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Why Understanding Tokenomics is Key to Successful Crypto Investing

If you’re interested in joining the crypto world, understanding tokenomics is key to making intelligent investment decisions. Tokenomics has to do with the rules and regulations built into the design of a crypto token. You can get a comprehensive outline of each token’s regulations and built-in incentives through its whitepaper. Understanding each cryptocurrency’s unique benefits and incentives can help you select the best one to invest in long-term or short-term. Here are a few important considerations when comparing various tokens.

Supply

One of the most critical factors of a token’s design is its supply. Some tokens will be built with a supply cap in mind that helps to regulate the rise of inflation over time. Other tokens, like the new FTX Token, FTT, have built-in burn mechanisms that will help ensure FTT continues to be an appreciating, valuable asset actively used within the crypto ecosystem and the FTX exchange. Burning tokens involves destroying a certain number of coins, so they are no longer in circulation; this deflationary practice ensures FTT remains valuable to its holders. As a currency holder, you can even have a say in the burning process as the FTX platform grows.

Liquidity

The liquidity of a particular exchange is integral to the success of traders on that exchange. You need to be able to pull your investment quickly to cash out on high prices if you so choose. Your exchange, therefore, requires a large liquidity pool to cash you out when needed. If your exchange does not have high enough liquidity, you may experience clawbacks. When the exchange you’re on can’t cover the losses, exchanges will requisition funds from net positive accounts. Consider the token’s liquidity when looking at which exchange and cryptocurrency to utilize. The FTX exchange offers a backstop liquidity pool that ensures liquidity is automatically injected into the market when needed. FTT is backed by the most extensive liquidity provider in the crypto world, Alameda Research, making it a highly reliable exchange for liquidation.

Stake and Yield

When investing in crypto, it’s essential to understand your long-term investment options for generating returns. If the crypto you invest in is built on a proof-of-stake blockchain model, you can join a stake pool and earn rewards. Any coin holder in a proof-of-stake blockchain can become a node on the network used to verify transactions. The more coins staked with a particular node, the higher the node’s chance of being selected to verify transactions. As long as the node correctly verifies the transactions in time, all coin holders in the stake pool get a reward. Otherwise, their coin is collateral for unsuccessful verifications.

Yield-farming is another way to generate rewards over time. You can put your coin into a liquidity farm through a smart contract for a specific period. You can’t pull your investment during this time, but your coins are lent out to borrowers in exchange for fees. You can test the health of a liquidity pool by seeing how much is already staked in the pool.

There are many considerations when comparing various cryptocurrencies in 2022. Be sure to take a close look at the whitepapers of each crypto you consider to see what unique mechanisms they have built-in to help regulate the coin over time. Select the crypto with the most built-in benefits and incentives for its holders, and select the exchange that can support your investment and your long-term crypto plans. 

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