A guide to tokenomics and utilities in cryptocurrency
Investing in cryptocurrency projects can be an incredibly lucrative venture. But to ensure that you’re not wasting your hard-earned cash, it’s critical that you spend some time familiarizing yourself with the cryptocurrency projects you’re interested in before you commit to them. A large part of that involves understanding their tokenomics and utilities.
These play a large part in shaping a project’s future and influencing its value. While some cryptocurrencies may take off quickly and be profitable for early investors, their tokenomics and utilities can help you decide whether they are going to stick around and be a sensible long-term investment. So, what exactly are tokenomics and utilities? We’ll help you understand.
What is tokenomics?
Tokenomics is essentially the economics of a cryptocurrency token. It specifies how many tokens exist, how many will exist in the future (and when additional tokens will be created), and how the tokens will be used and divided up between things like the treasury, investors, partners, and others. Tokenomics can also tell us how many cryptocurrency tokens have been lost or “burned.”
Why is tokenomics important?
Tokenomics is one of the primary ways of understanding a cryptocurrency project. It helps investors determine the potential value of a token, depending on how many are available and what they might be used for. Unlike the token’s current market price, which can fluctuate based on a wide range of factors, its tokenomics can help in establishing whether the project has a promising future.
Tokenomics is also key to a project’s transparency. It is usually laid out in a project’s whitepaper and often highlighted on its website, too, and it makes it clear to the community and potential investors how a token is distributed. That includes how many tokens are allocated to private backers, the team and contributors that created or maintain the project, and its liquidity pool.
Understanding the tokenomics
Current market price can tell you how much a cryptocurrency is worth today, but many different factors — like the state of the market as a whole — can cause the price to rise and fall continually, and that’s only a very small part of the story. So, before investing your own cash into a cryptocurrency token, it’s a good idea to have a basic understanding of its tokenomics.
One of the most important things to look out for is the token’s total supply — how many coins are available now (circulating), and how many will be added, generated, or unlocked in the future.
Inflationary and deflationary supplies
Many cryptocurrency projects have a hard cap on token supply. That means that only a certain number of tokens will ever be produced or issued. Once the cap is reached, that’s it. Other cryptocurrencies, like Dogecoin, have what’s called an inflationary supply. No matter how many coins are in circulation, new ones can be generated all the time, so supply is essentially unlimited.
Bitcoin is the biggest and most recognizable example of a cryptocurrency with a hard cap, which is just 21 million tokens. It is expected to reach that number around 2140. In the meantime, the number of new tokens generated by mining will decrease by half roughly every four years. This is what’s called a deflationary supply. Litecoin uses the same approach, but with a much bigger cap.
There are advantages and disadvantages to inflationary and deflationary supplies. With Bitcoin, for example, the fact that there are fewer tokens to go around — and that eventually no more will be generated — creates scarcity and can significantly increase the token’s value. However, because the supply of inflationary tokens keeps growing, they are better candidates for replacing real currency.
Distribution
The other important thing to look for in a cryptocurrency’s tokenomics is coin allocation and distribution. It tells us how many tokens are available to public investors (the community), how many are reserved for team members (like developers), how many are put into the treasury, and more. How the supply of tokens is divided up can be critical to the project’s future and its value.
It’s difficult to predict a project’s future using allocation and distribution data alone. You will also need an understanding of the project itself — such as what its goals are and how it plans to achieve them. But together, this information can be incredibly insightful.
What are utilities?
A utility in the cryptocurrency world is a certain type of token that is used to finance or add value to a cryptocurrency project. They can be used for a wide range of things, depending on how the project is set up and what it’s used for, but they are exclusive to that project’s ecosystem. In other words, a utility token for one project cannot be used to access services or projects within another project.
Utility tokens cannot be mined like other cryptocurrency coins, so they are usually created all at once and distributed in a manner decided by the project’s creators, usually through initial coin offerings (ICOs), rewards, and other methods. However, utility tokens do have value, which is usually determined by what they can be used for and how many are in circulation — and they can be sold.
A simple way to understand utility tokens is to think of them like credits. Let’s say, for example, that a company like Apple created its own “Apple Coins” currency. You could acquire Apple Coins by investing in Apple or using its products. You could then use them to purchase other Apple goods. You couldn’t use them elsewhere, but you could sell or exchange them for cash or other tokens.
Why are utilities important?
Utility tokens are important because they give the community and other investors an incentive to invest. You are more likely to support a project when you are rewarded for doing so, especially when that reward can be used in many different ways and could increase in value over time. And support is vital for projects that need funds to achieve their goals and develop new products or technologies.
This creates a cycle that can be beneficial to everyone involved. Investment helps push a project forward, which in turn increases the value of the project’s utility token.
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