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Blockchain technology promises to expand into a sector worth many trillions of dollars in the coming years. Analysts believe that token-based ecosystems will be the catalysts for most predicted growth because of the mass adoption of the cryptocurrencies that drive these ecosystems. $ALGO powers the Algorand network, for instance. Higher adoption and utilisation of the $ALGO coin will ultimately lead to an increase in the value of the entire Algorand ecosystem.
One of the first things people want to know about any token-based blockchain project is the token economics or tokenomics of the coin. For some investors, tokenomics is the primary criterion for investing in a project. Indeed, the elements of tokenomics affect the long-term value of a cryptocurrency; hence the subject is of high importance to adopters of digital currency.
Definition
Tokenomics is the science of supply, allocation, utility, incentivisation and distribution and other economic factors that affect the value of a cryptocurrency. Like in traditional currencies, economic factors affect the prices of cryptocurrencies. Elements such as inflation, deflation, demand, supply, utility and adoption all contribute to the value of a token, whether in the short or long term. Token economics deals with all the factors mentioned above and more and gives potential investors insights into the ecosystem’s overall potential and the team’s capability.
Elements of Token Economics
Tokenomics comprises a host of subdivisions that make up the whole. Here are some of the economic factors that apply to cryptocurrency as tokenomics:
Token Supply
The supply of a digital currency refers to the total amount of coins in that currency in existence. Depending on the protocol, some coins are mineable, or released periodically by an algorithm, or have their entire supply released into the market upon launch. $ALGO, the native token of the Algorand network, has a total and fixed supply of ten billion tokens. The 10 billion coins were minted at launch, and no other coins will ever be minted. Bitcoin, meanwhile, has a fixed supply of 18 million coins, but bitcoins only come into existence through mining.
Supply is an essential factor that affects the price of a cryptocurrency. Projects with vast token supplies have fewer chances of becoming very valuable. Supply can be fixed, inflationary or deflationary. An inflationary token has no maximum cap, which means more of it will continue to come into circulation. Most inflationary coins come into existence through mining, yield farming or algorithms. Deflationary tokens, meanwhile, experience decreasing supply as people transact with them. Ethereum recently became a deflationary token with a burning mechanism that destroys $ETH in every transaction.
Token Utility
The importance of a cryptocurrency to an ecosystem depends on its utility. Coins with high utility tend to be more valuable in the long term than coins with little or no utility. $ALGO, Algorand’s native token, is a utility token for governance, participation, rewards and payment of transaction fees on the Algorand blockchain. These various uses and functionalities add more value to the token and attract users to the ecosystem. Meme coins are tokens that have no straightforward utility and thrive on hype.
Token Distribution
An essential element of a cryptocurrency’s tokenomics is its distribution. Unlike Bitcoin, which rewards miners who validate the network, most cryptocurrencies are released upon launch, like $ALGO, or in phases. Users want to know the exact percentages of the total supply that go to a particular purpose, such as governance rewards, team allocation or airdrops, and the vesting schedules of these plans.
Tokens that do not provide clearly stated allocation and distribution information before launch are regarded as scams. Additionally, investors are wary of projects with high team token percentages and are attracted to projects with large token allocations for the community and ecosystem. For the $ALGO allocation schedule, click here to read more.
How Does Token Economics Affect the Prices of Cryptocurrencies?
If there were a billion bitcoins in circulation, 1 $BTC would be worth some $1,000 today. A smaller supply of bitcoins ensures scarcity of the coin, making it command a higher price. Additionally, the deflationary or inflationary nature of a cryptocurrency determines the rate at which its supply increases or decreases, thus affecting its price. Perpetually increasing supply, if not matched with equal demand, will lead to a fall in prices.
Token economics is a vital part of any token-based blockchain project. Demand, supply, utility and distribution have a say in the value of cryptocurrency. Read more here.
