Tokenomics: useful in cryptocurrency research

When exploring cryptocurrency projects, you can use several research methods. Basically, these are fundamental and technical analyses. Both forms of research use tokenomics — important data about the supply and price of a cryptocurrency.

In this article, we’ll look at what cryptocurrency tokenomics is and how you can use it for your research.

Defining tokenomics

You can guess the meaning of the term “tokenomics” by looking closely at the word itself: it consists of the words “token” and “economy. By tokenomics, we mean the economy associated with a cryptocurrency token. Many crypto traders consider project tokenomics essential and often decide to invest in a cryptocurrency (or vice versa) based on it.

In fundamental analysis, we examine the crucial factors related to cryptocurrency: the quality of the team, the competitors, the problem to be solved, the technology used, the blockchain on which the project operates, regulation, etc. We determine whether a cryptocurrency is undervalued or overvalued based on fundamental analysis.

Technical analysis allows us to examine the numbers surrounding the cryptocurrency. These are charts that can tell a lot about the future price of the cryptocurrency. Based on previous price values, you can make predictions.

Fundamental analysis is mostly used by people who want to invest in the long run. On the other hand, technical analysis is mostly used by people who invest in the short term (such as day traders).

In both fundamental and technical analysis, tokenomics analysis can be useful, so any crypto user should learn more about how to study cryptocurrency tokenomics properly.

How the price of cryptocurrency is determined

In many cases, if we consider the classical economic model, the price of a cryptocurrency is determined by supply and demand. How this works is quite simple to understand.

The moment demand for a cryptocurrency increases and supply stays the same or even decreases, the price of a cryptocurrency is likely to rise. This happens because growing demand creates scarcity: less is available, so people are willing to pay more (and sellers seek a higher price).

Of course, the team behind the project may also decide to put more coins into circulation, after which the supply increases. But that can also cause people to lose interest in the project, causing demand to drop.

This is what happens in almost all markets. Similarly, when oil demand increases or supply decreases, gasoline prices rise. This became evident in 2021 and 2022. The economy was expected to grind to a halt in 2020 because of COVID, and oil products began to produce less oil to avoid a surplus. However, the economy grew faster than expected, which meant a supply shortage. In some places, the cost of petrol doubled in a few years.

What kind of data does tokenomics show?

Supply

The supply of cryptocurrency is displayed by different types of indicators:

• Max Supply is the maximum number of coins/tokens that can go into circulation, which means that no more coins or tokens will ever be made than this number. For example, the maximum supply of BTC is 21 million coins, and the total supply of MDAO is 100 million tokens.
• Total Supply. Many confuse total supply with maximum supply or the number of tokens in circulation. Both are wrong. Total supply shows all tokens created minus tokens burned. This is due to the fact that project creators can withdraw tokens from circulation on their own. Total supply can never exceed Max supply.
• Circulating supply represents tokens or coins that are currently in circulation. Therefore, these tokens can be freely traded on the market. Circulating Supply or Circulating Supply can never exceed Total Supply or Max Supply. It is important to note that the circulating supply can be much smaller than the total due to part of the tokens being in lockup.

Market Cap

Market cap, or market capitalization, is the total value of a cryptocurrency. We can calculate market capitalization by multiplying the circulating supply by the price per token. If we calculate the market cap, we will know how much money is circulating in the cryptocurrency. It is crucial to study market capitalization carefully because it allows us to determine the potential growth of a cryptocurrency.

Fully Diluted Market Cap

The fully diluted market capitalization represents the maximum possible market capitalization. The price of a coin is multiplied by the maximum supply. Thus, based on the fully diluted market capitalization, one can see the cryptocurrency’s total value if all coins were in circulation (and the price remained the same).

Volume

You can also explore volume in cryptocurrency tokenomics. By volume, we mean the amount of money traded by a cryptocurrency in the last 24 hours. Based on the volume, we can understand if the cryptocurrency has been popular in the last 24 hours. Incidentally, here we are looking at the amounts of both buying and selling.

