Cryptocurrency has been making the news headlines for years now. Currently, the global crypto market is worth over $3 trillion, making this asset class too important to ignore any longer.
But many new crypto investors are putting their money into random cryptocurrencies, thinking they will rise to the value of bitcoin one day.
But most crypto tokens aren’t designed for that, thanks to their specific tokenomics, or the economics of a token.
Wondering how to understand tokenomics, so you can better understand the difference between various cryptocurrencies? Keep reading below.
Tokenomics Meaning
So what is tokenomics when it comes to cryptocurrency? First, let’s go over the tokenomics definition. Tokenomics, as mentioned above, is the economic understanding of a token.
Cryptocurrencies are often referred to as tokens, which exist on a blockchain. They are virtual currencies. And tokenomics is the inner workings that dictate nearly everything about a particular cryptocurrency.
This includes the total supply of the currency. Is it limited, like bitcoin, with only 21 million that will ever exist? Or is there an infinite supply, with more issued regularly?
The answer will determine if the value is expected to increase or decrease over time.
Also, how is the blockchain network maintained and secured? Does it rely on mining, like bitcoin or LiteCoin? Or does it depend on staking, like Solana?
Are there token burns that reduce the supply of available tokens by permanently destroying some? Ethereum does this by “burning” a percentage of every transaction fee, which has resulted in nearly $5 billion being burned at the time of writing.
With each cryptocurrency, these factors (and many others) are known as tokenomics and will determine the value proposition offered to investors.
How to Understand Tokenomics
Think of the US dollar. You can apply tokenomics to the currency we are most familiar with.
Dollars do not have a limited supply. There is an unlimited supply, and the government and big banks are free to print money as they see fit.
By constantly adding more money into circulation, they inflate the dollar, lowering the value. However, if dollars were limited or even reduced regularly, the value might improve.
The supply (and distribution) of dollars is just one example of tokenomics.
What Does Tokenomics Apply To?
Tokenomics applies to every single cryptocurrency. Each coin or token has its own set of tokenomics. And at certain times, these factors may change if the community or leadership team decides a chance is vital to move forward.
But tokenomics also applies to NFTs. Non-fungible tokens are also tokens on the blockchain, just like crypto tokens.
And while NFTs behave differently, they still apply their own tokenomics. NFTs often have minimal supplies, specific use-cases, and unique utility for owners.
Many people trade NFTs much like they do crypto, so it’s essential to understand tokenomics regarding NFTs as well.
Not only can artists create NFTs and earn royalties after they sell them, but traders can earn royalties on their trades.
How? By making their portfolio public on a platform like Nested.fi, they can share their portfolio, and if other users copy their portfolio, they earn royalties. Visit this URL to get started.
Don’t Buy Coins Blindly
Hopefully, our short guide has taught you how to understand tokenomics. You can’t just invest in any random coin and hope it rises to the value of bitcoin.
Tokenomics will prevent that from happening, as no other crypto is modeled the same way bitcoin is.
Looking to learn more about how tokenomics works? Continue browsing our blog to find other helpful articles.
