What Is Tokenomics?

Tokenomics refer to the study of token valuation or economy of tokens. The tokenomics reveal all the details of a crypto token’s quality to decide which cryptocurrency to buy in the blockchain . Before investing in any cryptocurrency, you need to evaluate and consider several factors, including allocation and distribution, token supply, market capitalisation, and token model. We will elaborate on each one in the following sections.

The Allocations and Distribution of Token

One of the essential keys to ensuring a token is valuable or not is token allocation and distribution. Crypto tokens are generated in two ways: they’re either pre-mined or released through a fair launch. Let's have a closer look at these models of token distribution and allocation.

Fair launch

There are no token allocations throughout a fair launch. A fair launch is a model of distributing tokens that allows all the developers to participate in a decentralised network. In the fair launch model, a group of investors or communities decide to mine, earn and govern a cryptocurrency and then make it public. Bitcoin, DogeCoin and Litecoin can be considered a type of fair launch. For instance, in order to have Bitcoin, everyone should mine it or buy it. There is no pre-mining and no ICO.

What Is Pre-mining?

Unlike the fair launch, in the pre-mining process, crypto tokens are generated and distributed among some exclusive addresses(usually project developers, other team members, and early investors) before going public. before going public. Developers and participants will be able to raise their stocks by selling their tokens before the public launch. Cryptocurrency pre-mining is used to reward those involved in launching a new cryptocurrency project.

Supply Of Token

The supply of the token is another primary component. If there are too many tokens being released at once, it can impact the token valuation. Thus before investing in any cryptocurrency, you would better consider the supply of the token. There are three types of supply, total, circulation, and maximum.

Total supply

The total token supply is the number of tokens that exist at present, excluding those that have been burned.

Circulation supply

The circulating supply of a token is the number of tokens that have been issued so far and are currently in circulation in the market.

Maximum Supply

Maximum supply is the limit of production of the token, and it means no more than that will ever be circulating in the market and is the maximum number of tokens that can ever be mined.

Market Capitalization Or Market Cap

Crypto market capitalisation is the total value of a cryptocurrency. The entire amount of funds and stocks that have been invested in the crypto project will be determined by the market cap. To calculate the market capitalisations, you need to multiply the total number of a company's outstanding shares by the current market price of one share. Cryptocurrencies with lower market cap have more potential to grow and expand.

Token Model

To make a purchase, you should make sure if the token’s type is inflationary or deflationary. Every crypto token has a certain model which ultimately specifies its value and price. In the following, we’ll see what the two token models are.

Inflationary Model

There is no limit to how many tokens are in circulation in inflationary currencies. It means that it doesn't have a max supply, so you can keep mining, and it will be released as time goes on. PoS cryptos like Ethereum utilise inflation to encourage validators across their network. Inflation happens when the prices of products and services increase. However, the main issue with inflationary currencies is that their value decreases when the currency supply grows.

Deflationary Model

A deflationary token model is completely the opposite of the inflationary token model. During deflation, the price of the units and goods reduces due to certain conditions, such as over-minting and a deflationary crypto declines in its market supply. To minimise the circulation supply, users or team members should destroy the tokens by burning the tokens. It lowers the supply and increases the token valuation due to rising demands. BNB, Cake, FTT are also deflationary tokens.

On the one hand,  Bitcoin can already be seen as a deflationary token. On the other hand, when its limit is increased and opted to limit the total supply, it eventually becomes deflationary.

Conclusion

As we have seen, tokenomics play a crucial role in blockchain and cryptocurrencies. To decide which coin to invest in, you need to consider tokenomics. What we offer at Cryptologist.st is to educate you about the crypto world. Remember that we do not provide financial advice; however, you will make confident crypto decisions by reading Cryptologi.st articles.