UNDERSTANDING THE TOKENOMICS OF A CRYPTO TOKEN

Before we go on to look at what tokenomics is, we need to first understand what a crypto token is. Simply put, a crypto token is a crypto coin that is based on a blockchain platform that can be swapped or exchanged with another blockchain, and that gives many incentives to holders of the said token.

So now, what’s tokenomics? The term tokenomics is formed by combining the words token and economics. So, the term tokenomics basically describe the economics of a crypto token. It refers to all of a crypto token’s features that make it desirable to investors. 

The tokenomics for a specific crypto token is usually clearly detailed in the project whitepaper, and it should help you understand the crypto token’s objective, functionality, allocation policy, and more. 

WHY IS TOKENOMICS IMPORTANT?

Projects can use blockchain technology to create micro-economies. They need to decipher how tokens should work within their ecosystem to become self-sustaining.

When it comes to tokens, there is no such thing as a “one size fits all” attitude. Blockchain has opened the door to a wide range of applications and implementations. 

Tokenomics allows teams to design a new model or adapt an existing one that fits with what the project aims to achieve. If done well, this can create a stable and high-functioning platform. 

THE SIGNIFICANCE OF VALUE IN TOKEN ECONOMICS

The world we see around us is driven by incentives. A child, for example, attends school because it will provide them with the opportunity to earn an education that will benefit them in the future. People adhere to their dentist’s recommendations to maintain dental hygiene and minimize the risk of any dental problems. 

The incentive structure is present in every institution, business, framework, as well as pretty much everywhere else you take a look at. Cryptocurrencies were not intended to be free of the incentive structure, and so, the tokenomics model was born. 

Value is the most essential factor that can propel the foundation of tokenomics. Although crypto assets have enthralled the entire world with several promises in economic opportunity, they lack tangibility. A US dollar may be seen and touched, but this is not the case with cryptocurrencies. 

A crypto token like LITH Token showcases its value in utility, helping to decentralize and incentivize a cleaner future through cryptocurrency. It utilizes blockchain technology to create an environment where all users within an ecosystem are incentivized to work together towards a common goal: the goal of creating a more sustainable environment. 

TYPES OF TOKENS

If you want to learn about tokenomics, it is essential for you to first understand the different types of tokens. Tokens can be classified according to the structure of tokens and also on the basis of usage. 

The structure of tokens can be classified into: 

LAYER 1 TOKENS 

These types of tokens are native to a particular blockchain and are used to power all of the services in the blockchain. The BNB on Binance Chain is an example of the Layer I token in cryptocurrencies. Ether or ETH on the Ethereum network is another well-known example of a Layer 1 token in cryptocurrencies.

LAYER 2 TOKENS

In the meaning of ‘what is tokenomics’, these types of tokens have a distinct representation. They’re utilized in the case of decentralized applications in a specific network. OMG tokens, for example, are classified as Layer 2 tokens since they are used in OmniseGO, a decentralized project in the Ethereum network. 

On the basis of usage, tokens can be categorized into: 

SECURITY TOKENS

Security tokens are called investment contracts, and they must meet several conditions for the same. These tokens are subjected to securities and regulations. In simple terms, security tokens on blockchain will get their value from tradable and external sources. For this reason, they will always be subject to government regulations, making them a safer choice. 

The way the Siafunds or SF on the Sia network work is one of the most noteworthy examples of security tokens.

UTILITY TOKENS

Utility tokens are another significant type of token that you will come across in tokenomics. These types of tokens are issued through an initial coin offering (ICO), and they are useful for financing a network. 

ICO is essential for funding project development. The Basic Attention Token or BAT is an example of a utility token that was first delivered via an ICO. 

CLASSIFICATION OF TOKENS

Tokens can also be classified into two categories: fungible tokens and non-fungible tokens.

FUNGIBLE TOKENS

These tokens are recognized for having the same value as well as replication facility. The scenario of ETH (Ether) on Ethereum is a perfect example of the fungible token. ETH tokens’ value is the same, and they can replace each other since their value is the same. 

NON-FUNGIBLE TOKENS

Non-fungible tokens (NFTs) do not share the same value and so, they are unique. NFTs have been trending in recent times, and they’ve sparked a lot of interest in tokenomics, especially with high-profile NFT auctions. 

The tokenization of assets such as real estate, artworks, pictures, and collectibles with NFT has sparked a new wave of digital ownership revolution while also showcasing the potential of tokens. 

