What is Tokenomics?
A Breakdown of Tokenomics
Tokenomics — the topic of understanding the supply and demand characteristics of cryptocurrency.
In the traditional economy, economists monitor the issuance of a currency using official money supply data. The numbers they report are generally called M1, M2 and — depending upon the country — M3 or M4 as well. An in-depth explanation of the four M categories is beyond this tokenomics analysis: just know that M1 is a measurement of the most liquid monies, M2 is less liquid, and so on. These numbers help to enable transparency and monitoring of different aspects of the supply of a currency.
These numbers are important because throughout history, kings, queens and governments have had a habit of creating additional money in their country. It turns out that running a country or fighting a war can be very expensive, and it was not always easy to raise revenues or balance a budget, which meant that it was often politically expedient to simply create more currency.
In the modern world, things like bank bailouts and pandemic responses have required governments around the world to create substantial amounts of new currency very quickly.
While governments oversee this process, creating additional currency can cause a slow, or sometimes fast, reduction in the value of the existing money. We call this reduction “inflation” and it is most visible when the prices of the things we buy increase year after year.
What Is a Token?
Cryptocurrencies and tokens built on blockchain have pre-set, algorithmically created, issuance schedules. This means that we can predict with quite some accuracy how many coins will have been created by a certain date in time. Though it is possible for most cryptoassets to have this issuance schedule altered, it will normally require the agreement of many people and is very difficult to implement. This provides some comfort and security for owners, because they know the tokenomics and what degree their asset will be created in a way that is much more predictable than governments creating money.
What Is The Total Bitcoin Supply?
While 21 million of total Bitcoin supply may sound like a very large number, when compared to the 8 billion or so people on earth, it is obviously incredibly small. It is this imbalance that leads many people to compare Bitcoin to gold and think of it as “hard” money.
Dogecoin and Grin Circulating Supply
Dogecoin circulating supply is currently 131.13 billion as of September 2021, with no fixed maximum supply. It has an inflationary supply, instead of a deflationary one like Bitcoin. Proponents of Dogecoin, which include high profile billionaires, argue that this tokenomics is what makes it a usable currency.
The founders of Grin hope that this feature will make it easier to maintain a stable price and thus become a more usable currency. It will take years to understand whether this actually happens.
Why Is Tokenomics Important When Investing in Cryptocurrency?
In which case, there are a number of factors to consider when looking at crypto tokenomics. Perhaps the most important is to understand how the digital currency will be used. Is there a clear link between usage of the platform or service being built and the asset? If there is, there is a strong chance that a growing service will require purchases and usage that ultimately helps to increase the price. If there is not, what can the token be used for?
Other important questions to answer include the following:
- How many coins or tokens currently exist?
- How many will exist in the future and when will they be created?
- Who owns the coins? Are there some set aside to be released in the future to developers?
- Is there any information to suggest that a large number of coins has been lost, burned, deleted or are somehow unusable?
Tokenomics in Determining Cryptocurrency Value
Tokenomics is also helpful as guidance to understand how much an asset might be worth in the future. For example, many people new to crypto will think something like, “If this coin becomes as valuable as Bitcoin, then one day…” while in reality it might never be possible. As an example, let’s think of two coins mentioned above, Bitcoin Cash and Tron. Bitcoin Cash has the same total supply as Bitcoin, so thinking that one may become as valuable as the other in time has some legitimacy — it is possible. However, with more than 100 billion Tron existing, for one coin to be valued in the thousands of dollars, Tron would need to become the most valuable business in the history of the world — how likely is that to happen?
While these questions may seem to require complex answers, they will provide an extra way to view cryptoassets and help to understand whether one asset is more likely to have a great future than another.