Economics and Tokenomics: The Demand and Supply of Cryptocurrency
The sole use of money is to circulate consumable goods. By means of it, provisions, materials, and finished work, are bought and sold, and distributed to their proper consumers. — Adam Smith.
Many decades after that statement was made, money — which can be Fiat Currency, Commodity Money, Fiduciary Money or Cryptocurrency — still holds a similar function and value among people who spend it.
Why is that still the case, well, it’s because there is a sustainable demand for money, to be able to purchase intended valuable goods or services that have a monetary value. This introduces the theory of Demand and Supply of Money.
And in Economics, Demand and Supply are simply the relationships between the quantity of a commodity that producers wish to sell at various prices and the amount that consumers wish to buy.
It is the main model of price determination used in economic theory.
With this knowledge about Money and how it ties back to goods and Services. We can safely agree with John Tammy about his statement: Money only has a purpose insofar as there’s already production.
This gives a good background to understanding what Tokenomics is, from the aspects of the Demand and Supply of Cryptocurrencies
What is Tokenomics
To understand Tokenomics better, let’s break the words into their singular meaning; Token and Economics. Then we take a look at both of them individually.
What is a Token? It is a cryptocurrency built on a blockchain, representing a virtual asset or providing a particular function/use case to people who spend or hold it.
A token is different from a coin. A Coin is the Native currency of a blockchain. Like $Ether the Coin for Ethereum. While a Token is a currency built on that same blockchain like $Yen is on the Ethereum blockchain.
Economics on the other hand has varying definitions from different scholars — Adam Smith, Marshall, Robbinson, etc — defining the concept of economics from different valid perspectives.
We can safely say Economics studies the production, Supply, distribution, and consumption of goods and services.
So what then is Tokenomics? It is simply a term that is used to explain the Economy of a Token; The production, distribution, Supply and consumption of the token.
Tokens are not edible, when looking at the consumption of the token, we actually look at the use case/utility of the token. To better put it, “what can we use this token to do or purchase or what value can we get from owing this token”.
So basically, the factors that affect a token’s use and value can be explained using tokenomics. These factors could relate to the generation and distribution of the token, supply and demand, reward system, and token burn timelines, among other things.
These factors an important for investors and stakeholders to understand. They play a major role in how you know whether or not a Token is good to invest in or not.
More than what we know money as, a token is way more than what It could be as a mere currency, both to the creators and people who demand to trade or hold it.
Tokens could take the form of any use case asides from a currency to trade with. a Token could be a reward token, currency token, utility token, security token, and asset token.
And each token type, built on the blockchain, can offer value to the holders depending on the utility it provides and the perception of the investors of that utility.
Either way, no token can survive without the demand for it. Also, no token can satisfy demand without a substantial Supply. There are more explanations as to what form of token it could be; Inflationary or Deflationary.
The knowledge token being inflationary or Deflationary gives a better understanding of the Supply and possible demand of that token.
Now, if you take a look back at Adam Smith's statement in the first paragraph, we can safely say, the sole use of a token is to circulate acceptable utility.
By means of it, value, access, and utility/use-case are bought, sold, and distributed to their proper holders.
Key Takeaways
If you want to start using cryptocurrency, it’s important to understand the basics of tokenomics. It is a phrase that encompasses the key elements influencing a token’s value.
It’s crucial to remember that no one element acts as a magic key. You should base your evaluation on as many variables as you can and conduct a comprehensive analysis.
To provide an educated assessment of a project’s future potential and its token price, tokenomics can be used in conjunction with other fundamental analysis techniques.
In the end, a token’s economics will significantly influence how it is used, how simple it will be to establish a network, and if there will be much interest in the token’s use case.
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