All You Need to Know About Crypto Tokenomics
Cryptocurrencies were introduced as an alternative to traditional currencies and payment systems that are largely dominated by centralized entities such as banks and governments. Cryptocurrencies are blockchain-based digital currencies that work on the mechanism of decentralization, i.e. allow transfer of money (in the form of cryptocurrencies) and make payments without the role of middlemen such as banks and financial institutions.
Tokenomics or token economics is the study of the economics of tokens or cryptocurrencies.
What is tokenomics?
Tokenomics in the crypto space refers to the study of the economic aspect of cryptocurrencies. This covers everything from the token foundation to the distribution and the generation of goods and services through tokenization.
As the blockchain is rising in popularity and more people are understanding its significance, the use of cryptocurrencies for economic transactions that are independent of centralized systems is also increasing.
There are numerous benefits of using cryptocurrencies for economic activities, the most common of which include decentralization (i.e. the ability to work without middlemen), low operational cost, and high security.
In the crypto space, a token is a unit of currency or value that is generally used to represent something specific like ownership of a physical asset, voting rights, access to a product or service, etc. Companies in the crypto space use tokens as a medium to raise funding for their upcoming projects.
As tokenomics is all about the study of tokens, i.e. crypto-tokens or cryptocurrencies, in this article, we try to understand the significance of tokens with the reference of Libra Coin, which is a fast-growing cryptocurrency for e-commerce payments and security.
Why tokenomics is important in the crypto space
One major part of crypto tokenomics is the study of the supply and demand of cryptocurrencies. Supply means the total market supply/cap of a particular token, and demand means the token demand in the respective market. The supply and demand of a token are major factors to decide the token price, which is why it’s crucial to understand tokenomics in order to understand the value of a token.
At the same time, it’s also important to know about the factors that impact the supply or demand of a token/cryptocurrency. All this is covered in the study of tokenomics.
In the case of the Libra coin, while the total supply is fixed (2 billion), the demand for the coin largely depends on its purpose and how the currency can be used. This is why the team has created a large number of growing use cases for the Libra coin, including but not limited to the Libra ecosystem, Libra Pay, Libra Exchange, Libra Marketplace, Libra ATM, Libra Card, Libra PoS, and more.
But, for many other cryptocurrencies, there are no actual use cases. That means the tokens are not supposed to be used for any particular purpose. Then, how do such tokens gain value? This is what you learn in tokenomics, and this is why it is important to seriously look at the tokenomics of a cryptocurrency that you are planning to invest in.
Some other factors that are considered and mentioned in tokenomics include token allocation and distribution, total supply, the token model, etc.
