Cryptocurrency has seen some of its biggest gains and losses in 2022, with one major coin losing its peg and causing billions of dollars in financial losses. With this kind of uncertainty in the market, investors will start looking more closely at individual coins and why they hold value.
As new coins take off, investors will develop answers to these questions. Tokenomics seeks to answer investors’ worries about a given coin.
What is tokenomics, then, and how does it figure into the success of a coin? Why do some coins have “good” or “bad” tokenomics?
Read along with us as we go through what tokenomics is and why coins need to consider it as they make their initial offering.
What Is Tokenomics?
Tokenomics comprises anything that makes crypto valuable. It includes things like supply, what it can be used for, and how developers intend to maintain that value.
As investors look more closely at individual coins, new coins will provide information on their tokenomics. Most tokens release a white paper, or guiding document, that spells out their plans. This white paper might look like this tokenomics page at nested.fi or offer a broader assessment, depending on the project.
How Do Developers Affect Tokenomics?
A blockchain platform can do a lot of things to affect its tokens’ value. While we haven’t listed every potential factor in tokenomics, we’ll list some common or interesting ones.
Supply
The supply of a token can affect its value. Some tokens, like Bitcoin, have a maximum supply. Others limit how many tokens can be issued within a given time frame.
Non-fungible tokens (NFTs) take this to an extreme. NFTs derive their value from their uniqueness. Each one points to a unique item.
Some tokens go through “burn” processes, during which excess tokens get removed from the pool. Tokens can be burned all at once or burned off as part of regular operations.
Incentives
The incentive to participate in a blockchain plays a role in its tokenomics. Classic tokens like Bitcoin incentivize transaction validation through mining. Others use different models, such as staking.
Some tokens have changed their model over time. Ethereum, for instance, intends to move to a stake-based incentive as part of its transition to 2.0.
Vesting Periods
Some tokens reserve early outlays for initial investors and creators, but limit when they can be traded or sold. This changes the rate at which tokens become available and in turn affects their long-term price.
Data-Driven Investing
Being able to answer the question, “what is tokenomics?” and how it figures into the value of your next coin can help you make better investment decisions. If a coin has no obvious route to becoming valuable, you can reconsider your investment. Likewise, if the tokenomics of a coin don’t seem realistic, you can consider whether it’s a scam.
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