What is tokenomics

In the world of blockchain, the word “tokenomics” sounds no less mysterious than the “Dark Web” for those who like to dive into technological secrets. But don’t let the term fool you: tokenomics is not just an obscure word from the world of cryptocurrencies, but rather one of the keys to understanding the unique economic mechanism that powers blockchain platforms and digital assets.

Let's figure out what really lies behind this cryptocurrency mystery. We will try to tell you simply and clearly, and most importantly, we will explain why this is necessary.
Tokenomics
Tokenomics is not only an understanding of the supply and demand of cryptocurrency, but also a special economic mechanism tied to blockchain platforms and digital assets. To put it very simply and give an analogy, this is a business plan for a token.
In classical finance, economists monitor currency output using official data on the money supply, usually denoted M1, M2, and sometimes M3 or M4 in some countries. However, an in-depth explanation of each M category can be difficult for the uninitiated. Just remember that M1 reflects the most liquid money, and M2 is less liquid, and so on... This data is important for ensuring transparency and monitoring various aspects of the supply of classical currency.
Historically, governments and monarchs have often been inclined to issue additional currency within their country. Running a government or waging war could be expensive, and it was often easier to increase the money supply. Nowadays, when crises arise, such as bank bailouts or the fight against pandemics, governments around the world are forced to quickly issue new currencies.

However, this process can lead to inflation, where a currency loses its value due to excess issuance. Inflation means that the prices of goods and services rise and our money decreases in value.

In blockchain everything is different, cryptocurrencies and tokens have predetermined release schedules and algorithms, which are usually prescribed in tokenomics. This means that the number of coins that will be created in the future can be predicted with some confidence. While changing the release schedule for most cryptocurrencies requires the consent of many people, making the process complex, it also provides greater predictability and security for cryptocurrency holders. They know that the amount of their assets will increase according to certain rules, as opposed to a situation where governments can simply push a button and print more money.

If tokens were issued physically.

Total token supply
The total supply is the total amount of tokens that will be created.
For example, only 21 million Bitcoins will be created and not one Bitcoin less or more. This process will be completed around 2140. Every four years, the number of new coins created by mining will be halved. This process is called halving, and it creates scarcity, which puts pressure on prices.

21 million may seem like a huge number, but compared to the world's population of about 8 billion people, it is actually very small. It is because of this that many compare Bitcoin to gold and see it as “hard” money.

An approximate Bitcoin mining schedule from the very start of the cryptocurrency until the near future.

Bitcoin's release process and schedule have become a model for many other cryptocurrencies. For example, Bitcoin Cash, Bitcoin SV and ZCash also have a hard emission limit of 21 million coins. There are other coins such as Litecoin that use a similar structure but have a larger total number of coins.

However, there are cryptocurrencies with a completely different approach to issuing coins. For example, in Dogecoin (hi Elon), the emission rules remain the same for each new block forever. This means that the number of tokens in these networks is practically unlimited. It is believed that this model will help maintain a stable price and make their coin more suitable for use as a medium of exchange. However, only time will tell if this theory comes true.

Many coins and tokens fall in between these extremes. Most of them are based on the Ethereum platform, and although they have a maximum issuance limit, this limit is often very high. For example, the total supply of the Tron network's native coin, TRX, is limited to more than 100 billion.

The total supply of the TRX token throughout its existence. Source: Tronscan

It is also not uncommon for the number of coins or tokens to decrease. Some projects establish rules according to which a certain number of coins are periodically “burned”. Essentially, these coins are sent to an address from which they cannot be retrieved. This usually occurs as a result of transaction fees, and the more an asset is used, the faster the reduction in its tokens occurs.

Of course, this is not how tokens are “burned,” but we hope the point is clear.

Why tokenomics is important
In short, tokenomics is one of the factors in assessing the reliability and stability of a crypto project. It, among other indicators, can help determine whether a project is fraudulent or not (we write more here), as well as whether it is worth investing in it.
In the well-known investment book "Margin of Safety", investor Seth Klarman says that "In the short term, market prices depend only on supply and demand." If we agree with this statement and apply it to cryptocurrencies, then understanding the factors influencing supply and demand is critical for both speculators and investors.

When analyzing such assets, several factors must be taken into account. The most important thing is understanding the purposes of using a specific cryptocurrency. Is there a strong connection between the token and the use of the corresponding platform or service? If so, then the likelihood is that growing demand for the service will lead to increased demand for the purchase and use of the token, and, as a result, an increase in its price. However, if there is no such connection, then what is this token intended for?

There are other important questions that need to be answered:
How many tokens exist now?
How many tokens will there be and when will they all be created?
Who are the creators of the project and tokens? What volume of tokens will go to the project creators?
Is there information about large losses, burning of tokens?
Studying tokenomics usually helps answer these questions, as well as understand what the asset's price might be in the future. For example, many people who are not very familiar with cryptocurrencies may think: “If this coin becomes as valuable as Bitcoin, then wow...”. However, this idea does not always correspond to reality.

The meme is funny, the situation is scary. You can wait like this all your life.

Let's look at two examples: Bitcoin Cash and TRX (Tron network). Bitcoin Cash has the same total number of coins as Bitcoin, so the idea that it could become just as valuable has some merit. But if we are talking about TRX with its more than 100 billion coins and one of them was worth thousands of dollars, then the total capitalization of the tokens must be the highest of any business in the history of mankind. How likely is this?
While these questions may seem complex, they are an additional way to evaluate a cryptocurrency and help determine whether a particular asset has the potential to have a successful future compared to others. Study the tokenomics of the project and don’t be afraid of this seemingly complex term.

An additional analysis measure can be AML verification of a crypto address in the blockchain network that interests you. You can do this using our solution for assessing the risks of interaction with a blockchain address Btrace.
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