Tokenomics 101: The Basics of Evaluating Cryptocurrencies

The numerous amounts of cryptocurrencies may have made it more challenging for novice crypto investors to decide which projects need investigating. You may be wondering what determines a coin's value? To that end, a cryptocurrencies tokenomics may provide a highly accurate indication of a utility.

What are Tokenomics for a Cryptocurrency or Crypto Token?

The term tokenomics is derived from combining the words "token" and "economics". Thus, tokenomics refers to the economics of a coin or token; it also encompasses all of the attributes of the project. The tokenomics of a given crypto token are often fully detailed in the project whitepaper. Reading this will assist you with the comprehension of the crypto’s token operation, vision, allocation, distribution strategy, and more.

Token Allocation & Distribution

The majority of crypto tokens are produced in one of two ways: pre-mined or released via a fair launch.

A fair launch refers to a situation when the whole community mines, earns, owns, and governs a particular cryptocurrency. Before their public release, there is no early access to tokens or private allocations.

On the other hand, pre-mining is the process in which a large number of crypto tokens are created and distributed to a few exclusive addresses (often project developers, other team members, and early investors) before they go public.

The Token Supply

The supply of a cryptocurrency is a critical component of its tokenomics. There are three distinct types of supply when it comes to cryptocurrency. Namely circulating supply, total supply, and maximum supply.

The circulating supply of a token refers to the total number of tokens produced and presently in circulation. The total token supply is the total amount of tokens currently in circulation, excluding those that might have been burnt. Finally, the maximum supply of a token refers to the total amount of tokens that can be created. There is no defined maximum supply for some tokens.

Market Capitalisation

A token's market capitalisation, or Market cap, indicates the total amount of money invested in the crypto project so far. It is important to check a project's fully diluted market cap, this is the theoretical market cap if the token's maximum supply was already in circulation.

The Token Model

An important factor when looking at a new project, is to ensure that you understand if the token is inflationary or deflationary. An inflationary token (similar to fiat money) has no maximum supply and will continue to be issued as time passes. On the other hand, a deflationary token refers to a token whose maximum supply is limited, such as Bitcoin with a maximum supply of 21 million. The majority of proof-of-stake coins, such as ETH, are inflationary in nature in order to reward the delegators and validators on the network.

It's worth noting that specific cryptocurrencies feature a dual token model, where a project issues two tokens: one token used for supporting the ecosystem and the other as a utility token.

Comparison Between Bitcoin vs ETH Tokenomics

Bitcoin and ETH are the two largest cryptocurrencies based on market capitalisation. Now, take a look at the Tokenomics of these two cryptos and their differences.

• Maximum supply: Bitcoin has a maximum supply of 21 million BTC in total, while the Ethereum platform has an infinite supply but a maximum annual supply of 18 million ETH.
• Token allocation & distribution: Both BTC and ETH were introduced with a fair launch, although a large amount of ETH was pre-mined. The top 100 BTC holders own 32% of the total BTC supply, while the top 376 ETH holders own 33% of the total ETH supply.
• Inflation: Since Bitcoin has a limited supply, there is no inflation, and the price of Bitcoin can increase as the coin becomes more scarce. Meanwhile, ETH has a high inflation potential because of its unlimited supply.
• Staking: Staking is only available with cryptocurrencies using the proof-of-stake (PoS) protocols. Because Bitcoin uses Proof of Work (PoW) protocols, it cannot be staked. On the other hand, as part of its Eth2 upgrade, the platform uses PoS, allowing Ethereum tokens to be staked on crypto exchanges.
• Utility: BTC and ETH are both digital currencies, but bitcoin was created as an alternative to fiat currencies and functions as a store of value and a medium of exchange. By contrast, ether primarily serves to facilitate the Ethereum smart contracts and decentralised applications (dApps) instead of establishing itself as an alternative monetary system.