Coins and Tokens. What are the differences in Cryptocurrency market? Table of Contents
Coin, Token and Tokenomics
Before investing in cryptocurrencies, it is recommended to analyze cryptocurrencies to manage the risk on the investment. Such an analysis requires a closer look at key aspects of the cryptocurrency in question. However, investors invest in tokens as well as cryptocurrency coins. Tokens also have value. It is the token economy, or tokenomics, that analyzes whether or not to invest in tokens.
Tokenomics is a compound word of “token” and “economics”. Tokennomics is the analysis of why a token is valuable and why it has reached its price. Tokennomics talks about the solution to the economic problems of tokens and the function of tokens in blockchain technology by looking at various elements in the cryptocurrency world. Before we get into the world of tokennomics, let’s briefly explain tokens.
What is Token?
Tokens are used for a specific purpose and each has a value according to its characteristics. Tokens are generally viewed as valuable assets that do more than just currency. For example, a soccer ticket can be considered a token, as it can be traded to see a soccer match or something else.
In the same vein, tokens can also be found in cryptocurrencies. In addition to being used as a trading asset, these tokens can have various functions within the network. With the creation of Ethereum, the concept of tokens in cryptocurrencies grew bigger. The Ethereum network was the first blockchain technology to go beyond simple transactions and provide more decentralized services to people. Just as money is needed for a transaction, a decentralized service on the Ethereum network also requires tokens. In the Ethereum network, these tokens are called ERC-20 tokens.
Tokens can be classified into two main types: Layer 1 and Layer 2.
Layer 1 tokens are native to a particular blockchain and can be used to run any service on the blockchain. Two examples of Layer 1 tokens in cryptocurrencies are Ether (ETH) on the Ethereum network and Binance Coin (BNB) on Binance Chain.
Layer 2 tokens are used for decentralized applications (DApps) within the network. For example, OMG tokens are layer 2. This is because OmiseGO, where the token is used, is a decentralized project within the Ethereum network.
Another way to classify tokens is their usage. There are two types: security and utility.
Security tokens are considered investment contracts. To be considered an investment contract, these tokens must entail a capital investment, profitability, and joint venture. Also, the revenue must come from someone else’s computational effort. These agreements verification process subtest called (Howey Test). Therefore, a token that passes the subtest is considered a security token. An example of a security token is Siafunds (SF), which operates on the Sia network.
Utility tokens are tokens that guarantee the finances of the network. Typically, a utility token waiting for funds to develop the project’s initial public coin: it will be paid by the (ICO Initial Coin Offering). For example, the Basic Attention Token (BAT) is a utility token initially distributed through the initial coin offering. These tokens can now be used in decentralized advertising on the Brave browser running on the Ethereum network.
Tokens can also be classified as fungible and non-fungible tokens.
Replaceable tokens have the same value and can therefore be duplicated. One Ether (ETH) can be exchanged for another Ether (ETH) as the exchangeable token is the same and has the same value for everyone.
However, non-fungible tokens, i.e. NFTs, are each unique, so non-fungible tokens do not have equal values. Non-fungible tokens are usually tokenized assets such as photos, artwork, collectibles, real estate, etc. Non-fungible tokens are unique and cannot be duplicated. These characteristics can make the value of non-fungible tokens higher than that of fungible tokens.
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Coin vs token – What is the difference?
So, what are the similarities and differences between coins and tokens in the cryptocurrency world?
Similarities are:
- Decentralization
- Both coins and tokens operate in a decentralized way on blockchain technology. This generally means that when tokens or coins are used in cryptocurrencies, there is no need for a third party or central authority to regulate these services.
- Value
- Both coins and tokens can have value. Although the price factors of coins and tokens may be different, both can be bought or sold.
Differences are:
- Independence
- Coins can be used on independent blockchains. This operability gives the coin an advantage.
- Value change
- There are many external factors that determine the price of a coin. However, the change in the value of the token is largely dependent on the change in the value of the cryptocurrency on which the token is based.
- Purpose
- As the name suggests, coins are designed to represent monetary value. On the other hand, tokens are created for the purpose of running other services within the blockchain.
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What is Tokenomics?
Tokennomics means researching how tokens work, what purpose they serve, and what factors to consider before investing in cryptocurrencies. That means token economics.
In general, anything that can affect the value of a token, including the token itself, is tokennomics.
There are many factors that determine the price of tokens and cryptocurrencies. However, some of these factors are very important and should be kept in mind when investing.
1. Total Supply and Market Cap
In cryptocurrency, it is important to look at the total supply of coins. In general, cryptocurrencies with limited aggregate supply may increase in value in the future. This is because shortages in the market cause scarcity. If something is lacking, the price must rise to balance the market.
On the other hand, if the supply is unlimited, the price may not rise in the future as much as the limited supply.
Cryptocurrency supply is closely related to market capitalization. The market capitalization is the total circulating supply multiplied by the current price of one token. A fully diluted market cap is a hypothetical estimate of the market cap when the total supply of cryptocurrencies is in circulation.
Cryptocurrencies that have a higher supply than other cryptocurrencies do not always have a greater market supply. The same goes for cryptocurrency prices. Just because the price is high does not mean that the market capitalization of cryptocurrencies is greater than that of other cryptocurrencies.
