In the real world a visible or tangible representation of quality, fact, feeling is known as token. But, in crypto-verse, a token can be defined as a representation of “something” in its ecosystem. Generally a token represents a utility or asset that a company is having and the companies usually give those during a public sale to their investors.
What is a Token?
What is Tokenomics?
Tokenomics comprises of two words “Token” and “Economics”. So tokenomics is defined as the quality of token which will attract the investors or users to adopt it and to help in making the ecosystem for the project which is around the token. It mostly focuses on token supply, token application, and validation. Token usage and its behavior is explained by tokenomics, while conducting a transaction and even after its accomplishment.
When we are talking about the quality of token, what do we mean exactly? It’s a big subject and it includes a variety of components that we are going to talk about.
Cryptocurrency and Blockchain projects raise funds using the three most popular methods. These are ICO, IEO & STO. All of them have their own perks and drawbacks, which one should consider before opting one.
- Initial Coin Offerings (ICO) –
The start-up companies which are seeking funds to finance their projects can get to the public directly, without the banks or venture capital interference. But, unlike the regulated stock market, the investors of ICO don’t get to own a part of the company and they don’t have voting options either in the company. However, they are investing in a currency so they get the coins themselves (for example Bitcoin), which can be used later for investments in future or online transactions.
- Initial Exchange Offering (IEO) –
Earlier methods like fund raising or token sale was performed at the issuer’s platform but in IEO fund raising is performed in cryptocurrency exchange platform. IEOs and ICOs are both techniques of crowdfunding, the difference lies in the management. IEO is managed by an exchange platform with help of startups who are willing to raise funds while ICO is managed by the issuer of the tokens responsible for ICO. Since the exchange of token takes place on crypto exchange platform, so the issuer needs to pay brokerage on the listing, IEO works more like a modern day IPO in stock exchanges.
- Security Coin Offering (STO) –
- STO or security coin offering is also used to pool funds for the new project and it is mostly considered safe and secure, mainly due to the program and encryption on which it works.
- STO is a regulated version of ICOs, the project selling tokens to a group of investors to find their work. In STO it is legal purchasing of digital ownership of a physical or digital assets. STOs are built in such a way that it tends to abide by all the relevant securities regulations and operate entirely within legal boundaries.
The team -
A credible project needs a reliable team behind to support it. The people involved in the project are critical in determining the chance of the coin gaining widespread adoption.
Token Allocation -
The other important thing is that how the token will be distributed after crowd sale. It is also important to check the lock-up period of the tokens distributed to advisers and team. A long lock-up period will be there for Founders/creators who are interested in the longterm potential of their projects.
Public Relations & Branding -
Community is one of the most important aspects of a crypto project. A project is nothing without a good community. It is very important to give proper respect and importance to your potential buyers aka community no matter how fundamentally great your cryptocurrency is. Most stable tokens are of those projects with most active communities.
Many crypto projects don’t give importance to their community building and put all their focus and energy on building a project. There is nothing wrong with being focused on building projects but one shouldn’t ignore the community while doing that. In projects there should be someone who is interacting regularly with the community making sure that everything is fine.
Business Model -
A business model is one of the most important factors of the project. Projects should have a strong model from which they can make money. Bitcoin and Bitcoin Cash (Crypto coins) are just used for payment purposes so they don’t need very complex business models. On the other hand for decentralized applications, which are quite more than simple payment systems, they need to have a strong business model.
Legal Side -
Just after the huge amount of money that ICOs have raised in 2017 & 2018, different governing bodies have increased legal scrutiny on them. So the project that you are going to begin should be legally compliant with all the rules and regulations of the country that it is in. The project needs to have a legal team which handles all the legal matters and compliance.
Real-World Utility -
The other thing which is important to look into is to gain a proper perspective on the tokenomics of the project is its real-world utility.
Real-world utility is also important to look into to gain a proper vision on the tokenomics of the project.
- Is the project bringing any real-world value to the market place?
- Is the platform of the project entirely based on the token?
If your answer is yes, then that project is worth investing in.
Stabilizing Prices -
The stabilizing mechanism is the next thing that should be combined into a solid tokenomics model. In general, there is a need for a strong monetary policy.
Central bank uses three different ways to achieve a strong monetary policy.
- By buying or selling the government bonds thus changing the money supply.
- They also change the reserve ration for banks.
- Credit policy towards other banks is also changed in this process.
Supply and Demand -
The method of supply and demand is quite easy to get:
- The price of the product will be lower if the supply is more and the demand is less.
- The price of the product will be greater if the supply is more and the demand is less.
But there is a sweet spot in between both of these cases, many people use an inflation & deflation method to improve the supply and demand of their holdings. Many projects inject new tokens into the ecosystem to increase the overall supply.
Thus, Tokenomics helps in providing an awareness about how a token needs to be used on a platform.
Behind a cryptocurrency, a deep analysis of the tokenomics can help define the potential of that cryptocurrency.