The Ironies of Cryptocurrency Tokenomics
Disclaimer: This is an opinion piece.
Everyone wants to know the next big coin. What tokens will multiply 1000x in value over the next year? What tokens will flop, never again to rise? Perhaps, there is a way…
What is Tokenomics?
Binance academy defines Tokenomics as a term that captures a token’s economics. A portmanteau of “token” and “economics,” Tokenomics describes the factors that impact a token’s use and value, including but not limited to the token’s creation and distribution, supply and demand, incentive mechanisms, and token burn schedules. For crypto projects, well-designed tokenomics is critical to success. Assessing a project’s tokenomics before deciding to participate is essential for investors and stakeholders.
DYOR — Do Your Own Research is one of most often repeated phrases in the cryptospace. Aside from looking at the white paper, founding team, roadmap, and community growth, Crypto investors and traders study the tokenomics of a project to predict how well the value will hold up in the future. A lot of factors are considered in this. The most important are the token’s total supply, its circulating supply, burn schedules (if any), staking protocols, and reward mechanisms, amongst others.
What’s the Catch?
By definition, the tokenomics of a cryptocurrency should be able to tell us how the token will perform. Unfortunately, it doesn’t quite work that way. Just like in regular economics, sometimes an activity produced the exact opposite of its desired result. In fact, this has gotten quite common, resulting in the rise of shitcoins, tokens without any use case or backing project. And herein lies the irony: one in every ten shitcoins will peak at least 10x in value from it launch, one in twenty will do 100x, and one in a hundred will peak at 1000x or over. On the other hand, meticulously planned projects may be lucky to peak at double their launch values. One in fifty may peak at 50x. One in a hundred may do 100x. And it is absolutely rare to see a mainstream token rocket to 1000x. A few of these can be found in this list by Investopedia. Others not listed are Steem and EOS.
The tokenomics irony is also found where a token’s burn results in a reduction of the token’s value, rather than an increase. This happened to Ethereum recently, amidst hopes that the burn would take the token up from the general bear market the cryptospace is currently experiencing. Stemm is a glaring example. By all indications, the tokenomics of the steem blockchain was perfect. However, the coin fell off badly after achieving great highs. It was a very dark time for artists, writers, and other creators who thought they had found a home.
So… What Then?
The constant factor underlying successful tokens is the same factor used to rate the success fo life. Money. Projects with enough funds to inject into their token’s liquidity pool in order to generate more volume always end up peaking at higher values. As someone said to me recently, it’s the Game of volumes. That’s just how it is.
However, it is important to note that 99% of shitcoins end up back in the gutter from whence they came, giving them the economic relevance of common ponzi schemes. Money will be made, but alas for those who come in late. Their fate will be to become the exit liquidity for the early investors. On the other hand, the Steem ecosystem is still up and running, with several projects still connected, such as the Steemit social media blog.
These ironies therefore doesn’t mean new crypto projects’ should abandon the practice of carefully crafting the tokenomics of their coins and tokens. If you want any chance at maintaining value, tokenomics remains highly important.
Conclusion
Right now, cryptocurrency and blockchain use in general is still in its infancy, despite the high amount of noise and many many riches generated from it. A personal opinion of mine is that blockchain will attain full maturity when focus shifts from active trading and raw token value to use cases and longevity. Furthermore, such a shift might result in tokens gaining even more value from conception than is presently achieved.
Now isn’t that ironic?
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