To make good money on trading any asset, incl. cryptocurrencies, you need to be able to consider a promising project in a startup. For this, various methods of financial and economic analysis are used. In a professional environment, this process is called tokenomics.
What is tokenomics?
Word “tokenomics” means the calculation of the economy of the token, it came from the other two: “token” and “economy”. The process allows you to answer questions such as: what and how determines the cost, i.e. value, cryptocurrencies. Thus, Cryptocurrency tokenomics is a detailed analysis of the economic feasibility of the token.
Tokenomics is designed to determine the economic essence of cryptocurrency. While its technical essence has long been well understood by all interested parties, the economic component is still not completely clear.
Everyone is used to the fact that national economies and states are engaged in the issue of money. At the same time, the value of money has a practical basis even after the abandonment of the gold standard. Since quotes show the level of development and competitiveness of the national economy and are actually a reflection of the country’s balance of payments. States are relatively stable, their future depends on many factors, and it is not difficult to predict it.
A token is a private currency created within many mini-economy. They, like governments, independently set the rules for handling the asset. This makes currencies more predictable in some ways and less predictable in some ways. On the one hand, many people now take on the traditional function of the state, on the other hand, ecosystems have managers who are more independent in decision-making, but are limited by objective technical factors, mainly production capabilities.
Still, the main factor in the development of tokens is the demand in the market. The most stable are those currencies whose authors managed to build a balanced viable business model. This is not as easy as it may seem, given that tokens are, in fact, multi-purpose tools.
Within the framework of tokenomics, various methods of analysis and various classifications can be used to evaluate (interpret) the results obtained. William Mougayar, author of the well-known work “Blockchain for Business” (not published in Russian), and general partner of the Virtual Capital Ventures project, suggests the following approach:
- A token is a unit of value created by a mini-system for managing a business project or business model. A sustainable business model can be used to interact with other products, i.e. exchange. Distribution facilitates the distribution of benefits and rewards to all stakeholders.
- The organization of the ICO makes the model underlying the token model more predictable, and also allows you to optimize the crypto-economy (the concept includes the mechanisms and features of the distribution of tokens, the structure of sales and the organization of subsequent storage).
- The possibilities of using tokens are not yet completely clear. These are multi-purpose tools that are just beginning to be used at scale and yet continue to cover new areas of application. Therefore, many poorly predictable facts underlie business models.
- Already existing tokens should be classified according to their goals, individual characteristics and role played. The goals can be: creating your own economic model, increasing user involvement and increasing their interest, acquiring new user experience, working out mechanisms for implementing transactions and ways to distribute benefits. Accordingly, the more effective the model is according to all these criteria, the more the currency is in demand. The scope and quality of the implementation of the functions that the system performs (payment unit and transaction unit, ownership, access to the product, and many others) also characterize its stability, prospects and efficiency. Roles are currency, scope of rights, exchange of value, means of earning, payment for services, functions. They allow you to determine the direction of analysis for forecasting.
In practice, the number of effectively working functions can serve as a criterion for the value of a token. If it is not clear how to use a particular token within a particular platform, then it is not ready for this, i.e. has weaknesses.
Where are tokenomics methods used?
Knowing the basics of tokenomics is a must for any investor. Since without understanding how, under the influence of what factors the price of a particular currency is formed, it is impossible to predict the trend and, as a result, successfully trade an asset. The opinion of analysts and technical analysis data do not replace, but supplement the basic information about the asset.
They are all the more important because the token industry itself is at the very beginning of its formation, and therefore there is not enough data for technical analysis. Information about how the price has changed over a relatively short period of time cannot be considered sufficient for a full-fledged extrapolation. We have a very small statistical sample at our disposal, and not all factors are quantifiable. There is a significant speculative component in price fluctuations. As the token economy develops, the perception of cryptocurrencies as an asset changes significantly, investors and speculators begin to react to events differently.
Ultimately, we come to the conclusion that cryptocurrency is an asset like any other, and without fundamental analysis it is impossible to consciously work with it. Therefore, it is necessary to study the related financial and economic factors and their impact on the price. Only after understanding how, under the influence of what factors the value is formed, it is possible to assess the potential of the asset.
When creating a project from scratch, and not analyzing an already finished one, the same rules and principles apply. But in this case, the development of tokenomics is actually the construction of a business plan that can be put into practice.
