Economic science has been around for several centuries. The development of blockchain and crypto has created a new subfield in the economy: ‘cryptonomy’. There is a lot to write about this, but this blog will focus expert Devin Schoor mainly on a subtopic, namely: ‘tokenomy’.
This topic is very important in the crypto market and valuable to understand when you want to invest in a crypto project such as trading Bitcoin (learn more about it at https://bitcoin360ai.com/bitcoin-360-ai-review/). The distribution of the tokens has a major influence on the price or it can indicate a ‘scam project’.
Within the economy, people are concerned with the distribution of scarce resources in a society. It mainly focuses on the distribution between assets, products and services. There are several subfields within the economy. For example, there is microeconomics, which focuses on the individual actors. And there is macroeconomics, where the workings of the economy as a whole are studied. But economic science can also be focused on certain sectors. For example, there is a fiscal economy, which deals with taxes or business economics where the financial position of a company is studied.
The development of blockchain technology has created a new subfield: cryptonomy. This is the combination of economics and crypto. Through numbers and trends, it is possible to analyze the crypto market. As mentioned in a previous blog, the prices of crypto are correlated with macroeconomic conditions such as interest rates. However, there are other topics very relevant within cryptonomy.
An important topic within cryptonomy is: ‘tokenomy’ or ‘tokenomics’. This word is a combination of the words: tokens and economy. Here, the distribution of the tokens of a particular crypto project is analyzed. Inexperienced investors often make the mistake of not taking into account the tokenomics, while this has a major impact on the relevant price or can prevent you from being scammed.
‘A crypto can have a limited or unlimited offer. Bitcoin is an example of a limited supply. Of these, up to 21 million could be put into circulation.
The creation of new tokens and the number of available tokens
In short, tokenomy refers to ‘the ratio between the number of circulating and total possible coins or tokens of a crypto’. In this case, the word tokens denote both coins and token. It describes the variables that influence this such as: The creation of new tokens, the number of available tokens, incentive mechanisms, token ‘mints of burns’ and the distribution of tokens.
Blockchain projects design a project’s tokenomics to encourage or discourage user actions. This is similar to how a central bank prints money and conducts monetary policy to control spending or saving. However, the difference is that with crypto it is encrypted and therefore transparent and predictable.
When the tokens are released on the market, it can greatly affect the price
A crypto can have a limited or unlimited offer. Bitcoin is an example of a limited supply. Of these, up to 21 million can come into circulation. Crypto can also be both inflationary and deflationary in nature. When new tokens are added you call this ‘minting’ and when tokens are removed from circulation you call this ‘burning’. Thus, researching this information is very useful, because according to economic rules, the price of crypto is correlated with supply and demand. When there is a lot of room for minting new tokens, it can negatively affect the price of crypto.
Another important part to take into account is the so-called ‘token distribution’. In many projects, investors have purchased tokens at the beginning of the project for a low price. These tokens are issued to the investors at some point. When these tokens are released on the market, it can greatly affect the price. Often this information including the dates on which the tokens are released is in the white paper of the project. Ideally, the team of a project has implemented a system in which tokens are distributed in such a way that it limits the impact on the circulating supply and price. Unfortunately, this is not always the case.
‘So-called tokenomy is a valuable part to understand before investing in a project’
It is important to listen to experienced professionals
Finally, it is possible to identify scam projects by analyzing tokenomics. Through ‘block-explorers’, which are websites where you can view the blockchain, you can see what the actual distribution of the tokens of a project is. When a party owns most of the tokens, it is often a scam. The possibility for creators to mint (create) unlimited tokens is also a red flag. A blockchain is publicly visible. Yet it is difficult for the average investor to understand everything. It is therefore important to listen to experienced professionals.
Economics can also be applied to the crypto market. So-called tokenomy is a valuable part to understand before investing in a project. The distribution of the tokens is of great importance for the price. The tokenomics can often be found in a project’s white paper. Unfortunately, certain mechanisms of tokenomics can also be exploited in scam projects. Because blockchains are publicly visible, it is possible via block explorers to investigate whether a project is good.