What are Cryptocurrency Tokenomics?
Last Update: March 8th, 2022
The word “Tokenomics” is a combination of the words “Token” and “Economics”, which basically means the study of how capital flows in and out of a certain cryptocurrency project. It involves the supply and demand of tokens in the project, inflation or deflation, token allocation and token burning. This includes all the factors that most investors consider crucial information to be aware of before investing in a cryptocurrency project.
Important Factors to Understand
Arguably, the very first thing one needs to know about when investing in a crypto project is the supply of the tokens. There are three types of supply when it comes to tokens: circulating supply, total supply and maximum supply. It is important to understand the differences between the three:
- Circulating supply refers to all of the tokens in various exchanges that are available for the investing public to buy and sell.
- Maximum supply refers to all of the tokens ever created. In some cases, there is no maximum supply, because token creation is done on a daily basis.
- Total Supply refers to all of the tokens created, including circulating and non-circulating tokens. This does not include tokens that may already have been burned.
The market capitalization can be derived from the total supply of a crypto project, by multiplying it to the current market price of the actual token. Market capitalization is the value of invested funds, both public and private, in a certain token. This number is usually used to compare the market cap sizes of different cryptocurrencies available in the overall market.
Token allocation basically refers to how a certain token is being distributed to public and private investors. This is done either via pre-mined, private sale or fair launch. Most of the time, it’s a combination of any of the three types of distribution methods.
- Pre-mined means the tokens were distributed via token mining. This is usually done before a token is launched in a large exchange. This method enables a crypto project to raise capital for operations. Although very risky, early adopters can usually mine tokens via the cryptocurrency project website.
- Private Token Sale refers to an initial offering of the token to a select number of private investors. These investors usually have large sums of capital. They may be high net worth individuals or professionally managed funds. This is sometimes referred to as “pre-sale.”
- Fair Launch refers to the equal access of both private and public investors to the crypto project. This means everyone has the chance to get a piece of the pie, since the launch is done all at once.
The “Vesting Period”, also commonly called the “token lockup period”, refers to the period during which early investors in a crypto project are unable to sell the early tokens they have received to the public market. This is done to prevent early investors from dumping their tokens into the market, which protects the interests of smaller, public investors.
Inflationary or Deflationary
Inflationary refers to tokens or currencies that have no maximum supply limit. This could be the continuous printing of the US Dollar or the continuous creation of Dogecoin (DOGE). “Inflationary” can affect the integral value of a certain token, because the greater the supply put into the market, the more value it will lose over time.
Deflationary on the other hand, refers to tokens or currencies that have a limited maximum supply. Bitcoin (BTC) is a perfect example, because it has a definite supply available, mining Bitcoin will eventually stop when all the Bitcoins available have already been mined. This lack of supply in the market will in theory raise the value of the token because of scarcity.
Token burning is a process by which a token is removed from the circulating supply of a crypto project. This is done to prevent inflation in the value of the token if there is too much of it in circulation. This is usually done by dumping the token in a wallet address where it cannot be accessed and used for any other type of transaction, other than receiving the burned tokens. This, in effect, creates a deflationary state in the token and makes it more valuable because of the reduced supply in circulation, due to the burning of the tokens.