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The concept of Tokenomics is among the most crucial topic a crypto investor needs to get familiar with to make investment decisions. In essence, it is very straightforward; demand and supply dynamics drive prices; however, analyzing any tokenomics structure requires a lot of thought and time. The conclusion typically evolves around figuring out the scenario and timing for the token to become self-sustaining and either maintain price stability or create a potential for price appreciation over time.
As the term would suggest, "Tokenomics" stands for the economics of token. Tokenomics define consumption and creation of the token, the availability of the token in the market, the relative rate of change. The business model and flow of capital that is beyond the pre-set Tokenomics structure act as external factors.
When we talk about demand and supply dynamics, it's a fancy way of describing how much the token is consumed and created. It is important to understand the demand and supply dynamics as over the short- and long-term, token prices are driven by this fundamental force.
What is Token Supply?
The team mints tokens, this creates supply that gets released into the market. How they are created and released depends on the project's founders. The following are typical structure considerations:
- Emissions Schedule (how are tokens minted and how fast)
- Total Supply (is there a cap to total supply, when is this hit)
Supply creation is crucial as it typically drives the forces on the selling side of the equation. One example of this is farmers receiving token rewards being generated sell to lock in returns. A countering force is needed to balance the equation; that's Demand.
What is Token Demand?
Tokens created and released into the market would only depress prices were it to lack buyers. Buying "demand" or the consumption of these tokens out of the market can be achieved in multiple ways; however, they are different in short- versus long-term.
In the short term, the biggest driver of token demand, and arguably, supply, are speculative forces. Investors buy and sell the token on expectations of the future. If they're bullish, demand increases and supply gets sucked out of the market; the opposite is true if they are bearish.
In the long run, the demand needs to be created organically from a sustainable source. You run out of buyers at some point, so dependence solely on buyers is short-term in nature.
Organic Demand Sources
- Revenue: A business model of some kind that generates income for the project used to buy back tokens from the market is among the most efficient methods.
- Governance: Most tokens are used as a voting tool for changes to the project. For large projects, governance is highly valuable due to the impact on the number of users from any changes to the protocol.
- Taxes: Trading tax is a popular tool that many projects without a revenue model use to create organic demand from trading activity; it uses the tax to burn or lock up liquidity to reduce the supply.
Ultimately understanding the forces driving Demand and Supply is a critical concept driving the Tokenomics of a token; however, more important is understanding the relativity between the two. Tokens can be created indefinitely; however as long as there is more demand for it than new supply, the net effect is positive for the price. Therefore investors need to understand the rate of change on both sides of the equation to measure the net effects. What needs to happen for a net negative to supply. Is there more demand than supply? Is this sustainable? When will this occur? Among other questions.
Disclaimer: Nothing written here should be considered investment advice. The article is intended for informational purposes to guide investors only. For investment advice, please consult a licensed professional.