22nd Apr 2021

Busting the Biggest Myths about Tokenomics

Article Table of Contents:

Myth #1: Tokens are Just Digital Coins
Myth #2: Tokens are Too Volatile to be a Store of Value
Myth #3: Tokens are Used Only for Speculation
Myth #4: Token Generation is Bad for the Environment

It’s been a little more than a decade since blockchain technology was invented. During this time, there have been significant developments in the crypto sphere. We are constantly seeing new, and sometimes bewildering, terms and definitions related to technological, legal, and informational trends.

In this new age of financial literacy, tokenomics is a relatively new and growing field. By understanding the pros and cons of this exciting branch, crypto and FX traders will be in a better position to evaluate coin fundamentals and their trading conditions. Tokenomics or token economics is related to the pricing, distribution, and production of goods and services that have been tokenised. They are specifically built on top of an existing blockchain, in the current context.

Unfortunately, the world of tokenomics has been subject to various myths and misconceptions that come in the way of traders making informed investment decisions. So, here are some of the most common myths debunked.

Myth #1: Tokens are Just Digital Coins

This is one of the most common assumptions. The reality is that tokens are created on top of an existing blockchain. One of the most popular blockchain platforms for their creation is Ethereum. Tokens built on top of Ethereum are called ERC-20 tokens. However, there are other platforms, like NEO, used to create NEP-5 tokens. 

So, a larger definition of the process of tokenomics is that:
  • They should have value
  • They need to have scalability
  • There should be incentives to use them
  • They should be based on a financially sustainable business model.

Myth #2: Tokens are Too Volatile to be a Store of Value

Bitcoin is an example of a currency token. Cryptocurrency markets are characterized by volatility which some economists have argued that this volatility is what diminishes the intrinsic value of some tokens. Highly volatile assets like BTC need to be traded with proper risk management. 

In the 1970s, when President Nixon decoupled gold and the US dollar, he triggered massive volatility, where the price of gold increased 25-fold to reach $850  within a decade, before falling over the next few years. The metal increased in value, as well as in volatility. Like gold, BTC too is currently at a price discovery phase, with huge price whipsaws. This doesn’t mean it won’t have value in the future. 

Myth #3: Tokens are Used Only for Speculation

Tokens can be of many types, including utility tokens, currency tokens and asset tokens. They have various use cases, apart from speculation. For example, DOT is the native token of the Polkadot blockchain. DOT token holders have voting rights and other privileges over the protocol. This includes determining network fees and scheduling the addition of parachains.

Even if we consider Bitcoin, the network settles billions of dollars worth of transactions every day. Some of these transactions might be for speculation purposes and some for remittances. One of the reasons for the growth of cryptocurrency adoption in the African continent has been the rise in remittances. Approximately $562 million worth of cryptocurrencies were transferred to various regions in Africa directly from overseas addresses. Recently, huge institutional names have added cryptocurrencies to their payment networks, such as Visa and PayPal.

Myth #4: Token Generation is Bad for the Environment

Miners do need vast amounts of computing power to earn tokens and secure the blockchain networks. But, cryptos like BTC have a huge role to play in financial inclusion. According to a study, 39% of Proof-of-Work mining  is now being powered through renewable energy sources. Also, major blockchain networks like Ethereum are now in the process of shifting to a less energy-intensive protocol, called Proof-of-Stake. Ethereum is lagging behind competitors like Cardano and Polkadot, which have already launched their networks based on this consensus mechanism.

The concept of tokenomics provides limitless use cases to organisations looking to solve real-world problems. However, the variety of properties, mechanics, and functions of tokens can create confusion regarding tokenomics. The best course of action is learning more about the token you wish to invest in before opening a trading position.
What myths have you come across regarding cryptocurrencies? Tweet us @CryptoGTGlobal to share your experience. 
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