What You Need to Know about Tokenomics
To understand tokenomics, let’s first briefly recall the definition of a crypto token. Conceptually, a token is a digital unit of cryptocurrency that corresponds to fungible and tradeable assets. It holds an ascribed value and is usually generated when the company is going through the initial coin offering process.
Tokens allow companies to raise funds and attract investors to develop other projects on the blockchain. Accordingly, crypto tokens are a subset of a larger superset, i.e., a cryptocurrency.
Each cryptocurrency operates using its blockchain — and tokens work on top of that blockchain. Tokenomics, on that account, refers to the demand and supply of cryptocurrency that is affected through crypto tokens.
To understand this further, let’s look at the example of two famous cryptocurrencies, Bitcoin and Dogecoin.
Bitcoin is a cryptocurrency that has gained exponential popularity over the past few years. This has resulted in high price inflation. As the bitcoin mining rate increases, the supply of tokens decreases. This essentially means that the resource is becoming scarce with each passing day.
Did you know that the total bitcoin supply is 21 million? Meaning, 21 million bitcoins will be generated before the pool completely drains. At a glance, 21 million seems to be a large number, but compared to the global population of 8 billion people, it seems insignificant. Bitcoin’s tokenomics operates on a notion of scarcity — which applies upward pressure on prices.
On the other hand, Dogecoin has an infinite supply of tokens — and unlike bitcoin, there is no cap limit. The coin is supported by high-profile billionaires who induce a demand against the infinite supply. Thus, it operates on a rather different tangent of tokenomics.
Tokenomics acts as a guideline to understand, speculate, and estimate the worth of an asset in the future. There are other coins that have a fixed supply, but the total number is much larger than that of bitcoins. For example, Tron has a supply of over 100 billion.
Each blockchain revolves around its tokenomics. The study of tokenomics, then, is a fundamental part of studying the crypto market. It helps investors understand the functionality, development possibilities, and return on investment on cryptocurrencies.
In general, tokenomics reinforces the overall understanding of how the blockchain world actually operates.
