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Understanding Tokenomics;

The Supply and Demand of Cryptocurrencies

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In today’s financial world, Central Banks act as the financial regulator who controls and oversees all that has to do with a Nation’s currency (or group of Nations).

Central banks are independent institutions that make and enforce policies that are aimed at stabilizing the economy, and reducing or avoiding inflation. They are the sole printers of currencies meaning they handle the supply of these currencies and try to maintain their value.

This is a glance at what Tokenomics is about. Tokenomics is a combination of Token and economics this directly means a token’s economics. Tokens in this article represent both Tokens and coins. Tokenomics deals with a token’s creation and distribution, its utility, supply, and demand, burn schedule(the amount of it to be burned and taken out of circulation), rewarding active users, and other factors.

These tokenomics rules are executed through code (Unlike fiat currencies) and are open for all to see and difficult to change.

A token’s tokenomics should be among the first things to go through when analyzing them. Tokenomics is an important aspect of crypto projects because its design can make or mar them. It is also an important part of Fundamental analysis. Understanding it, and knowing how to analyze the tokenomics of tokens and projects is essential to making better decisions.

Breaking down tokenomics; Elements.

When looking at the design of a cryptocurrency’s tokenomics, the factors below should be considered.

Token Supply: It is essential to check the maximum supply and circulating supply of any token while doing research.

BNB’s circulating supply (Feb 2022)

The circulating supply of a token says the amount in circulation. More tokens can be added to this by minting and tokens can be taken away from circulation by burning. Each of these will affect the price of the token.

The maximum supply of a token simply means the total number of a token to exist in their lifetime. AVAX has a maximum supply of 720 million coins, SOL has a maximum supply of 489 million, and Bitcoin has a maximum supply of 21 million.

Some tokens don’t have a maximum supply. Stablecoins like USDT, and USD Coin (USDC) can always keep growing in supply because they’re pegged to the fiat US Dollar and are issued based on their reserves.

Incentive mechanisms; Mining and staking: This is how a token rewards active participants as it is crucial for the smooth operations of the token (or project) in the long run.

Mining: Mining is used to reward those who validate transactions for base-layer blockchains. This can be a set of computers that add new blocks just discovered and filled with data to the blockchain. Bitcoin uses this mechanism.

Staking: This is similar to mining and is used more recently by new tokens, and projects. Here validators lock some amount of the tokens in a smart contract. Chances to validate transactions increase with more tokens locked.

Analyzing Token burns: The permanent removal of tokens from circulation and their total supply helps add value to the price of the token as scarcity leads to more demand.

Some tokens burn certain amounts at intervals e.g BNB burns quarterly till 50% of the total amount in circulation has been destroyed. While Ethereum started burning ETH in 2021.

The reduction of the supply of a token makes it deflationary while the continuous increase in a token’s supply makes it inflationary.

Token Distribution: The distribution of tokens is an important aspect to pay attention to because it also plays a huge role in the present and future value of the token.

Tokens are either launched via a fair launch or a pre-mining launch. In a fair launch, the token is released to the market at the same time and rate, no amount is given to anyone earlier. Btc is an example of this category.

AVAX’s token distribution

In a pre-mining launch, some amount is allocated and given to a select group before it is released to the public. This could be as airdrops or allowing institutional investors to invest. ETH and AVAX are examples of this.

Institutional or huge investors holding large portions of a token could lead to future value loss because they can dump them at any time. But if a token is held by founding team members and good investors- long-term success will be achievable.

Some portion of tokens could also be locked up, to be released at certain times. Pay attention to this, if a huge amount of the token is to be released in the future, this may affect the token’s value negatively.

In conclusion, studying and analyzing a token’s tokenomics is essential for making better investment choices, and should be done before buying any token. It is an analysis that should be based on many individual factors, but also analyzed as a whole.

Through the economics of a token, how it will be used and its scalability will be made clear.

Always check the Tokenomics!

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