Market capitalization is an important factor to consider before investing. A lower market cap could mean that cryptocurrencies have more potential to grow. This is true of small-cap cryptocurrencies (with a market cap of less than $1 billion). While large-cap cryptocurrencies (more than $10 billion market cap) may be a safe investment, their growth potential is on the smaller side.
2. Allocation and distribution
Before a cryptocurrency is released, token allocation can be viewed as a fair launch or mining a certain amount in advance (premining).
The fair launch is the allocation of cryptocurrencies in an orderly manner after they have been released. Tokens are allocated through mining, and the amount of mining usually depends on the computational power of the blockchain nodes.
On the other hand, premining is allocating cryptocurrency before it is released. This is done through an Initial Coin Offering (ICO), which secures funds for cryptocurrency development.
These two models have a huge impact on how tokens are distributed.
When cryptocurrencies are launched fairly, more tokens can be mined, so the distribution is more concentrated on nodes with higher computational power. This approach is considered “fair” because those who invest more in mining will be rewarded more than those who invest less.
After a certain amount of cryptocurrency is mined (pre-mined) in advance, tokens that are usually sold through an initial coin offering (ICO) are sold to institutional investors and cryptocurrency teams, not individual investors. Therefore, if the share of institutional investors in the total supply increases, the token distribution will become out of balance. This means that these investors can completely change the price of a cryptocurrency by selling their tokens all at once.
3. Vesting and inflation
Once the cryptocurrency is ready in advance, cryptocurrency operators can decide to lock up the circulating supply and gradually release tokens over time. This assures individual investors that institutional investors will not be able to dominate all tokens at once, resulting in market imbalance. However, the release of tokens should be logical. This means that the distribution will be on a lower scale for years to come.
Inflation refers to the change in the value of existing tokens after many tokens are released at once. If any tokens are supplied, there will be a surplus of tokens. And whenever there is a surplus of tokens, the price will fall. On the other hand, deflation means that when the existing supply decreases, it causes the price of tokens in circulation to rise, as opposed to inflation.
4. Staking and utility
Staking is the process of locking tokens for a certain period of time (depending on the cryptocurrency) in order to receive passive income or rewards from the network. The problem with staking is that staked tokens cannot be moved until the end of the staking period. If any tokens are staked, the supply will be more limited during the staking period. This may affect the cryptocurrency price. There are cryptocurrencies with little or no staking time at all. This makes it easy for users to buy or sell tokens, so price increases or cuts may not occur significantly.
Utility refers to the use of tokens. Put simply, token utilities encourage people to buy more tokens, which in turn increases the price of cryptocurrencies.
5. Cryptocurrency teams and communities
The crypto team is also a factor to consider. For example, one of the reasons for the success of Basic Attention Token (BAT) is the team that operates it. Brandon Ike (Brendan Eich) and Brian Bondi people who are as academically reliable as (Brian Bondy) has increased the confidence of the people even before the launch of the Basic Attention Token (BAT) project.
Community is also an important factor. After all, cryptocurrency has no value if there are no people to buy the tokens. Therefore, the cryptocurrency team should strive to build good relationships with the community and expand the community.
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Bitcoin vs. Ethereum Tokennomics
Bitcoin and Ethereum are the largest cryptocurrencies by market cap. Let’s check the tokennomics of these two cryptocurrencies and find out the differences.
- Total supply
- While Bitcoin’s supply is limited to 21 million BTC, Ethereum has an unlimited supply.
- Market cap
- As of April 2021, Bitcoin’s market capitalization is approximately $940 billion, while Ethereum’s is $260 billion. Both cryptocurrencies are large cryptocurrencies, meaning their growth potential is different from when they had a market cap of less than $1 billion.
- Allocation
- Although a large number of Ethereum (ETH) was premined, both Bitcoin (BTC) and Ethereum (ETH) were launched fairly.
- Distribution
- The top 100 Bitcoin (BTC) owners own 32% of the total Bitcoin supply. The top 376 of Ethereum (ETH) owners own 33% of the total Ethereum supply.
- Vesting
- Bitcoin is launched fairly, so no vesting is required However, some Ethereum tokens are in the vesting process.
- Inflation
- Bitcoin has a limited supply, so there is no inflation, and its price can rise over time. However, Ethereum is prone to inflation due to its unlimited supply.
- Staking
- Staking can happen on a proof-of-stake (PoS) blockchain. Bitcoin cannot be staked as it has a proof-of-work (PoW) blockchain. Ethereum tokens can be staked. Some have staked ERC-20 tokens to develop Ethereum 2.0.
- Utility
- Bitcoin utilities serve as the “gold” of cryptocurrencies. In terms of utility, Ethereum tokens have a variety of utilities. As a network, Ethereum utilities charge people for gas to run decentralized services. The more services you use, the more gas you pay. So, the bigger the gas cost, the bigger the market cap.
- Team
- A very interesting factor in Bitcoin’s success was its founder, who went under the pseudonym Satoshi Nakamoto. Ethereum was founded on the insight and charisma of Vitalik Buterin to establish Ethereum credibility.
- Community
- As Bitcoin and Ethereum are the largest cryptocurrencies in the crypto world, both cryptocurrencies have huge communities.
In conclusion, you can think of Tokenomics as everything related to cryptocurrency tokens. Before investing in cryptocurrencies, it is necessary to analyze the tokennomic factors of each cryptocurrency in detail.
Tokennomics is a relatively new field of study, but it could become one of the largest economic fields in the future.
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April 24, 2024
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