layer 1 or Layer 2.

Layer 1 blockchains operate independently of other blockchains, examples of Layer 1 Tokens are ETH for Ethereum, Avax for Avalanche, etc.

Layer 2 Solution is a third-party protocol built on the L1 public chain. For example, the Maker Protocol is built on Ethereum. It is an L2-layer Protocol, so MKR and Dai are Layer 2 Tokens;

Note: The L1 public chain and the L2 protocol will affect each other. If the Layer 1 public chain provides a simple, efficient and secure infrastructure, it will attract more L2 projects. In turn, if the L2 project does well, it will in turn have a positive impact on L1, thereby increasing the value of the Layer 1 cryptocurrency.

How to study a chain ecosystem

Since L1 and L2 are intertwined, and various projects with different backgrounds, it is very important to understand the interdependence of different encrypted tokens as comprehensively and in detail as possible.

If you want to discover the next blockchain ecosystem with huge future growth potential. This means that there needs to be a solid Layer 1 blockchain, which is the basis for L2 applications to run well.

Original Chain vs Forked Chain

It should also be considered, whether the blockchain to be studied is an initial blockchain or a forked blockchain

For example, Ethereum Classic is a fork of Ethereum. Litecoin and Bitcoin Cash are forks of the Bitcoin blockchain.

It’s important to study what modifications the fork chain has made to understand in what ways it is better or worse than the original chain. For example, Bitcoin Cash will never have more users than Bitcoin. However, BSC is a very successful fork of the Go Ethereum protocol, but their consensus mechanism is different.

Research on Token

After studying the basic information of the relevant blockchains, a comprehensive analysis of the Token can be started.

Utility vs Security (Securities) Token

The purpose and purpose of the token setting is critical: for example, the token holder can use the token to pay transaction fees, enable the holder to obtain related services, such as staking (PoS), or for governance (voting).

A token with practical value usually has a specific use case. For example: some Tokens allow users who hold them to obtain products or services on the blockchain, and some Tokens allow users to have voting rights.

Security-type tokens are somewhat similar to stocks: there are two types of tokens:

  • Asset tokenization: Traditional financial assets are represented by tokens on-chain, for example, stocks representing a percentage of company ownership can be tokenized. In other scenarios, the ownership of unit gold can also be tokenized and represented on the chain.
  • Native Token Assets: Tokens represent newly generated digital assets on the chain. Tokens are generated through native assets, for example, through staking or mining.

Note: In the United States, companies that want to issue Security Tokens need to be regulated by the SEC. Blockchain projects that do not comply with these regulations risk being fined or shut down. Therefore, it is important to know whether the token you want to research or invest is a token for the intended use or a security token.

Generally speaking, according to the Howey test, if a Token cannot be characterized as a SecurityToken, then it is a Utility Token;

What is the Howey test?

How to study Token in the encrypted world?

The Howey test refers to a criterion for determining whether a particular transaction constitutes an offering of securities. The test stems largely from a 1946 U.S. Supreme Court decision that used a specific criterion for determining whether a particular transaction constituted an offering of securities. If this transaction is recognized as a security, it will be subject to the provisions of the U.S. Securities Act of 1933 and the Securities Exchange Act of 1934. At present, many ICOs on the market may be identified as securities issuance and thus accept relevant supervision.

The standard of the Howe test:

  • The Investment of Money
  • Invest in Common Enterprise
  • Investors have profit expectations and expect to obtain profits (Expectation of Profit)
  • Does not directly participate in the operation, only relying on the efforts of the promoters or third parties. (Effort of Others)

In order to determine the possibility of a Token being a Security Token or a utility Token, you can use the score given by the Crypto Rating Council Website . The higher the score, the more likely the Token is a Security Token;

Fungible vs Non-Fungible Tokens

Fungible Tokens are not unique. For example, an ether you own is the same as an ether in my wallet.

Non-Fungible Tokens (NFTs) are unique and cannot be copied, such as personal academic records, artworks, music, etc. For example, each CryptoKitty is unique and represented by an NFT, or each piece of land in Decentraland can also be represented by an NFT.

On the Ethereum blockchain, ERC721 Token is irreplaceable

generation, and ERC20 Token is fungible.

