HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
XM information and reviews
XM
82%

What is tokenomics? Understanding the token economy


With thousands of cryptocurrencies available, traders are beginning to think to themselves "What makes one crypto more valuable than another?" Tokenomics will help make sense of this. Central banks control the interest rate and the supply of money to maintain a stable price for a country’s currency and grow the economy. Economists call this monetary policy. Cryptocurrencies, like Bitcoin (BTC) and Ether (ETH), also have such systems in place to control supply. A cryptocurrency’s monetary policy is determined by the issuing entity or the network’s tokenomics.

In this guide, traders will learn about the concept of tokenomics and why it’s important as a trader and investor to understand a digital asset’s tokenomics before investing in the project. So let’s dive right in!

What is tokenomics?

Tokenomics, short for 'token economics', refers to the set of rules that govern a cryptocurrency’s issuance and supply. Digital coins and tokens built on a blockchain typically have pre-set, algorithmically-created distribution schedules. Additionally, some crypto assets also have hard-coded policies in place for the removal of units of the asset in the circulating supply. These are the essential factors determining a digital asset’s tokenomics. 

A digital asset’s tokenomics allow us to reasonably predict the number of coins that will be created by a certain date and the group of people who could have the largest ownership of the crypto network. Though an asset’s tokenomics can be altered at times, it often requires the agreement of the majority of the blockchain network’s participants to make it happen.

What are tokens?

To understand how tokenomics works we need to start at the ground level and first understand what tokens are and what their difference is too coins in the crypto market. Tokens are digital assets that are issued on and powered by blockchain technology. Though bitcoin and ether can also be referred to as crypto tokens, it’s increasingly common to use the word “token” to refer to cryptocurrencies that run on top of another cryptocurrency’s blockchain or to digital assets that have a specific utility or function within a network. 

Generally, tokens are a type of cryptocurrency that represent a particular use on the blockchain. They can serve multiple purposes, including being used to access products and services on the blockchain and reward users for performing specific operations on a blockchain.

What is the difference between coins and tokens in cryptocurrency?

The terms “coins” and “tokens” are often used interchangeably. However, most people use the word “coins” when they are referring to a digital currency, such as Bitcoin (BTC) or Litecoin (LTC), while the term “tokens”  typically refers to digital assets that provide some type of function or utility, such as Ether (ETH) being used to pay for transaction fees on the Ethereum network.

The idea is that coins refer to money while tokens refer to non-currency digital assets that can be used for a variety of use cases. Additionally, any asset built on top of another cryptocurrency’s network is typically referred to as a digital token.

How are tokens used in tokenomics?

Tokenomics covers all essential aspects of how a digital token is managed - either by code or by a centralised issuing entity. Let’s take a look at the role of tokens in tokenomics.

What is a token burn?

A token burn is a process of permanently removing tokens from circulation with the aim of reducing the total supply. If a crypto project executes a burn function to destroy its tokens, the tokens will be gone forever. It's impossible to recover tokens once they are burned. One of the ways crypto projects burn their tokens is to purchase some of the tokens from the market and transfer them into a frozen private address called a ‘burn address’. There’s no way to reverse the transaction or withdraw the coin from that address.

Token burn is a strategy used to control the price of the token in the market. Reducing the supply of the token in the market can create scarcity and lead to price appreciation.

Types of tokens

There are different types of tokens with unique use cases and significance in the broader crypto economy. Tokens can be divided into two types: Layer 1 and Layer 2 tokens. 

For example, Compound tokens are seen as Layer 2 tokens because they are implemented as a reward and governance token for the lending & borrowing services offered on the Compound protocol, a decentralised finance application on the Ethereum blockchain. Traders can also divide tokens based on their use cases. The two most popular token use cases are utility and security tokens.

Security vs utility tokens

Security and utility tokens both operate as tradable digital tokens on open blockchain networks. However, the two have very different characteristics and functions. Security tokens are tokenised financial securities governed by Securities Law. For example, a security token can represent an ownership stake in a company and entitles its holder to specific rights, such as a portion of the company’s profit.

Utility tokens allow users to access products or services provided by a blockchain network or decentralised application (DApp). They don’t give the holder any specific rights or claims to the project.

The main difference between security and utility tokens is the regulatory frameworks guiding both. Security tokens are subjected to a higher degree of regulation than utility tokens.

Fungible vs non-fungible tokens

A fungible token is replaceable and interchangeable with other similar tokens. Fungibility is the essential feature of any currency, including fiat currencies like the US dollar. $100 dollar notes are always worth $100, which means if traders hold a $100 note, traders can buy $100 worth of goods and services.  However, in the case where someone borrows a car, the lender expects them to return the exact same car that was lent to them. The car is non-fungible, which means no two cars are exactly alike.

It’s the same with non-fungible tokens (NFTs). NFTs are unique and cannot be replaced with tokens of the same type. An example is a token storing a trader’s birth certificate, traders wouldn’t want to replace it with another token because the birth certificate is unique.

What makes tokenomics different from other economies

The main difference between the traditional economy and tokenomics is that tokenomics are designed specifically for a decentralised crypto network or application while traditional economies are built on predicting the effects of specific events or human behaviour for a country. Also, in the traditional economy, only a few centralised institutions determine the control of money, while tokenomics often allow the community to decide how a crypto venture should be governed.

Finally, tokenomics are applied in the digital realm while the traditional economy covers both the virtual and the physical world.

Selecting a consensus algorithm for the token model

A consensus algorithm is one of the key parts of a blockchain network as it helps participants to agree on a universal shared ledger that only includes valid transactions. Due to the decentralised system of a public blockchain, no centralised authority makes all the decisions.

