An Intro to Tokenomics
Content:
General Information-
What Is Tokenomics?
Why Tokenomics Are Important
Token Governance
Tokenomic Tips
Closing Thoughts
General Information-
What Is Tokenomics?
Tokenomics is the most important thing when it comes to the success of a token/coin/project in crypto. The word comes from Token + Economics which gives us a new magical work “Tokenomics.” Tokenomics can mean a lot of things, but the most important aspect of it is, understanding value and the tokens' utility. However, it doesn’t end there. Tokenomics also has things that may change it like, token burns, mining, staking, token allocation, vesting periods, and governance. All these elements give us an overview of a coin/token/project tokenomics and are strongly considered before investors and stakeholders decide to participate.
2. Why Tokenomics Are Important
Is Tokenomics important? Depending on who you ask, you may receive different answers on this topic. However, for me, it is a deciding factor on whether or not I will invest in a token/coin/project. Truly speaking, if you don’t take Tokenomics into account then you should revise your strategy and I will break down why by asking a series of questions. 1. Would you buy a token, if 1 entity on-chain held 50% of the supply? 2. Would you buy a token, if unlocks of early investors were going to take place soon? 3. Would you buy a token, if there was a proposal passing that was going to inflate the supply by 50%? 4. Would you buy a token, if there are no clear tokenomics of the protocol? If you are like me and care about the price of a token, then you will answer no to all of these. When I invest, I like to make sure that I don’t get blindsided by any funny business.
3. Token Governance
Now that we have an understanding of what Tokenomics is, and why it's important we should discuss a little bit of the technical aspects. Governance is a hidden factor that is often overlooked when understanding the Tokenomics of a coin/token/protocol. For example, if a network is a Proof-of-stake consensus and the majority of stakeholders are a few individuals then they can change key aspects that may or may not benefit other token holders. This is why I prefer a decentralized network because it takes away most of the risk that is the unknown. Today, when you look at a tokens whitepaper the team doesn’t clarify tokenomics. These same teams, also have no explorer where on-chain metrics can be tracked to identify whales. It’s a gamble in some ways because you don’t know who is pulling strings or when/if they want to.
4. Tokenomic Tips
In this section, I will go over tools that you may use to help you find the tokenomics of a project/coin/token. Most of the time if the protocol is transparent all the tokenomics are displayed on the whitepaper. If all your questions are not answered from the whitepaper, that is okay. Sometimes things may change due to governance and you can check data providers like Messari.io or Nansen.ai to confirm/review the tokenomics of a specific protocol. Another thing that you can do is look up blockchain explorers on-chain, to see if you can find early wallet addresses from early investors. There are plenty of resources out there but I like, whitepapers, using data providers, and looking at on-chain metrics.
Closing Thoughts
Tokenomics are an important aspect to consider if you wish to invest in a project. Understanding how a token is used, and the supply will impact whether or not buying/selling a project is a good/bad idea. This is why I spend so much time trying to understand how tokens/coins are used to solve certain problems. A lot of times you will see a coin/token but it has no utility which is a red flag. This is why you need to pay close attention to all the details we spoke about in the article. Understanding things like governance, supply schedules, vesting, token burn mechanisms, inflationary supply, and on-chain wallet tracking are all valuable things when assessing Tokenomics. To cap off this article, I want to leave you all with a golden tip. If a project/coin/token doesn’t give you 100% transparency of their tokenomics then you should most likely be cautious of that protocol. Why would you invest in something that is hiding something?
