Introduction

Cryptocurrency is all the rage around the world, and understanding Tokenomics is very important for cryptocurrency investors. In simple terms, Tokenomics explains the economics of a cryptocurrency project (Token + Economics). The cryptocurrency market is considered to be quite volatile, so before buying or investing in a cryptocurrency, studying its Tokenomics helps investors decide whether it is a good investment.

What are token economics?

Tokenomics combines two words, "tokens" and "economics". It refers to the science of tokens and the economics behind them. It also refers to the study of how cryptocurrencies work within a larger ecosystem, including but not limited to the distribution of tokens, and how tokens are used to encourage good behavior in the network. Tokenomics explains why a token project is valuable and how it gets its price growth.

What are tokens?

Tokens are usually used as units of cryptocurrency, they function the same as physical coins or tokens, they can also be called a simple unit of value that can be passed from one person to another. They are used for specific purposes and have value based on their unique characteristics.

Types of Tokens

There are three basic types of tokens commonly found in the market, including: commodity tokens, utility tokens, and security tokens.

  • Commodity Tokens

    Gold and monetary notes are standard examples of assets with independent value that can be a great backing for a token. In this case, these types of tokens are called commodity tokens. The value of a commodity token is backed by some reasonable and tangible asset, such as gold. Take Paxos Gold (PAXG), for example, which is pegged to a troy ounce of gold in the London Goods Delivery Market, currently priced at $1,800. Another example of a commodity token is the Silver Token (SLVT). SLVT is an ERC-20 token on the Ethereum blockchain, and as the name suggests, SLVT allows people to hold silver digitally.

  • Utility Tokens

    A utility token is a special type of token that is designed to be used for a specific purpose. For example, it helps companies and organizations capitalize or finance projects. Utility tokens only have value in the system of use, but can be exchanged for other types of tokens or cryptocurrencies. Examples include Chainlink (LINK), Filecoin (FIL), and Brave Browser's token (BAT).

  • Security Tokens

    Security tokens are crypto assets that represent ownership rights or asset value transferred to a blockchain token. Security tokens can be created through tokenization. The first step in the process is to select an investment target, and then the information is entered into the blockchain to create a token. Security tokens are not yet available to retail investors, but many institutions are working hard to develop and make it available to users.

How to use token economics to estimate the value of cryptocurrencies

Token economics is used to determine the future value of an asset, such as Bitcoin Cash (BCH) and Tron (TRX). Bitcoin Cash has the same total supply as Bitcoin, so it is reasonable to predict that Bitcoin Cash will be more expensive in the future than another token with a non-limited supply.

On the contrary, since there are more than 100 billion TRONs in existence, in order for the coin to be worth thousands of dollars, TRON would need to become the most valuable company in the history of the world, which may be difficult to achieve.

This approach provides a different way to look at crypto assets and helps understand whether one crypto asset has a better future than another.

The Importance of Token Economics in Cryptocurrency Investing

In the cryptocurrency space, it is very important to understand the impact of supply and demand. These two market forces are important factors that affect the market price of cryptocurrencies. Cryptocurrency tokenomics defines a clear roadmap of how the cryptocurrency will be used and also clarifies whether there is a definite connection between the platform's use or the service being built and the proposed crypto asset.

These factors together determine whether a crypto asset will have the potential to continue to grow. When deciding on a cryptocurrency’s token economics, one must understand the following questions:

  • How many tokens are currently in circulation?
  • How many tokens will be generated in the future?
  • When will the tokens be generated?
  • Who owns these tokens?
  • Are some tokens reserved to be released to developers in the future?
  • How does it account for any tokens that are lost, burned, deleted, or become unusable?

in conclusion

For anyone who wants to enter the cryptocurrency space, it is very important to understand the concept of token economics, as token economics has a significant impact on the dynamics of cryptocurrencies, and it includes almost everything related to tokens. Therefore, cryptocurrency investors are advised to research the token economics of a project before participating and understand the financial and governance rights they can obtain by purchasing tokens. In addition, a good understanding of token economics will equip investors with the knowledge and skills to evaluate cryptocurrency projects.