Understanding Tokenomics. A beginner’s primer on supply and demand of cryptocurrency
WHAT IS TOKENOMICS?
The terms “token” and “economics” are combined to form the term “tokenomics,” which describes the supply and demand dynamics of a cryptocurrency project. It considers a cryptocurrency token’s supply, demand, distribution, properties, and other economic aspects.
On the other hand, cryptocurrency projects have token issuance timetables that are predetermined and generated using algorithms. We are able to forecast with precision how many coins will be in use at any given moment. Additionally, the allocation of coins to different stakeholders is premeditated. The issue timetable and distribution plan can be changed, however the procedure is challenging to carry out.
By defining the tokens’ utility—a primary driver of demand—and offering incentives to token hodlers, tokenomics established the economics of a cryptocurrency project. Developers manipulate a number of factors to affect different aspects of tokenomics, such as supply and demand.
When predicting a token’s performance in relation to the US dollar, Bitcoin, or other cryptocurrencies, tokenomics is a crucial consideration. Analyses let you determine whether the developers have devised novel concepts for the token distribution or have just used existing concepts. Selecting projects with strong tokenomics also helps to increase the return on your investment.
Understanding a currency’s supply and demand is the fundamental goal of economics. These two variables provide information on the desirability of a particular currency. The same approach applies to tokenomics as well, providing you with a clear understanding of the supply and demand of a particular token.
SUPPLY:
First, let’s look at the supply side. We must ascertain if, after accounting for only supply, a token’s value would rise proportionately or be inflated. According to economic theory, a token’s value will rise as there are fewer of them in use. Deflation is the term for this occurrence. On the other side, the value will drop if there are more tokens overall. Inflation is defined as this.
You are not need to take into account elements like the utility or the ability to produce revenue for its investors when looking at the supply side. The supply fluctuation over time is the only criteria. You take into account the quantity of tokens that are now in circulation as well as the quantity that is algorithmically designated for mining or release at a later time.
To have a deeper knowledge of Bitcoin, it is helpful to look at its supply side. As previously indicated, the total amount of Bitcoin is limited to 21,000,000, and it will be distributed at a rate of around half a million each four years until 2140. By June 2022, more over 19,000,000 Bitcoin had been mined; the remaining 2,000,000 will be issued over the next 120 years. Thus, starting in 2022, just around 10% of Bitcoin will be mined for more than a century, eliminating the possibility of significant inflationary pressure.
DEMAND:
The supply side is the only one that produces no value. Rather, a token’s value comes from the demand side. Now let’s examine this phenomena.
Let’s say you own ten exquisite baskets. Encouraged by the beautiful design, you start to think that they’re in high demand. You establish a fixed supply when you declare you won’t be bringing any more of them home. Well-done work? Now, baskets ought to be valued at jewels. A brilliant move? Nope.
Value does not always translate from a given source. People must think that the items are valuable now and will remain so in the future. You must look at game theory, memes, and return on investment (ROI) to ascertain whether a token will be in demand.