What you can use crypto project currency for

Now we know more about cryptocurrency numbers, but its function is just as important for tokenomics. What a coin or token is used for can determine a lot about its future value.

• Transaction fees. Many blockchains use coins or tokens to pay transaction fees, comparable to a service fee. For example, BNB is the native cryptocurrency of BNB Smart Chain and is necessary for transactions on this network.
• Protocol or blockchain operations. When the functioning of a blockchain or protocol depends on a cryptocurrency, we call it a native (proprietary) token. For example, ETH is used to operate smart contracts on Ethereum, and MDAO is the native token of the MarsDAO ecosystem.
• Using dApps. Some dApps will require you to own cryptocurrency before you can use the actual app. In this case, they’re called utility tokens. MDAO is one of them — only its owners can use the valuable products of the MarsDAO ecosystem, for example, the MDAO Maker allocation pad.
• Staking. When a blockchain uses a Proof of Stake (PoS) consensus mechanism, you can stake tokens. This way, you contribute to network security and transaction validation. To understand how this works in practice, follow this link to the MarsDAO partner staking platform.

Tokenomics DYOR

As we mentioned at the beginning of this article, tokenomics can be used for both fundamental and technical analysis. It is important to understand what cryptocurrency tokenomics can tell us about. You can consider the following situations:

• Inflation
• Deflation
• Vesting

Situation 1: Inflation

It is common for fiat currency to drop in value over time. This happens because more and more coins come into circulation, increasing the supply. This leads to a drop in our purchasing power in the future. This only sometimes leads to problems since wages are supposed to rise with inflation.

Other cryptocurrencies have higher inflation rates because not all have maximum supplies programmed into their code. Sometimes developers can control how many new cryptocurrencies come into circulation at any given time, and this, of course, is not conducive to low inflation.

When the difference between the number of tokens in circulation and the maximum supply is large, one can investigate how the remaining tokens will come into circulation. Does the protocol description indicate that the tokens will be released in a few hundred years? That might indicate a low inflation rate. But will 90% of the maximum supply be released within that and two years? This could lead to a high inflation rate.

Situation 2: Deflation

Developers can also program in the protocol that the number of tokens in circulation will continue to shrink by “burning”. This mechanism makes tokens disappear forever so that they never appear in circulation again. In this case, deflation occurs because fewer and fewer tokens come into circulation, causing the supply to shrink.

Deflation can lead to higher prices. However, the condition is that the demand for cryptocurrency does not fall simultaneously as the supply drops. In this case, the supply/demand ratio will remain almost unchanged.

A cryptocurrency with multiple functions within a protocol or blockchain, of which there will be less and less in circulation, can increase in price over time.

What makes the MDAO token special is that it has now reached full emission, and a deflationary model is run as part of its tokenomics. Every minute MDAO burns under the “hood” of the developed products of the ecosystem.

Situation 3: Vesting

Sometimes the participants or groups from the teams behind a project get part of its coin or token supply. These are, for example, developers, consultants, partners, or people who participated in the pre-sale.

In a traditional financial context, companies usually offer shares to employees. However, if these employees access or cash out their shares simultaneously, this can cause selling pressure and lower stock prices. As a result, companies typically use vesting to defer ownership and the use of promised assets. Crypto vesting is the crypto version of this method.

The team may decide to set a lockup period. This is the period during which these people cannot use their tokens. Often tokens or coins are only released after a specific time, which can be months or even years. As such, the tokens are actually in circulation but cannot be used. However, when these tokens enter into circulation, the token supply also increases.

Conclusion

The use of tokenomics can be useful when researching crypto projects. Supply, market capitalization, and market volume say a lot about a token or coin. Based on this information you can evaluate different situations, which is why many crypto traders use tokenomics specifically for fundamental or technical analysis.

Are you looking for more information or have questions about tokenomics or other cryptocurrency topics? Or do you want to meet other crypto traders? You can ask questions and connect with thousands of other crypto enthusiasts on the free MarsDAO ecosystem Telegram channels.