WTF Is Tokenomics?!
Fungible vs. Non-Fungible, Supply & Demand – What’s the Big Deal?
The surge of crypto and blockchain technology to the forefront of the current cultural zeitgeist is palpable, from celebrities toting Bored Ape Yacht Club NFTs (BAYC) to the formerly known Staples Center in Los Angeles being renamed the Crypto.com Arena in arguably one of the largest partnership deals of the decade. There’s a lot to break down when forecasting what role crypto will play in the future of global economic systems, and in the words of Sonny & Cher, we’ve got you, babe.
One of the first keys to unlocking a solid understanding of cryptocurrency coins or tokens is to take a look at their respective ‘tokenomics’ publications.
We love a good portmanteau (you know, when two words are combined to make a new one), and tokenomics is probably the most common example of one that you’ll encounter in the crypto space. Made up of the words ‘token’ and ‘economics’, tokenomics is simply a series of metrics that includes the supply, distribution, allocation, utility and/or governance of a cryptocurrency. Whether you’re a crypto newbie or have been in the space for a while, cryptocurrency is an emerging market with terms that are constantly being defined and redefined, so it’s always helpful to brush up on the basics.
In this article we’ll explore what this combination word really means by defining some critical terms and providing an overview on how they’re used in crypto.
The Token Side – Fungible vs. Non-Fungible
First, let’s define ‘cryptocurrency’ as an umbrella term that covers both Fungible and Non-Fungible tokens. Now let’s take it a step further, fungible and non-fungible tokens both store value and can fall into several categories, including utility, governance, security, etc. However, they are two completely different things. Oftentimes, these terms can create a bit of confusion, so let’s clear this up…
- Fungible Tokens (FTs) – Simply put, think of FTs as digital money in the same way that dollars are physical money; they are not unique and have a 1:1 trading ratio. For example, one USD can be traded for another USD no matter where you go in the United States, and you wouldn’t trade a five-dollar bill for a one-dollar bill, right? Well, FTs operate in the same manner, except digitally.
It’s important to note that FTs can be broken down even further into the categories of ‘coins’ and ‘tokens’. Some major coins you’re probably already familiar with are Bitcoin, ADA and Ether. Coins are the native currencies of specific blockchains – e.g., the Bitcoin blockchain’s native coin is obviously Bitcoin, the Cardano blockchain has ADA and Ethereum has Ether. Coins are used to pay fees on their respective networks, transfer value and provide rewards to users who participate in the maintenance of their blockchain. Tokens work pretty similarly, but depending on the blockchain, they may or may not travel as native assets.
- Non-Fungible Tokens (NFTs) – On the other hand, NFTs are unique and assigned a value. They are tradable digital assets tagged with a proof of ownership and originality. To put it in literary terms; NFTs are first editions or originals that can’t be replicated and hold value. They can also represent credible digital certificates tied to real-world assets, like Intellectual Property (IP) rights in projectNEWM’s case.
The Economics Side
Here’s where we get into the monetary policy of a cryptocurrency, and we won’t dive too deep as this is just a 101 overview. According to a recent CoinDesk publication, tokenomics can determine two things:
The incentives that set out how the token will be distributed and the utility of the tokens that influence its demand. Supply and demand has a huge impact on price, and projects that get the incentives right can surge in value.
Source: CoinDesk, 2022
That being said, when looking at a tokenomics document, a few of the first things you’ll want to take into account are:
- Total Supply – The total amount of the token that’s been minted.
- Allocation & Distribution – How the project/blockchain is distributing the token among their team, investors and general public.
- Circulating Supply – The amount of coins or tokens that have already been distributed are publicly available to be traded in the market.
- Market Cap – The number of tokens in circulation multiplied by the current price of the token in question.
Seeing these numbers and percentages (and how transparent a project is being with them) can provide insight into future token valuation. I would be remiss if I didn’t mention here that there are several other variables that make token projects worth the while in addition to their tokenomics, but we’ll get into that in another article.
Global economics in general is constantly evolving, and in the crypto world, we’re still in a phase of early adoption. Now is as great a time as any to learn the terminology that drives many blockchain projects. With the amount of information that’s being shared in real time, it can be quite overwhelming entering or navigating the space. To better understand the tokens or coins you’re interested in, a good place to start is with their tokenomics.
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Hello.This post was really fascinating, particularly since I was looking for thoughts on this subject last Monday.