Tokenomics: When it comes to investing in the crypto world, understanding the basics of tokenomics is essential for navigating the over 19000 cryptocurrency options that exist today. If you’re interested in entering the crypto world, here’s what you need to know about tokenomics and how you can get the most out of your investment.
How Tokens Are Built
Tokenomics signifies the details about how a certain coin functions monetarily and the specific regulations that are built into its design. Each new crypto token is designed with clear goals and motivations behind its creation that are detailed in the coin’s whitepaper. Benefits and advantageous regulations are built-in to incentivize users to participate in this new cryptocurrency. Here are a few incentives and rules that could be included in the design of a new token.
To ‘burn’ tokens is to destroy a certain number of specific crypto to lower the overall price of that coin. The number of coins in circulation determines the market cap of a crypto at any moment. A deflationary mechanism is built into the token to reduce the cost, allowing for the burning of coins as needed. If the ethereum price usd rises quickly and dramatically, a ‘burn’ ensues that will destroy a portion of the supply to regulate the price for users. Many cryptocurrencies will have overall caps on the number of coins that will ever be minted; this number is also essential when speculating the long-term or short-term success of that crypto. The minting process is another indication of the sustainability of that coin.
Some blockchain networks are run off of proof-of-work models, which require high levels of computer processing to verify transactions and mint new coins. Bitcoin is one crypto that runs off of this model. Proof-of-work models are not super sustainable because they require users to race each other to verify transactions first for the rewards. Complex computer processing is the best way to run the algorithms for verification quickly.
Other blockchains are built on proof-of-stake models, which allow users to stake their coins in exchange for an opportunity to be randomly selected to verify transactions and earn rewards. This requires less computing power and takes much of the competition out of the verification process. Instead, the stake pools with many coins will have greater chances of being randomly selected. The blockchain model you choose will determine how you can participate in the minting process.
Airdrops are a popular form of incentive that offers users free tokens just for holding the cryptocurrency. New tokens can often offer airdrops to stimulate the use of their crypto or encourage users to participate in some other way. For example, the new FTT Token by FTX offers airdrops of SRM tokens to stimulate the use of their new Serum DEX and encourage users to invest and hold their FTT tokens. Airdrops are a fantastic benefit for crypto investors and essentially offer free money to traders.
Any new token can be designed with specific benefits for its users, as dictated by the creators of that coin. Some new tokens, like the FTT token, are being developed with the user in mind more than ever before. Rules of governance are being implemented to allow coin holders more significant influence over the future of the token. Coin holders have the option to attend events and join forums where they can share their opinions, teach others in the community, and participate in discussions about the governance of that cryptocurrency.
A strong understanding of tokenomics and its impact on the crypto world can offer investors significant insight into the long-term success of specific tokens and uncover new opportunities for investors to influence the future of those cryptocurrencies. Be sure to reach the whitepaper of your tokens very closely to understand the unique incentives your tokens offer you.