There are two major kinds of consensus algorithms: Proof of Work (PoW) and Proof of Stake (PoS):

Newer consensus protocols based primarily on PoS have appeared in recent years, such as Delegated Proof of Stake (DPoS) and Pure Proof of Stake (PPoS), but they share many of the characteristics of their pioneering predecessor.

How to access an ICO’s token economy?

A typical project’s initial coin offering (ICO) will have a website and a whitepaper detailing its tokenomics. Please read the website and its whitepaper to find out:

What is an ICO in cryptocurrency?

A company looking to raise money in the crypto capital markets can issue a digital token in a so-called Initial Coin Offering (ICO). In a sense, an ICO is similar to an Initial Public Offering (IPO) on a stock exchange, with the main difference being that a standard ICO token does not provide the holder with shareholder rights. (Unless, of course, the token issued is a security token.)

How can token economics be used?

The tokenomics of a crypto network or decentralised application can vary greatly and involve a number of different methods. New types of tokens and innovative projects are always being created in the crypto space, most recently 'soulbound tokens'. Let’s dive into ways crypto networks are applying token economics.

Examples of tokenomics in action

Let’s take a look at the tokenomics of four of the most popular and trending digital assets: Bitcoin, Ethereum, Tether USD and SafeMoon. 

Why is tokenomics important when investing in cryptocurrency?

Tokenomics control the supply and demand of a token, which influences the price. Understanding cryptocurrency tokenomics before investing can help traders identify some of the factors that will impact the price of a token. Traders will know how many tokens are in circulation, how much more is still coming into circulation and who are the largest owners in the project.

Tokenomics are extremely important when trying to analyse the worth of a cryptocurrency. However, it should not be the only consideration when investing.

#source


RELATED

NFP's Effect on Gold Prices

While the relationship between gold and NFP is not clearly defined, in the short term, it could serve as an indicator and a trading opportunity. Being one of the most...

Unlocking the Potential of Asset-Backed Cryptocurrencies: An In-Depth Exploration

Imagine blending age-old investment wisdom with the groundbreaking digital currency sphere. The infusion of the US dollar into blockchain technology, or endowing cryptocurrencies...

Key Tips for Trading in a Fluctuating Market

Have you ever observed nature? Many things, such as the trajectory of a bee, may seem random. At the same time, they are not - there is nothing random in nature...

How to Trade Copper: A Comprehensive Guide

Copper is a widely used hard commodity that finds applications in various sectors, including technology, construction, plumbing, and wiring. While it may be less expensive...

Smart contracts explained: What is a smart contract?

Smart contracts play an integral role in the blockchain ecosystem, enabling the creation of decentralised applications (DApps) and programmable payments. In this guide, we will explain...

Libertex: Dash Price Prediction for 2021-2025

At one point, investments in Dash were highly profitable. Many traders received significant gains from the Dash cryptocurrency when the price action surpassed the $1,500...

How to Make the Most of the Crypto Drop with Shorting?

The crypto market undergoes a clear negative trend that is expected to last for a while. Bitcoin has plummeted by 33% this week and reached the 18-month low...

Coronavirus pandemic: Three scenarios on the global markets

Markets require central banks to take regulatory responses, and after the chaos that occurred last week, the expectation of such measures was quickly taken...

What should you do during a crash?

The world of markets can, in some cases, become very difficult, while uncertainty and often a lack of essential knowledge can lead to confusion amongst traders. And a market crash could be one of those situations...

A Guide to Indices Trading

Indices measure the price performance of a basket of securities or a group of shares. Indices trading provides investors with the opportunity to gain exposure...

What Is Spoofing in Crypto Trading?

Spoofing is a way to attempt to manipulate the market in your favor. If you spend any time trading, you will eventually hear the term “spoofing.” Spoofing is illegal...

Salvador Bitcoin Experiment: A brilliant idea or a fiasco

There are so many countries, so many opinions and approaches. Each country has its vision. And it is not always clear why digital assets are welcome in one economy and are considered evil by the other...

Netflix Stock: Should You Invest in Netflix in 2022?

We can argue about whether investing in Netflix (NFLX) stock is a good or bad option, but there is no denying that the American entertainment company has changed the rules of the game...

What Is Cosmos Crypto?

Scalability and interoperability have been two significant problems for the blockchain world. There are a handful of options for interoperable blockchain networks...

Maximizing Returns with USDT Staking: A Comprehensive Guide

In the dynamic world of cryptocurrency, staking has emerged as a popular way to earn passive income. Among the various digital currencies available for staking...

How to avoid analysts' mistakes?

We often hear about an undervalued asset, an unfair exchange rate, or an overvalued dividend forecast. In my opinion, such "expert" statements...

The Relationship between Gold and the USD

If you have been reading our research articles, you must have seen that our analysts very often talk about the negative correlation between gold and the US dollar...

What are Expert Advisors?

Expert Advisors (EAs) are automated programs that run on the MetaTrader 4 (MT4) or MetaTrader 5 (MT5) trading platforms. They are algorithms that can be used...

Bonds in 2023: Deep Dive into 7 Essential Bond Types for Investors

In the world of investment, bonds stand as one of the cornerstones, allowing entities, whether corporate or governmental, to secure funds over an agreed duration...

What is a Zero-Knowledge Rollup?

Blockchain technology is revolutionizing the way we store, transmit, and validate data. However, as the popularity of blockchain technology grows, so too does the demand for faster...

FP Markets information and reviews
FP Markets
81%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%
FXNovus information and reviews
FXNovus
75%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.