Tokenomics Explained

Understanding the demand and supply of cryptocurrencies is called tokenomics. Before we understand tokenomics in detail, let us first look at tokens.

What is a Token?

A crypto token is a digital unit of cryptocurrency that has many use cases. It is a type of cryptocurrency that can be used to represent assets or specific uses on their blockchain. They are used to facilitate crypto transactions and also as a substitute for other things. Usually, these tokens get distributed through Initial Coin Offering (ICO) processes.

What is Tokenomics?

Tokenomics is comprised of two words — token and economics. So, putting it simply, it is token economics or crypto-economics. Tokenomics is the study of the economics of tokens, which involves understanding the production and distribution of these tokens along with many other things.

Why is Tokenomics Important?

The demand and supply of cryptocurrencies play a major role in determining their prices. So, understanding the factors that affect them is important for investors and speculators. Some of which are listed below:

• Use cases for tokens

One factor affecting crypto tokens is their usage. If there is a connection between the asset and the services provided or the platform usage, then the prices will go up with the purchases of these services.

• Number of coins present in the market

The number of coins currently present in the market greatly affects the price of the tokens. The more the number of tokens in the market, the more likely it is that their prices will be low. The fewer the tokens present and higher the demand, the prices go up.

• Future of these coins

Is there a pre-decided supply of these coins that can exist in the market at any point in the future? For example, Bitcoin has a total supply of 21 million. Currently, there are around 18.8 million bitcoins in circulation in the market. The rest have been scheduled to be mined in the future, with the last one in 2140. All these aspects contribute to the demand and supply of the coins and, in turn, affect their prices.

• Coins burned or lost

Certain cryptocurrencies, in an effort to increase their prices, are burned periodically by their developers. If an excess supply of coins is affecting the market price of the crypto, then coin burn might be an option to increase its price. And if certain coins that were in circulation are now lost or inaccessible due to certain reasons, then that might also contribute to determining the crypto’s price.

Final Thoughts

Tokenomics, as the name suggests, is the study of the economics of crypto tokens. It involves understanding the demand and supply of these tokens and the factors affecting them, which in turn, determine their prices.

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