Over the past few years, the term “tokenomics” has become widely used to evaluate cryptocurrency assets. This term combines the economic characteristics, and principles of operation of an asset, as well as psychological and behavioral factors that can influence its value in the future. USDT to TRX exchange rate will probably be associated with the development of the entertainment industry on the blockchain, but this is not the only pricing factor.
Projects with carefully thought-out tokenomics have a much greater chance of success because their team has carefully worked out mechanisms to incentivize the acquisition and retention of their tokens.
Tokenomics-poor projects are bound to fail because investors will swiftly dump tokens when problems arise. One of the best places to start if you’re considering buying a cryptocurrency asset is learning about tokenomics. This will enable you to make an informed choice.
In tokenomics, supply and demand have the same significance as they have in conventional economics. Having an idea of their current ratio, it will be easier to get an idea of the demand for assets.
Supply: Emissions, Inflation and Distribution
Emissions and inflation
One of the main aspects of a token supply is its emission, which can be a key factor in determining future value. A decline in the total quantity of tokens is a favorable precondition for a rise in the token’s price. Conversely, if a lot of tokens are created, this can lead to inflation and eventually cause the token’s value to decrease. There is no particular point in holding such an asset.
An important aspect of the proposal is also the way the tokens are distributed. For example, if most of the tokens are already in circulation, this may indicate stability. The distribution of tokens over time and between project participants also affects its future dynamics. For example, if 25-30% of the supply is concentrated in the hands of a limited number of people, this begs the question: what would happen if they suddenly decided to sell their coins?
Demand: ROI, Memes and Game Theory
Imagine that you have broken some stones and decided to sell them. However, if no one needs your stones, they will remain dead weight. This simple comparison highlights that having a limited supply does not guarantee value. People need to be convinced of the value of the asset and its prospects.
Return on Investment (ROI)
Return on investment is not just a prediction of the growth in the price of an asset. It is an estimate of the income or cash flows that an asset can generate for the owner. For example, if you have Ether, you can lock it into a contract using Proof of Stake and receive about 5% per annum on the amount you have frozen. Some tokens provide income from the protocol rather than from the tokens themselves. For example, by holding SUSHI, you can stake it and receive a share of the revenue from the Sushi protocol.
Another reason why a token may become in demand is simply the belief that other people will want the token and will continue to be interested in it in the future. This confidence can be called faith, belief or even memes, but no matter what we call it, the mechanism that generates belief in the growth of future value always remains an important factor.
How to evaluate the influence of a psychological factor? If everything else in tokenomics can be measured, then you can’t do without immersing yourself in the community to feel its pulse. It’s important to consider how things are going in their Discord channels. How active are they on Twitter? Do people make this token or protocol part of their identity? How long have community members been active?
Belief in future value is often one of the powerful drivers of demand. Therefore, in addition to pure analytics, you should not neglect emotions and conviction. A token with belief, clever memes, and a cult following can go a long way. Surely some people are in no hurry to change DOGE to CAKE or another asset simply because they like this coin.
Game theory encourages us to think about what additional elements in tokenomics might help increase demand for a token. This is a fairly complex area of tokenomics, but a basic understanding of it won’t hurt.
One of the popular theories of token games is the blocking theory. The idea is to create an incentive to lock your tokens in the protocol contract.
An example of such a theory is the Curve liquidity pool. Similar to Sushi, you can lock up your CRV tokens and receive a share of the protocol’s revenue. However, the longer you lock your tokens (up to a maximum of 4 years), the higher your share of the reward.
Additionally, the more tokens you have locked and the longer you have them locked, the lower your fees when using other services on the Curve exchange.
Analysis of technical documentation and assessment of tokenomics
After carefully studying the documentation or whitepaper. You should have a clear understanding of how the supply of tokens works and what factors will help stimulate demand.
It is not necessary to focus on the question: “Will the token rise against the dollar?” Instead, ask yourself the question: “Will it be more valuable than BTC/ETH/SOL?” (or another coin you invested in).
Cryptocurrency prices are highly correlated and change synchronously. Therefore, if you have anything other than the major cryptocurrencies in your portfolio, its presence must be justified by the belief that the tokenomics and value of this asset will surpass the underlying currencies. Evaluate not only the current value but also the potential development of the token in the future.