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How to ‘DYOR’: Tokenomics Edition

Learn how to analyze a cryptocurrency’s economics and determine if it is worth investing in

Tokenomics Background Information

To understand tokenomics, one must first understand what a cryptocurrency token is and how they work. Simply put, a cryptocurrency is a digital currency built on decentralized computer networks where transactions are recorded on a distributed ledger known as the blockchain. This digital currency functions differently from fiat currencies, like the US Dollar, which is a form of currency minted by governments for citizens in their country to use as a medium of exchanging value. The value of fiat currencies are affected by three main things:

  • Sentiment and market psychology
  • Technical factors (GDP Data, News, big events)
Source

Elements of Tokenomics

Now that you have some background information on tokenomics, Let’s look at what aspects actually comprise the token economics of a cryptocurrency.

Allocation and Distribution of Tokens

Most cryptocurrencies are generated through either a fair launch or are pre-mined. Fair launched tokens are earned, owned and governed by the community from the start, meaning everyone can participate equally. There is no early access, pre-mine or allocation of tokens. Examples include Bitcoin, Yearn Finance, and Dogecoin. Most projects however, are pre-mined meaning a select group of people such as developers, early investors and team members are allocated a percentage of the tokens before their initial coin offering (ICO).

The Token Supply

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Volume

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Fully Diluted/Market Capitalization

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Consensus Algorithm

Currently there are two main consensus algorithms that cryptocurrencies can use: Proof-of-work (PoW) and proof-of-stake (PoS).

The Tokenomics of Bitcoin

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Graph Depicting the Price of BTC after First Halving

Conclusion

Admittedly, the economics of tokens is not the sexiest of topics to learn about, but it certainly can be helpful when doing your research on a potential investment. Simply looking at degen discord chats about the latest ‘sh*tcoin’ and memes will only get you so far. But if you are trying to become a serious investor in this space, understanding how to analyze the tokenomics of any given cryptocurrency is a great place to start.

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Thank You

Thank you for getting involved early in the Arts DAO journey. We are dedicating every moment we have to building and being part of the evolution of blockchain technology, the NFT space, and art more generally. We look forward to meeting with you either in one of our real-life events or elsewhere in the metaverse!

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Arts DAO

Redefining the collection of value through fractionalized ownership of NFT projects and decentralized governance. Arts DAO seeks to represent Community 3.0.