DEV Community: Amy

Intro To Tokenomics

Amy — Thu, 11 Apr 2024 22:14:01 +0000

“Cryptocurrency” is basically a decentralized form of currency that is composed of coins and tokens. Coins are digital assets that are often used as a direct form of currency to pay in exchange for goods and services, more similar to what we have always known as currency, but decentralized and intangible in nature. Tokens are also digital assets, and can be used similarly, in exchange for goods and services (where accepted), but they often offer added benefits with regards to the project (likely, an application) they were created to represent, support, or raise funds on behalf of. Crypto coins operate on independent blockchains, whereas tokens are created within a pre-existing blockchain. While coins and tokens can be distinguished from each other in this way, they are both subject to the application of tokenomics.

Blockchains are transparent systems built to make various decentralized exchanges on a shared network.This especially pertains to actual cryptocurrency, but also includes data and information, among other things. Blockchains are highly insusceptible to hacking or otherwise manipulation, as there is no central computer storing key information. Rather, data is stored in various blocks that exist across many computers/users/networks and strung together like links in a chain. Creating a blockchain is an extremely complex, and likely to be an expensive endeavor. For this reason, there are relatively few of them, and in turn, relatively few of these high value coins such as Bitcoin and Ethereum, which exist on their own independent blockchains. Tokens are easier to “create” as they are realized within a preexisting blockchain, and therefore require a lot less back end development. Coins, while often more valuable in terms of their exchange value to fiat currency, often don’t offer the wide array of intrinsic bonus value that tokens may offer within the sphere of their specific product or investment, though this is not necessarily always true, or true of all tokens.

Fiat currency is physical currency that is backed by the issuing government rather than gold, etc. Most of the major global currencies are fiat currencies, including the US dollar, the Euro, the British pound and Japanese yen. Representative currency includes goods with an agreed upon value being exchanged for other goods or services. Something like a check is a form of representative currency that is backed by the issuer's possession of fiat currency.

Cryptocurrency differs from fiat currency in that it is neither backed by, nor centrally regulated by any single government entity, nor do they exist in a physically tangible sense. As a non-fiat form of currency, crypto is simply backed by its investors, but it can be used in exchange for goods and services just as fiat currency can. Like any foreign currency, you may have trouble using cryptocurrency to pay for services outside of the crypto realm, but many coins and tokens can be easily exchanged for various global currencies. In a sense, cryptocurrency is an intangible form of representative currency. Unlike fiat currency, which is centralized in nature, it is more difficult to keep tabs on the exchange and development of cryptocurrency than it is for electronic banking methods using physical currency.

Tokenomics are a set of economic considerations as they pertain specifically to crypto tokens and coins. Many of the major components/considerations of tokenomics may be applied to other trade sectors. In its most basic sense, the mathematical portion of tokenomics is a set of calculations that help to establish information regarding the supply and demand of a token. However, tokenomics also takes into consideration the security, utility and distribution of tokens as well, all of which are important factors used to make predictions about the market fluctuation of any given token.

Taking first into consideration the supply side, we have total supply, which is the total possible number of coins or tokens minted, whether in circulation or yet to be released. Circulating supply is the number of coins or tokens currently active on the blockchain. By dividing a tokens’ circulating supply by its total supply, we can derive the percentage of a given token in circulation. From this number we can understand a few things. Too high of a percentage of supply in circulation may indicate that a token has nearly run its course, and/or is likely to begin declining in value. Depending on the protocols for a given token, this could also give way to additional minting of a token, increasing total supply, and likely in turn, decreasing its value. However, too low of a percentage also risks a sudden release of additional tokens into circulation, which could also devalue the token.

To calculate percentage in circulation, use the following formula:

(circulating supply/total supply)

Another important consideration in terms of supply is the number of holders, or individuals that currently hold a given coin or token. The number of holders is worth considering as such that a smaller number of holders could indicate the potential that one or several of the few holders could buy or sell in mass quantities, effectively manipulating the market, and possibly even doing so drastically. A high number of holders signifies a diverse holding and points to favorable liquidity of said token.

Ahead we will discuss the demand-end of tokenomics, starting with liquidity. Liquidity is the ease at which something can be bought, sold, or traded. To be liquid is to be quickly and easily converted into liquid funds, or fiat currency, but it can also be applied to tradeability. Land and real estate can be great investment opportunities, but oftentimes not considerably liquid in nature. In order to sell a property, it needs to be listed, most likely shown by yourself or a real estate agent, offers will need to be sorted and responded to, and even then, you may not attract potential buyers right away. There are many factors that can affect the liquidity of a piece of real estate, such as location, interest rates, visibility, even your choice of real estate agent could help or hurt a property’s liquidity. These are all variables that can influence how quickly a home or property is able to be sold, in other words, its liquidity. Similarly, tokens and coins factor in many variables when calculating liquidity. A high market capitalization or a high daily trade volume could indicate favorable liquidity. A high number of holders could also hint at a token being favorably liquid.

