The key to influencing the average crypto investor: Token economics

The token economics of a cryptocurrency gives you a good idea of ​​whether or not to invest in it, which is one of the key factors that influence the success of a token project.

What is crypto-token economics

Crypto-token economics is a combination of “tokens” and “economics”. It lacks a generally accepted definition in the cryptocurrency space. However, the words “tokens” and “economics” are excellent starting points for a better understanding of this topic.

Economics is a discipline that studies various economic activities and various corresponding economic relations and the laws of operation and development of human society at various stages of development. The core idea of ​​economics is material scarcity and efficient use of resources. Economist Paul Samuelson pointed out that economics studies how a society uses scarce resources to produce valuable goods and distributes them among different individuals.

Tokens refer to non-native digital assets based on existing blockchains (for example, ETH is Ethereum ’s native cryptocurrency, while projects can launch their own fungible tokens via the ERC-20 standard).

Combining these two definitions, we can conclude that token economics is a study that explores all fundamental parts of a token economy, including key factors such as its utility, supply, price stability, distribution, and governance.

The place of token economics in crypto projects

Much like how central banks utilize monetary policy relative to their respective fiat currencies, the design, management and execution of token economics allows project teams to create an efficient economy around their solutions, thereby fostering the growth of the ecosystem and the growth of the token. price.

In general, from an investor’s perspective, token economics is a key factor to consider, as it has a large impact on the future price of a digital asset and whether a project can achieve the goals specified in its roadmap.

In short, regardless of the expertise and dedication of the team, the potential of the concept, and the amount of capital raised from early investors and venture capitalists, poor token economics can lead to the eventual failure of a crypto project.

One of the keys to the importance of tokenomics in crypto projects is its incentive utility. In fact, much of the world we see around us is driven by incentives, for example, a child goes to school because it will provide them with access to an education that will benefit them in the future. People follow their dentist’s advice to maintain dental hygiene and minimise the risk of any dental problems, all in order to function better.

Incentive structures exist in every institution, business, framework, and pretty much everywhere else you see it. Incentive structures are also needed for crypto projects to grow, and thus, the token economics model was born. Value is the most important factor driving the foundation of token economics. Many crypto projects promise to use blockchain technology to create an environment that incentivizes all users in the ecosystem to work together toward a common goal, creating a better goal and allowing users in the system to be rewarded.

Existing Token Types

In general, tokens can be classified according to the structure, purpose, and value of the tokens.

Sort by structure

Native Tokens (Tier 1 Tokens)

These types of tokens are the native tokens of a particular blockchain and are used to power all services in the blockchain. For example, ETH on the Ethereum network is an example of a layer 1 token in cryptocurrency.

Layer 2 Tokens

Tokens of this type are used for decentralized applications in specific networks. For example, the OMG token is classified as a layer 2 token because this is a decentralized project in the Ethereum network.

Tokens can be divided into:

security token

Security tokens are called investment contracts, and they must meet several conditions at the same time. These tokens are subject to securities and regulations. Simply put, security tokens on the blockchain will derive value from tradable and external sources. Therefore, they will always be subject to government regulations, making them a safer option.

utility token

Utility tokens are another important type of token you will encounter in token economics. These types of tokens are issued through initial coin offerings and they are useful for financing the network.

According to whether the value is the same or not, it can be divided into:

fungible tokens

These tokens are considered to have the same value as well as replication facilities. The ETH (ether) scenario on Ethereum is a perfect example of fungible tokens. ETH tokens have the same value, and because they have the same value, they are substitutable for each other.

non-fungible token

Non-Fungible Tokens (NFTs) do not have the same value, so they are unique. NFTs have been in vogue lately, and they have sparked a lot of interest in token economics, especially in the high-profile NFT auctions. The use of NFTs to tokenize assets such as real estate, art, pictures, and collectibles has sparked a new revolution in digital ownership, while also demonstrating the potential of tokens.

Token distribution, supply model and market cap

In general, the way tokens are distributed, the supply model, and the market cap development are observed when looking further into the representation of a particular project.

The first is the supply of tokens, the total supply of tokens refers to the number of tokens currently in existence, excluding tokens that have been burned. The circulating supply of a token refers to the number of tokens that have been issued to date and are currently in circulation. Finally, the maximum supply of tokens is the maximum number of tokens that will be created. Certain tokens do not have a defined maximum supply. In general, if you observe that project developers regularly increase the circulating supply of a particular token over time, you can assume that the token’s value will rise in the future. Conversely, if too many tokens are released at the same time or frequently, the value of the tokens may plummet.

In terms of token models, make sure you understand whether it is an inflationary or deflationary token before investing. Over time, inflation tokens will continue to be created. Such tokens do not have a maximum supply or cap of tokens that can be created. The deflationary token model, on the other hand, is the exact opposite. In this model, tokens have a maximum supply. Some crypto tokens have a dual token model, where one token is used as security for raising funds and the other is used for utility within the network. Examples of projects running on the dual-token model include MakerDAO, Axie Infinity , and more.

The market cap of a token is a measure of the relative size of a token. It is calculated by multiplying the token’s current market price by the total number of tokens in circulation. It does not reflect the amount of money in the market. Generally speaking, the higher the market cap of a token and the lower its circulating supply, the higher the value of the token in the future.

Multiple functions of digital assets

As we mentioned earlier, one of the keys to the importance of token economics in crypto projects is its incentive utility. Value is the most important factor driving the foundation of token economics. In order to ensure the stability and play of value, and thus ensure a continuous incentive effect, crypto project teams must endow their digital assets with multiple functions that benefit the ecosystem and its participants.

The functions of tokens generally include: access to opportunities through activities such as staking, mining, yielding, and sharing; participation in governance; medium of exchange within the platform or the entire ecosystem; collateral for other assets in the ecosystem (e.g., stablecoins).

For example, the main use of ETH is to pay transaction fees and the deployment of DApps and smart contracts. On the other hand, users use Bitcoin as a store of value and a medium of exchange.

Additionally, to ensure stable value play, crypto projects must carefully manage the supply, distribution, and governance of their tokens.

On the supply side, if the supply of a token increases while the demand remains the same, it will cause its price to drop. On the other hand, the price of a token increases as supply decreases (while demand remains the same). Many projects will achieve price stability by implementing mechanisms that take tokens out of circulation (e.g., token burns and buybacks, and BTC halving). It’s worth noting that if there are factors such as supply management and poor project development, many project tokens experience inflation-induced price crashes even after attracting record amounts of new capital and buyers.

Distribution-wise, the token distribution model has a big impact on whether a crypto project has the necessary funding to achieve its roadmap goals and whether its business model is sustainable. A fully fair launch model facilitates trust, decentralization and transparency are two qualities that are highly valued in cryptocurrencies, and the community generally prefers a fair launch model, which has gradually replaced the previous model of ICOs.

The governance model is often related to the subsequent development of the project. The main concerns are: the degree of centralization (the core team has the ultimate authority vs. a fully decentralized community governance process); whether governance occurs on-chain or off-chain (although, off-chain governance can still be decentralized); How easy the governance process is for the average user (e.g. how easy is it to create and vote on proposals); the minimum number of votes required to approve a proposal; the background, skills, and experience of the core team highly involved in project governance. While decentralization is highly valued in the crypto space, this does not mean that all projects with decentralized governance are better than fully or partially centralized ones.

While lacking a common definition, token economics explores the most important parts of the token economy that have a significant impact on the future of a project and the price of its native digital assets. For ordinary investors, if you want to invest in a crypto project, you must pay attention to the token economy of the project.

Posted by:CoinYuppie,Reprinted with attribution to:
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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