Token supply side

When analyzing the supply of a token, the following points need to be considered:

Total Supply: The number of tokens created minus the tokens that have been “destroyed”.

Total supply: the number of tokens created minus the tokens which have been “burned”.

Maximum supply: refers to the total amount of tokens that will always exist. For example, Bitcoin has a maximum supply of 21 million, while ETH has no maximum supply.

Maximum supply: refers to the total amount of a token that will ever exist. For example, the maximum supply of Bitcoin is 21 million, whereas Ether has no maximum supply.

Circulating supply: is important, because it influences the market capitalization of a token .

Here’s how Marketcap is calculated:

Here is how marketcap is calculated:

Marketcap = number of coins/circulating supply of the token * current price per coin/token)

Market cap = the number of tokens / the circulating supply of tokens * the current price of each token

Compare market capitalization to diluted market capitalization, which can often be found on tool sites like coinmarketcap.com and coingecko.com.

The market value after dilution means: the theoretical market value of a Token under the condition of the maximum supply in circulation.

(The diluted marketcap indicates the theoretical marketcap if the maximum supply of a token is in circulation.)

To ensure accuracy, tools that record blockchain data should always be carefully checked to ensure that the data obtained is up-to-date.

Token’s market value: It is more indicative of the economic value of a Token than the price of a single Token. Note that some projects issue a large number of Tokens at very cheap prices, such as $0.0001 per Token.

(Market capitalization of the token: a better indication of the token’s economic value than an individual token’s price.)

They do this to convince investors that the token price can easily rise 1,000 times. But the reality is that if the market value of the token is already very large, then the token price may not be likely to rise very high.

Even though the price of most cryptocurrencies is often manipulated by the big players, it should be noted that the higher the market capitalization, the more difficult it is to manipulate the price.

Has the Token you are following been minted in advance (Pre-minted)?

Pre-minted means that the Token was created before it was released. Note that this happens quite often in ICOs. Many Layey 2 tokens, such as ERC20 tokens, are pre-mint so that contributors, early investors and contributors can be rewarded.

So why is it important to know if a token is pre-mined?

Because Pre-mint tokens are often distributed internally before they can be purchased by the public. If a large number of tokens are held by insiders at the time of issuance, the token price is vulnerable to manipulation.

Token allocation and distribution: We should always understand how tokens are allocated and distributed. First, this information can be researched from the project’s whitepaper and sites like icodrops.com. But remember to cross-check holders on the blockchain browser, as sometimes the information on the white paper or other website may be out of date.

Other issues to look into when studying the distribution and distribution of tokens include:

  • Who will receive Tokens as rewards?
  • For ICO, what is the price of Token in Private Sale? This information can be found on a project’s whitepaper and on websites such as icodrops. If the token is already listed on the exchange, then you can compare the pre-sale price with the current price. If the pre-sale price is very cheap, investors who get tokens in the pre-sale can sell their tokens for profit.

How is the Vesting Schedule of this Token arranged? Vesting Schedule means that a certain number of Tokens will be locked for a period of time to prevent a sudden large number of Token sell-offs and the price collapse. If a large number of tokens are locked, you should study their release schedule, because when more tokens are released, it will affect the token price and market cap. If the project unlocks a large number of tokens at one time, there will be a high probability that the price will drop sharply.

Is the Token model inflationary or deflationary?

Is the token model inflationary or deflationary?

Such patterns affect token supply patterns: if a cryptocurrency does not have a maximum supply limit, then it is an inflation-like pattern. Usually some projects use Token destruction to control price inflation.

It should be remembered that just because some tokens will be burned reducing the supply, it does not mean that the price of that token will definitely increase. The intrinsic value of Token mainly comes from what value it provides to users, not the supply.

References:

1.The Howey Test: Regulating the Blockchain Tokens (leewayhertz.com)

2.https://medium.com/the-capital/your-guide-to-researching-tokenomics-931c3e3b84c

3.https://research.thetie.io/token-economics/

4.https://time.com/nextadvisor/investing/cryptocurrency/common-crypto-scams/

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-to-study-token-in-the-encrypted-world/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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