Another consideration in terms of liquidity are liquidity pools, where a certain portion of a tokens market capitalization is made available in liquid form to be traded (often with another specific token) at a given moment. This allows ease in the flow of trading tokens up to the liquid amount. However, for me, this is a bit of a complicated topic as a beginner, so I will have to expand on it later as I broaden my understanding of the subject.

Next, let’s consider market capitalization. Market capitalization is the total number of tokens circulating multiplied by the price of said token (often shown as USD), or the total market value of a given token. A high market cap relative to total market cap likely indicates a token’s stability and importance in the market, while a smaller market cap to total market cap ratio can indicate a token’s potential volatility. A rising market cap points to a “bullish” market trend, whereas a falling market cap indicates a “bearish” market trend, and can indicate volatility.

[Note: “Bullish” indicates a market trend where a token is being held for longer periods of time by its buyers. Likely indicates favorable perception of a token’s growth potential. “Bearish” indicates a market trend where a token is being sold quickly by its holders, likely indicating an unfavorable perception of growth potential.]

Market capitalization can be calculating using the simply formula:

(current price x circulating supply)

Total market capitalization is the sum of all tokens’ and coins’ individual market caps added together. This number provides insight into the size and value of the overall crypto market. The formula for calculating total market cap may look something like this:

(current price token A x circ. Supply token A) + (current price token B x circ. Supply token B) + …… (current price token n x circ. Supply token n)

Next, the 24 hour trade volume indicates the total volume in dollars of a given token that were traded in a 24 hour period. 24 hour trade volume can be used to gauge buyers’ interest in a given token, especially when contrasted with the same figure for previous days. It can be said that a positive trend in terms of 24 hour volume points to a coin’s growing popularity in the current market. The 24 hour market volume can be calculated as such:

(number of tokens traded x price per 24 hour period)

The last tokenomic figure I’m going to discuss here is volatility. Volatility is a figure that is meant to indicate the risk level of an investment by measuring how much its value has fluctuated overtime. In general, cryptocurrency is considered to be a highly volatile investment, given its tendency to fluctuate in value, sometimes drastically, in a short period of time. Highly volatile investments are riskier. However, as the risk entails the possibility of huge losses, it also allows for the possibility of huge gains.

Volatility can be calculated using the following formula:

(24 hour volume/liquidity)

Another way to quantify a token’s current volatility would be to calculate its standard deviation, which shows how much a token’s value has diverged from its historical average at present. My poking around seems to indicate that the figure for liquidity is calculated differently on different exchanges, the given formula for volatility comes from Dextools.

Finally, I’m going to do a quick example of tokenomic analysis for Buddha token. I’m neither advocating for, nor against this token, simply using my rudimentary knowledge as objectively as possible to give an example of how the aforementioned figures can be used to help assess the tokenomics, and in turn investability of any given token. I’m going to use the following information taken from Dextools, which shows the following figures for Buddha token taken on 04/07/24 and 04/11/24.

04/07/24

04/11/24

Going in order (ish) from left to right, let’s start with the market cap, using the first image dated 4/7. By comparing total market cap ($8.98M) with the token’s individual market cap ($449.34K), we can see that Buddha token is a relatively small player in the market. I can also compare the market cap given on 4/7 ($449.34K) with that on 4/11 (413.01K), two days later. While trends must be considered over longer periods of time, this five day trend indicates a falling market where some investors may be selling at lower rates and or higher speeds. In other words, a “bearish” trend. The figure for liquidity sits at $294.32K, which seems like a good number when compared to its market cap ($449.34K), which denotes that a large portion of this token can be easily and readily liquidated if need be. Next, we have circulating supply which is at 50.00B. Let’s compare this to the total supply which is 999.99B. If we divide 50B by 999.99B we are given that just over 5% of the total supply of Buddha tokens are in circulation, which indicates the potential for a significant fluctuation in value if and when more tokens are released into circulation. This has further implications into the token’s potential volatility and as a result adds some additional risk to this investment. [Please note, I have been told Buddha is set to burn 90% of its tokens, which will change things dramatically in the near future. Number of holders sits at 1.12K, which, without much frame of reference, seems like a relatively low number of holders, also indicating some risk. However, one must recall that the early investors who take on significantly more risk also have the potential to be rewarded big time, if they’re “bullish” enough. The 24 hour volume seems low at $5.79K, however this number should be considered against the token’s liquidity ($294.32K) for further insight. By dividing the 24 hour volume by the token’s liquidity, we get the figure 0.0196 for volatility, which I feel is VERY low, denoting an overall low risk.

I just want to wrap this up by noting that there are numerous other factors to consider when making crypto token investment decisions including token utility and security, burnability, and rewards systems, among other things. I’m just here trying to scratch the surface of the beast that is tokenomics, and hopefully I can provide some helpful insight to at least someone. Please feel free to reach out with any concerns or corrections, as I’m also just getting started and would love to learn what I can with as much accuracy as possible.

