The acronym ‘DYOR’ (Do Your Own Research) is used a lot in the crypto space, but how do you actually do your own research?
Admittedly, it’s not simple and learning to DYOR takes a lot of time, practice and commitment. But if you’re ready to learn, this Tokenomics series is a good place to start!
Let’s dive into the realm of Tokenomics.
What is Tokenomics?
Put simply, Tokenomics, or ‘token economics’, is the basics of evaluating a crypto (the token itself and the economics around it, not the protocol).
It covers everything about how tokens work, including their mechanics, distribution, the factors that influence long-term value (such as supply and demand), and much more.
But first, what are tokens?
In the crypto space, the word ‘token’ is used to describe digital assets that operate on another cryptocurrency’s blockchain (which is the case with many DeFi tokens).
In simple terms, a token belongs to applications built on top of blockchains like the Bitcoin or Ethereum blockchain, whereas a cryptocurrency belongs to the blockchain itself, e.g. BTC and ETH.
Why is Tokenomics important?
When looking at Tokenomics, we’re looking to determine what makes a crypto valuable. We aren’t considering the protocol it belongs to, but rather the token in isolation.
What does the token do within the ecosystem? How is it designed to act with supply and demand dynamics? Is it inflationary or deflationary? Does it have staking? etc.
Tokenomics are extremely helpful in determining how valuable an asset is and how valuable it will be in the future. If you’re looking at investing in a crypto asset, understanding its tokenomics is absolutely key to making a good decision.
Supply & Value
When looking at a crypto’s supply, it is vital we consider how the supply will change over time, as this will determine whether the token holds, increases or decreases in value over time.
Also, when the token’s price is affected by supply change, the perceived value of the project can also be affected. This is because when the price falls due to an increase in supply, investors can get spooked and sell out, perceiving the fall to be a risk.
This can be very negative for a protocol, especially one that relies on public attention and hype, as it can cause a domino effect, with more investors getting spooked and selling out, driving the price further down, in a self-reinforcing loop.
In terms of supply, with all else being equal, a token’s value will increase if, in the future, fewer tokens exist compared to now – this is known as deflation.
On the other hand, if more exist, a token’s value will decrease – this is known as inflation.