THE FACTORS INCLUDED IN A CRYPTO TOKENOMICS

When considering the tokenomics of a crypto token, any factor that even slightly concerns the value of that crypto token should be considered. 

Most of the factors that constitute a crypto’s tokenomics can be found on websites like CoinGecko and CoinMarketCap, but still, verify with the project whitepaper to ensure accuracy. For example, you can learn about LITH Token’s tokenomics by downloading the project whitepaper.

To determine the worth of a crypto token, some of the most important metrics to consider are given below.

1. THE ALLOCATION AND DISTRIBUTION OF TOKENS

Make sure you understand how the token will be distributed. Most crypto tokens are generated through any of the following ways: either they are released through a fair launch or they’re pre-mined. 

A fair launch is when a crypto is mined, earned, owned, and regulated by the entire community. Before making the token public, there is no early access or private allocations. Bitcoin, YFI, and Dogecoin are a few examples of this. 

Pre-mining, on the other hand, is when several of the crypto tokens are generated and distributed to a select group of addresses (typically project developers, early investors, and other team members) before they are made public.

These days, most crypto projects come with pre-mined tokens. So, don’t dismiss a project just because some tokens were minted before it was made public. However, you must check to see if there is any wallet that is hoarding a considerable percentage of the circulating token supply. If there is, there is a high chance of the whale dumping their holdings and causing the price of the token to drop in a moment.  

On the other hand, you can assume that a project is credible and that it truly cares about its future development if the project distributes its tokens to as many members as possible. 

2. THE SUPPLY OF THE TOKEN

The supply of a crypto token is a primary component of its tokenomics. When it comes to crypto, there are three types of supply to keep an eye on. There is the total supply, circulating supply, and the max supply. 

The total token supply refers to the number of tokens that are in existence presently, excluding any that have been burned. The circulating supply of a token refers to the number of tokens that have been issued thus far and are presently in circulation. And finally, a token’s max supply is the maximum number of tokens that will be ever created. There is no determined max supply for some tokens.

If you observe that the circulating supply of a particular token has been increased by the project developers regularly over time, you can assume that the token’s value will rise in the future. Contrarily, if too many tokens are being released at the same time or very often, the token’s value may plummet.

3. THE TOKEN MODEL

Make certain you understand if it’s an inflationary or deflationary token. An inflationary token will continuously be produced over time. Such a token does not have max supply or capped limit of tokens that can ever be created. 

A deflationary token model, on the other hand, is the exact opposite. In this model, there is a max supply the token is capped at. For example, the total supply of Bitcoins is capped at 21 million. Most POS (proof-of-stake) tokens, such as ETH, are inflationary in order to reward the delegators and validators in the network. 

Some crypto tokens have a dual token model, where one token is used as security to raise funds and the other is used for utility inside the network. Examples of projects that function on the dual-token model are MakerDAO, Axie Infinity, Filmio, and VeChainThor.

You can learn more about the dual-token economy/model here.  

4. MARKET CAPITALIZATION

The term market cap (or market capitalization) of a token refers to a metric that measures the relative size of the token. It is calculated by multiplying the present market price of the token with the total number of tokens in circulation. 

While the market capitalization of a crypto token may provide some insights into its performance and size, it is crucial to note that it is not the same as money inflow. Therefore, it does not reflect the amount of money in the market. 

In addition to the market cap, you can also check a project’s fully diluted market cap, which is the theoretical market cap if the token’s max supply was already in circulation. 

The higher the market cap of a token and the lower its circulating supply, the more valuable that token could be in the future. 

5. FUTURE READINESS

Tokenomics also involves understanding how a crypto token can help address the challenges of the future. Many teams in the crypto space that are responsible for the development of a network do not end up as its rulers. 

So, developers must accept the fact that what works now for their token projects may not work in the future. The network’s growth and maturity may necessitate changes in the way the token is being governed. 

LITH Token is future-ready as it is positioned to be the crypto of choice for sustainable and socially conscious businesses to thrive. It aims to help make the world a better place through decentralization and accountability in business. 

TO WRAP UP

Tokenomics is an essential concept you need to understand when deciding which crypto to invest in, as the factors included will have a significant impact on your investment. However, when trying to value a crypto, also keep in mind that you need to seek answers to a few additional questions.

For example, you should seek information about the project’s team and members’ backgrounds (check them up on social media), the historical performance of the token, its use cases, and if you can, data gained from technical analysis.