Here’s a quick summary of some important aforementioned tokenomic figures:

Market cap: (current price in USD x circulating supply) aka total value of a platform’s tokens, high cap equals likely high stability (rising equals bullish, falling equals bearish)

Liquidity: ease of liquidation (selling), various methods of calculation

Circ. supply: (number of tokens in circulation)

Holders: (total number of people holding a token) (large or rising numbers good, show that holding is diversified and no one of few people can easily manipulate the market)

Total mktcap: (circulating supply of token A x price token A) + (circ supply of token B x price token B) + (circ supply token C x price token C).....+ (circ supply of token n x price of token n)

24hr volume: (total amount traded in 24 hr period in USD, compare to other days) number of tokens traded x price per 24hr period

Total supply: (total possible number of tokens).

Volatility: (24 hr volume/liquidity, as shown on dextools) or alternatively can use standard deviation.

My Intro To Crypto

Amy — Thu, 04 Apr 2024 18:41:23 +0000

Boredom, and broke-ness have led me to develop somewhat of a curiosity about the vast realm that is, cryptocurrency. Initially, I first heard a tiny bit about cryptocurrency around eight or nine years ago, when a coworker at the restaurant I worked at was discussing their Bitcoin investments.

“This stuff’s DEFINITELY going to blow up!!” exclaimed the confident early-investor-slash-line-cook.

“I swear this dude is stupid…” mumbled a nearby line-cook-slash-skeptic.

Sometimes I wonder if the first guy ended up holding on to his Bitcoin for long enough to reap the rewards, but besides that, I can’t say I’ve thought much about the whole crypto thing since then. It seemed cool enough, but I was too impatient and unsure to join the craze.

Which brings me to today… After witnessing my brother make a little money with crypto, and developing a healthy curiosity based on the growing phenomenon and its many success stories, I’ve decided to compose a blog about my crypto journey to help me learn, grow my understanding, and document my progress while delving into the world of crypto currency.

My first real introduction into and participation in cryptocurrency would be the DID Wallet app, which I will explain in further detail momentarily. Basically, my brother texted me to download some app, that he would be sending me NFTs on occasion. I didn’t really understand what I was getting into, but I figured there’s no harm in accepting gifts from my brother. Over the course of a year or so, my brother sent me the occasional NFT, usually something I would think is cute like a chicken or robot, and I’d allow it to remain in my unused DID Wallet until further notice.

Now, all of those NFTs are still there, unused and unbothered, but I decided it’s about time I took the time to learn what this DID Wallet app is, and what are its capabilities. In order to grasp this idea, I found I needed to figure out what a few terms that were being thrown around frequently meant.

DID Wallet is a decentralized wallet application that uses decentralized identity to protect/ensure privacy and allows the users to maintain several different block chains and exchange tokens, NFTs and cryptocurrencies outside of a centralized system. A centralized system, for example, is a typical bank, wherein contacting/utilizing the features of the bank is necessary in order to move money from your account, to a different account, or to send money outside of your account. It’s your money, but some greater entity essentially has direct control of it, and you will need to go through it in order to access your funds. In terms of social media, Twitter and Facebook are centralized applications in that there is a centralized entity that can remove content at will as a means of censorship, for better or for worse. Ebay and Amazon are centralized applications that are governed by a central host and its policies, and in addition, they charge its vendors a fee in order to utilize their platforms. A decentralized platform is, of course, the opposite of those. There is no central server that governs the use of the application. Cryptocurrency can be bought, sold and moved around without interference from a central server, same with NFTs. In terms of social media, posts cannot be removed nor censored to comply with a centralized policy. Basically decentralized applications are controlled by the individual users rather than a central entity. It has a bit of a wild west vibe to it, don’t you think?

Blockchains are transparent systems that record exchanges, especially in terms of cryptocurrency. ArcBlock is a particular decentralized blockchain that can be openly invested in and traded via purchasing the cryptocurrency, ABT or ArcBlock. ArcBlock is the creator of the DID Wallet app, which is used to maintain a variety of blockchains for trading and storing cryptocurrencies, tokens and NFTs. DID technology uses the idea of decentralized identities to create various DIDs which encrypt one’s identity while maintaining various private channels for communication with other users.

In short, I found out the DID Wallet my NFTs have been living in is an ultra encrypted, identity protecting wallet app that can be used to manage various blockchains at once, as well as store tokens and NFTs. I’ve still got a ton of stuff I need to wrap my head around in this vast universe that is cryptocurrency, but I’ll be taking it day by day, learning more as I go, until I’ve grasped enough fundamental information to feel confident enough to begin making my own investments and decisions. In my next blog, I’ll likely dig even deeper into the fundamentals in order to gain a better understanding before jumping back into the specific systems at play in my own journey. Thanks for reading this far, I hope you’ll join me as I grow and document my journey into cryptocurrency.