Many people new to Web3 believe that any crypto coin can become as big as bitcoin or Ethereum, even if nothing could be further from the truth. This is where tokenomics becomes very useful.
Knowing token economics will help you understand how much a crypto asset might be worth in the future. You’ll be able to compare different tokens and confidently choose the best coin to invest in.
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What is a crypto token?
Before diving into tokenomics, let’s make sure we understand what a crypto token is.
A token is a digital unit of a cryptocurrency. It can represent an asset or a specific use on a blockchain – a database that stores information in blocks linked together chronologically.
Image source: Unsplash.com
Learn more about blockchain technology and how a decentralized network works here.
Tokens are used to store value, buy something, and for investment purposes. The most common tokens are 1) security, 2) utility, and 3) governance.
Tokens can also be fungible and non-fungible:
- Fungible tokens - crypto tokens that can be traded for other tokens of the same type and value.
- Non-fungible tokens (NFTs) - unique crypto assets that you can’t trade or exchange. They are either one of a kind or belong to a limited collection.
Tokens are created, distributed, and sold through the standard initial coin offering (ICO) process, which involves selling crypto assets to fund blockchain-based project development.
What is crypto tokenomics?
Tokenomics, as the name suggests, is the study of the economics of crypto tokens. It analyzes a wide range of topics from token functionality and objective to allocation policy and incentives for token holders.
In the most basic sense, token economics talks about the supply and demand characteristics of crypto to find out what makes a token appealing to investors.
You can usually read about the tokenomics of a particular crypto project in its whitepaper (or lightpaper). For example, you can learn about Wizardia’s token economics here.
4 core features of tokenomics
There are four key factors you should consider when evaluating a crypto token’s worth. You will find most of them listed on sites like CoinGecko, but it’s still a good idea to double-check your information on the official website of the crypto project.
1. Token supply
Token supply is one of the first things to consider when evaluating a crypto project.
There are three types of token supply:
- Circulating token supply - the number of crypto tokens that have been released thus far and are now in circulation.
- Total token supply - the number of tokens currently in existence, excluding those that may have been burned.
- Max supply - the maximum number of crypto tokens that can ever be issued. Some tokens don’t have the maximum token supply.
Ask yourself three questions when looking at token supply:
- How many crypto tokens currently exist?
- How many tokens will exist in the future, and when will they be created?
- Have the project creators set aside some of the tokens to be released in the future to developers?
Key takeaway #1.
You may predict that a token's value will rise in the future if you see that the project developers have been steadily increasing its available quantity over time by active mining. On the other hand, the value of the token may decrease if too many tokens are being released or if it’s done too frequently.
2. Token distribution and allocation
Most crypto tokens are distributed in two ways: by pre-mining or a fair launch.
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Pre-mined tokens
Think of crypto projects as tech startups. However, instead of issuing shares, crypto projects release a number of tokens (or coins) before going public, usually to project developers and early investors. We call these tokens “pre-mined.”
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Fair launch
With a fair launch, there’s no early access to the crypto token or private allocations before they are made public. These tokens are mined, earned, and governed by the entire community participating in their creation. Think of Bitcoin.
Image source: Unsplash.com
Bitcoin had no pre-mined tokens.
However, while the idea of a fair launch made perfect sense to Bitcoin, which itself was not envisioned to become a company, it’s different for tech startups. Today, most crypto projects need to raise funds to be able to make their ideas a reality. Investors, in turn, get great opportunities to make money from successful crypto projects.
For instance, Wizardia is releasing pre-mined tokens to create a kick-ass game that already has thousands of crypto gaming enthusiasts bullish about it!
Wizardia’s planned fund allocation from pre-mined tokens
Key takeaway #2.
Whether you should go for pre-mined tokens or a fair launch comes down to your goals. If you believe in a crypto project and want to invest in it, pre-mined tokens are the way to go. However, if you want to invest in an alternative—completely decentralized money—you should look for fair launch projects. And if you can, it’s a good idea to invest in both!
3. Market capitalization (or market cap)
Here are two essential terms you will come across when browsing CoinMarketCap or a similar website that will give you a good idea of how valuable a token is.
- Market capitalization - displays the total amount of funds invested in the crypto project up to this point.
- Fully diluted market cap - the theoretical market cap if the maximum token supply was already in circulation (actively available for trade).
Key takeaway #3.
To find tokens that could be valuable in the future, look for the ones with higher market caps and lower circulating supply.
4. Token model
There are three types of token models:
- Inflationary token model - there’s no max supply (a limit to the tokens that can be issued). Think of these tokens as fiat money (money not backed by a physical commodity, such as gold or silver).
- Deflationary token model - the opposite to the inflationary token model, which means the token is capped at a max supply. For example, Wizardia’s max supply is 300,000,000 WZRD.
- Dual token model - a combination of both models seen above where one crypto token is created for funding within the ecosystem and the other acts as a utility token.
Key takeaway #4.
All three types of tokens can be valuable; they simply serve different purposes. Inflationary tokens are great for incentivizing miners in the network. On the other hand, deflationary tokens help avoid the circulation of unsold tokens. Plus, they are less affected by market volatility.
Who shapes crypto’s tokenomics?
Since cryptocurrencies typically use decentralized control (DAO)—there’s no central authority involved in the project—in a sense, coin tokenomics of a particular token is created by everyone involved in it.
Image source: cryptonewsbtc.org
Members collectively decide how the project’s money should be used. There are multiple ways to run a DAO, with the most common one being through ownership of a crypto token which grants holders voting rights.
Your voting power increases proportionally with your number of tokens or crypto. Token holders can also profit from dividends or by selling tokens at a profit when their value rises.
According to the DAO governance paradigm, new ideas may only be adopted if most token holders agree. It’s a highly transparent way to govern a project since all the financial transactions are based on open-source blockchains and can be viewed by anyone.
Bonus tip
To succeed in the crypto space, you must understand the factors that will influence token supply and demand.
When considering a specific crypto project, a key thing is how the digital currency will be used. You need to ask yourself, is there a clear link between the platform or service being built and the crypto asset?
If that’s the case, as the project grows, it will need purchases that will increase usage and demand, boosting the price. And if you don’t see a clear link between the service and crypto token, look for what else it can be used for.
FAQs
How do you read tokenomics?
To read about the tokenomics of a specific crypto token, look for their whitepaper on their official website.
What is tokenomics of Wizardia?
You can learn about the tokenomics of Wizardia here.
What is another name for tokenomics?
Tokenomics is formed by combining the words token and economics. The concept is also known as token economics or crypto economics.
Julija Paškevičienė
Julija is a freelance content marketer. Specialized in content writing, social media, and finding the best dog memes, she helps businesses get their message across and create content that sells.
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