Tokenomics and Investors
NB: BLOCKCHAIN FOR NEWBIES.
TABLE OF CONTENT
- WHO IS AN INVESTOR
- KEY ELEMENTS OF TOKENOMICS
WHO IS AN INVESTOR?
An investor is an individual who puts money into a business in the hope of earning profits (more money). On a norm, this person has an agreement with the party he invested with on how long his money would be kept, how much profit he would receive, and how frequently his profit would be paid out.
An investment is any asset bought by an investor in the hope the asset increases in monetary value in the future. This asset could be physical (houses, gold bars) or digital (shares, cryptocurrencies).
There are three (3) types of investments:
- Short term investments
- Middle term investments
- Long term investments.
Who is an investor in the Crypto Space?
Any individual that holds any form of cryptocurrency or NFTs is known as a crypto or NFTs investor.
They are many signs a crypto investor should be on the lookout for before committing one hard-earned money to a crypto project. Explained below are some of the characteristics investors should be aware of.
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Key Elements of Tokenomics
The market cap of a token is the total worth of all cryptocurrencies that have been mined. This worth is valued in dollars.
For example, the bitcoin market cap is the dollar value of all bitcoins mined.
Market cap is a pointer to how stable and profitable a token is.
- A larger market cap equates a stable token, lesser gains, and lesser losses.
- A smaller market cap equates less stability, higher returns, and higher losses.
Token utility means use case. The token you want to purchase as an investment, is there a use-case for it in the blockchain space?
There are numerous ways a token could be helpful in the blockchain space. Some of these ways are:
- Transaction fees: some tokens are used as fees to facilitate transactions on blockchains. For example, BNB is used as fees to facilitate transactions on the Binance Smart Chain.
- Rewards: some tokens are given as rewards points to validators and participant. For example, $Cake tokens are distributed to investors who provide liquidity to the Pancakeswap (a decentralized exchange).
- Waive: holding specific tokens would lead to a deduction of transaction fees, paid while interacting within the blockchain app. And in some cases, as seen with TWT, total cancellation of transaction fees.
- Access: before anyone can fully interact with some decentralized applications (Dapps), one has to hold the blockchain native token the Dapps were built on. For example, Polkadot (DOT) is required before a new blockchain can be created on the Polkadot network.
A token burn is an act of removing several tokens/coins from circulation. This would lead to a reduction in the number of tokens/coins circulating.
The process entails sending tokens to wallets that can never be accessed by anyone. This renders cryptocurrencies sent to this wallet useless hence the name ‘burn.’
The supply of a token is one of the keys to its success. For example, if the supply of a commodity is low and demand is high, this leads to an increase in price. This is the same principle token burning follows.
Token burning is carried out on tokens to increase the value of these said tokens.
Let us take a break to process all that we have learned. Chill. Ready. Let’s go.
Token supply means the total number of tokens created during the onset of the crypto project. Explained below are the different branches of token supply.
- Max supply: total number of tokens created. This consist of both the one locked and in circulation.
- Circulating supply: total number of tokens in circulation
- Locked supply: consists of tokens burned and tokens mined.
A token with a high supply is tagged as a shitcoin. (The token supply of Safemoon is 1000 billion compared to Bitcoin’s max supply of 21 million).
A token with a low supply with high demand could potentially lead to an upward movement in price. But tokens with high supply would hardly have a drive-in high demand. Exceptions to this statement can occur, especially during the bull season.
This is a way of rewarding participants active in the Crypto project. A token incentive mechanism is one sign a potential investor should be on the lookout for.
There are various ways a token can lure investors. Examples are:
- Voting and governance: Token holders have a say in decisions and input concerning the blockchain or crypto project.
- Staking rewards: In Pancakeswap, token holders who stake their tokens earn cake as rewards for providing liquidity.
- Mining fees: Validators who approve transactions on the blockchain are rewarded with coins.