Prior to the hard currency era, the batter trade system attaches value to real goods. Even in era, real goods become a token of exchange. Valuation of an item depends on its availability and the demand for it. Tokenization is hence as early as exchange itself.
A Token is a store of value attached to a concept an event or a project. Tokens attached to a project tends to embody the value of the project itself. A token hence is a representation of the value of the concept it is attached to. In simpler terms, a token drives its value from the concept or project it is attached to.
Tokenomics in plain terms is Token economics. Broadening this definition, tokenomics, it’s the science of token valuation, it encompasses every financial aspect of a token attached to a project and every efforts of the project which affects the value of the token.
With the pitfalls of batter system over-shadowing its advantages, concerned governments sort better ways to exchange and ease the burden associated with the batter system. This gave birth to our present-day idea of Tokenization. Introducing many solid materials as a store of value, and finally issuing Currencies as a store of value, these governments not only tokenized the market and the commodities traded, they tokenized the country / community as a whole.
Tokenomics in cryptocurrency
Blockchain technology have gained seamless applications. As a versatile technology, it supports several use cases depending on how it is been developed and the applications built upon it. For some of these applications, it is used plainly as a blockchain.
However, for most blockchain projects, cryptographically generated tokens are created to allow its users perform some activities on the blockchain. Such blockchain projects are said to be Tokenized. cryptographic tokens assume the role of a token in it’s real sense.
Cryptographic Tokens attached to blockchains are generally known as cryptocurrencies. Apart from enabling users of the blockchain to perform activities on the blockchain, it incentivizes the users and represent both the financial and technological strength of the project. Cryptocurrencies reflects the value of the blockchain project to which is attached.
What’s in the economy?
Token generation and distribution: Scarcity breeds value, this a prominent idea in tokenomics. Cryptocurrencies are not indifferent to this. The rate of generation of blockchain tokens and the distribution scheme affects its reputation and subsequently value. Cryptocurrencies are generated via the process of mining as well as staking as the case may be. Smart contracts blockchains also allows the creation of separate tokens for applications running on it.
For Proof-of-work blockchains whose tokens are generated by mining, miners are rewarded with tokens for solving puzzles and mining blocks. The amount of token rewarded per block determines the rate at which the tokens are generated and this also affects the distribution. Blockchain developers introduced the concept of halving to reduce the mining rewards over time hence reducing the rate of generation and distribution in order to build value. Projects with pre-mined token are often discriminated as this is already a poor tokenomics practice.
Proof of stake blockchains rewards its users for locking up certain number of tokens on their wallets or in a staking pool. This is a passive way of generating tokens. Number of tokens rewarded to each staked depends on the number of tokens they have locked up in their wallets of in the pool. Proof of stake blockchains also meets some discrimination as a passively earned token hardly earns enough reputation. Users are more eager to sell off passively earned tokens.
For the above reason, proof of work blockchain tokens usually get valued more than proof of stake blockchain token. There may be exceptions to this due to reasons mentioned below.
Functionality of the blockchain and utility of the token: Regardless of the generation and distribution scheme of any cryptocurrency project, the functionally and utility of the blockchain is paramount. This simply explains why ripple sits third on the market capitalization ranking with over forty (40) billion tokens in circulation. How does the blockchain work? and what use is the blockchain? A good cryptocurrency investor must first ensure that the project answers these questions satisfactorily.
For national currencies, the GDP and financial stability of the nation plays major roles in its valuation; for cryptocurrencies, it’s is the functionality of the blockchain and it’s use cases. The problems a blockchain solves and the population which adopts it (or will adopt it) is enough to drive the value to the moon or to the mud, regardless of how it is been generated, amount in circulation or how it is been distributed.
Developing a good use case for a blockchain project and working towards building a flexible blockchain which achieves this is the master key to a valuable blockchain token. A good generation and distribution scheme add even more taste to this. A good example is bitcoin which sits first in the capitalization rankings with just over eighteen (18) million tokens in circulation.
Viability and overall reputation of the project: How active a project is and the reputation of the project, the community or team behind it, affects the value of its tokens notably. The XRP army or the bitcoinists? these are two very popular communities in the cryptosphere. The role they played/are playing in driving the value of their associated cryptocurrencies rings bell across the cryptosphere.
A community standing behind a project and propelling its success has proved to be of value over the years. A good tokenomics practice may include building a great community around a project. However, this cannot be achieved without at least a promise of a potential good utility for the token.
This promise backed up with visible proofs of hardwork from the team towards achieving this goal and also sincerity and transparency from the team is the first step towards attracting a good user base. The user base builds the community, continued dedication and good practices by the team grows this support and solidifies the stance of the community on the project.
Considering a project’s tokenomics as an investor/enthusiast
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The cryptosphere has a very dynamic atmosphere, with new projects springing up frequently and existing ones striving to gain grounds in this very competitive industry. Each project comes in with a new concept and a proposal which aims to solve an issue. Written carefully in their whitepapers are plans and road maps towards achieving this stated goal. Each paragraph comes with a promise and a vision.
Despite these promises and carefully crafted proposals, a higher percentage of new projects fail. Most existing projects are merely struggling to retain its investors, stay in the game and make progress. This is always below the expectations of the investors who are compelled to invest in these projects because of the visions…and promises.
Each project which fails to live up to its promises incur grave losses on the investors and drums home the importance of careful investigation prior to investment. Taking a deep look at the tokenomics of a cryptocurrency project cannot be over-emphasized.
A project which fails to present a feasible use case and a flexible functionality is a huge gamble. Having a good branding, token generation and distribution scheme may appeal to the shallow view of investors. For a clever investor, a shallow view appeal should be a mere attraction. Closer look at the feasibility of the proposals and the abilities of the project team is paramount to building trust and making more careful investment.