Components of tokenomics
Tokenomics includes microtokenomics and macrotokenomics. The first reflects the individual properties of the network, as well as an analysis of the variable factors that lead to changes in the function of individual parts in the blockchain. The second studies the collective properties of the network, its interaction with the blockchain economy, as well as third parties, which include governance, exchanges, etc.
Basic goals project tokenomics:
- Define the purpose of the token. It is important to understand why the token was created, what functions it performs. You can see whether the founder of the project is simply seeking additional funding for basic needs or is pursuing large-scale long-term goals.
- Define the main function of the token. Is it scalable (a system is usually called scalable if it achieves a higher TPS value than others through a change in the consensus mechanism and / or refinement of individual system parameters). And also whether it can be sold on the stock exchange.
- Understand what the fair value of the token is and how stable the price of the asset is. The cost is difficult to predict, as it depends on many external factors. In addition, a liquid token, like any liquid asset, is subject to permanent fluctuations in price. If transactions are often made with an asset, it is volatile. From significant fluctuations can keep stable production, which provides a constant sufficient amount of currency in the market.
- Assess the mechanism for distributing tokens. The produced asset can be distributed among users in several ways:
- through the accrual of rewards by miners;
- through ICO (initial public offering);
- In English, the word means landing from an aircraft. In marketing, asset toss is used to attract new members. The event can be implemented in different ways, there are two types of airdrops: incentive distribution to those who wish and automatic distribution of the asset, as a rule, after a new rule is entered into the protocol.
- Method similar to AirDrop. It is used to stimulate network activity, when coins are sent to virtually random addresses in order to attract new participants.
By answering these questions, you can get a basic idea of how an asset develops, what factors affect its price. A deeper analysis includes quantitative measurement, the study of its dynamics, and the identification of relationships.
How to identify a good token?
A good token is a promising token, i.e. one that will grow in price as the project develops. By means of tokenomics, one can study what factors and how they influence the position of the token in the market at the present time. What factors and how will influence the position of the asset in the market in the future. What use will the token get, and what place will it take.
The criteria for a promising (good) token are:
- The practical use of the ecosystem at the present time. An ecosystem is commonly understood as a platform for developing blockchain projects of a certain direction (issuing new coins, exchanging data or values, etc.). If you can already earn money on the token, i.e. it is in demand, or with its help, demanded, income-generating products are created.
- Inflation resistance. In order for an investment not to be unprofitable, an asset should at least not depreciate over time.
- Potential and scalability. Simply put, if a cryptocurrency copes well with the influx of transactions per unit of time, then it develops well, develops correctly and has a future. Bitcoin can serve as a benchmark, which functions stably with 7 transactions per 1 second. Having potential means having development. Both the demand for the product and its supply must progressively increase. Only such balanced growth can be sustainable.
- High and desirable growing cost. But you can also earn money on a stable token by trading on volatility. If the demand is low and it goes down, there is a risk of a collapse in quotes.
- Presence on the stock exchanges. If an asset is quoted, and not just diverges among network participants, it has a good chance of further development.
Such a simple analysis allows us to assess the prospects. But in practice, users conducting project analysis often face a lack of open information about the asset, and this is no longer a good signal. The lack of open data does not allow predicting the future, and therefore carries increased risks. This factor should not be ignored. And before taking the next steps towards a seductive currency, you need to answer a simple question for yourself: who is hiding information and why.
Examples of using tokenomics
If a decision is made to develop tokenomics for a new project, it is necessary to go through the following steps:
- Platform choice.
- Using the platform for monetization.
- Practical (utilitarian) accrual of tokens and the process of their accrual to users.
At the same time, tokenization for a new project may include:
- Preparation for release and creation of a viable structure.
- First commercial/non-commercial token offering.
- Distribution of devices in exchange for tokens.
- Collection and analysis of data on the first results of work and subsequent price adjustments The cost of listing on the internal exchange will be determined by demand, but the cost of the data itself depends not only on demand, but also on a number of inelastic parameters: uniqueness, location, etc.
- Secondary sale of tokens by participants on the internal exchange.
- Companies buying data for ITR.
- Additional issue, usually carried out in a year.
This is one of the simplest examples of creating cryptocurrency tokenomicsin practice, the process may include many detailed steps.
Summary: why do you need to understand tokenomics?
In simple terms, toketonomics is the search for the economic meaning and economic prospects of cryptocurrencies. Understanding opens up wide opportunities for the commercial use of a resource (asset, token). Besides, project tokenomics is also a business plan for a new project, so mastering it allows you to create and implement viable blockchain projects.