Tokenomics is the economics of tokens (cryptocurrencies). It is the study of token behaviour to read and analyse the token value over time as well as the factors that affect the token price.
Tokenomics usually include things like the total number of tokens, token distribution, token holding, trading, etc. The overall purpose is to incentivize positive growth of the respective token.
Until now, money or currencies were only issued by central banks under the guidance of governments. But cryptocurrencies have changed that. These are decentralized currencies which can be issued by just anyone, even individuals seeking to create their own micro-economies around the blockchain network.
So, basically, tokenomics is all about tokens: how they are created, sold, traded and increase/decrease in value.
So, how does it all work? Let’s see. The economics of tokens is governed by factors like token distribution, price, governance, adaption, etc. Let’s discuss each in details.
Token Distribution is how coins/tokens are circulated in the market in order to increase their applications as well as value. This is achieved in many ways. For instance, cryptocurrency mining is an activity where miners are rewarded with new coins. ICO (initial coin offering) is another method that companies utilize to distribute their tokens in the market.
Another thing of importance in tokenomics is the price stability of tokens. Cryptocurrencies are volatile in nature, as their value change very frequently owing to demand and supply. Networks need to take care of this by maintaining sync between the supply and demand of their tokens in order to create a stable price.
Since cryptocurrencies are not controlled by any centralized entity such as banks or the government, the team behind a project is itself responsible to devise the rules for the creation (mining), distribution and trading of its tokens. While some projects choose to release all their tokens at once, some others prefer to hold a few tokens in reserve to be released later. The ‘burning’ of tokens is another popular method followed by some networks to help control the volatility of their tokens.
Governance of tokens also involves devising the rules for incentivising people who purchase, hold or use the said tokens. For instance, some networks reward their users for holding the tokens rather than selling them back.
Moreover, tokenomics also details the future adaptation of a token and defines how the token will change over time. The team or developers behind a crypto project do not know whether their product will work in the future, this is why they need to make provisions to alter the way tokens are operated in the future, if need be. This is crucial in order to maintain a constant interest in the token.
For example, the supply (release, sell and trading) of Bitica coins is completely governed by the underlying rules devised by the team. A total of 18 million coins will be released, not more than that. The rules for the distribution of tokens are also mentioned in the project whitepaper and on the website. Check details at https://thebitica.com/.
The X20 is a new cryptocurrency mining/hashing algorithm which was founded by the Pieta.Network on the concept of the X11 and its successor hashing algorithm.
The fundamental working is the same, which is to increase the hashing of the mining process to make the overall process (and transactions) more efficient and secure. However, the X20 algorithm was created with another major purpose of reducing energy consumption in the crypto mining process.
The X20 algorithm is a proof-of-work mining/hashing function which provides a cost-effective alternative to high-end mining hardware such as Application-Specific Integrated Circuits, or ASICs.
The X20 algo works by enabling 20 round of hash functions, instead of just 1 or 2) for each mining transaction, therefore, encrypting each new value with 20 separate hash functions, thus increasing the security and efficiency of blockchain transactions.
Now, the X20 algorithm also speeds up the block creation process to less than 20 seconds by reducing the block size to 2 MB, in the Pieta project. The increased efficiency not only improves the mining speed but also makes it more energy efficient by keeping the mining hardware cool, as more blocks are now produced in less time and with less effort.
As the mining algorithm becomes more powerful, less power is required to produce each new block.
The biggest advantage of the implementation of the X20 algorithm in the mining process is the increased productivity and profitability for the miners.
But that’s not all, it also makes the overall process more energy efficient.
Benefit for the Environment
As the X20 algorithm limits energy consumption in the mining process by keeping the hardware cool, the emission of harmful gases and carbon is also limited by a great extent, thus making the bitcoin mining process more friendly to the environment. It also helps limit the cost of energy in mining.
Benefit for the Miners
The main benefit of X20 is for the miners who are troubled by the high cost of mining hardware and energy. The use of this algorithm is expected to reduce energy consumption in mining by as much as half, thus effectively reducing the cost of mining and increasing profitability. Low energy consumption means that the overall profits of miners will increase.
Pieta, in addition to the new X20 algorithm, also focuses on the use of green solar energy in the cryptocurrency mining activity, thus limiting the adverse impacts of mining on our ecosystem. You can check out the complete project details at https://pieta.network
During the past several years, the traditional Investment Management (IM) industry has seen rapid changes with the appearance of well-funded fintech companies, the digital tsunami and the shifting of demographics. DCI is one such upcoming finance preferred ecosystem that leverages the digital capabilities in order to provide excellent investment opportunity for the private, retail, and institutional investors. DCI uses advanced technologies like AI, machine learning, and Robo-advisory to offer a complete 360-degree view of the private and institutional portfolio to the users of the ecosystem.
Coming back to traditional investment methods in the IM industry, it is observed that the traditional investment methods like mutual funds and hedge funds do not guarantee an excellent return to investors due to limited investment opportunities and larger capital requirements. In the recent past, investing in mutual funds has also been considered as expensive by IM industry experts that is largely considered as an anachronistic ETF.
In the cryptocurrency space too, the investors are looking to invest in digital crypto funds that offer high returns with minimum market risk. In order to help investors, modern fintech players, such as DCI (Digital Crypto Invest), are planning to provide active portfolio management capabilities in a ready turn-key ecosystem featured by modern technologies such as Artificial Intelligence (A.I)/Robotics.
Despite rapid changes in the IM industry, it is important for the investors (i.e. private, retail and institutional) to obtain proper knowledge regarding the difference between types of funds in terms of risk, return, tax treatment, and investment opportunity.
Here are the category-wise differences between three major funds, which include equity funds, hybrid fund, and debt funds.
When it comes to investment risk, the equity funds come on top with a high-risk rating in comparison to debt and hybrid funds. Equity funds are the ones that primarily invest in stocks. In equity funds also, the risk varies in sub-categories. For instance, mid-cap and small-cap are riskier than the diversified large-cap funds.
The lowest risk credit in the equity category goes to index funds, which passively tracks the index. On the other hand, in the debt category, the risk rating is mainly determined by maturity and credit quality. Debt funds primarily invest in different securities like Treasury bills. High maturity generally incurs high risk in debt funds. Lastly, in the hybrid category (debt and equity both), the riskiest category is the balanced funds as it has a greater than 50% exposure to equity.
In obvious terms, it can be simply stated that the returns expected on each type of fund are generally proportional to the risk taken by the investor. One thing that affects this relationship between risk and return is Total Expense Ratio (TER). TER, in simple terms, can be defined as the total cost that incurs to the investor for managing and operating any fund like a mutual fund.
The level of TER varies with active management of funds by the investor. Talking about three different funds, the closely ended and liquid funds have a low TER in debt category, whereas in the equity category, diversified and sectoral funds have high TER and high expense ratio. In the hybrid category, arbitrage funds are largely passive in nature, hence have low TER, whereas the balanced funds have high TER close of 2.5 percent.
Apart from TER, the choice between regular and direct plan also affects the NAV to investors, and as a result, overall return also gets affected.
Keeping this in mind low TER would be the best choice for investors to have a high return in the alpha markets.
Talking about taxation, there are broadly two categories, dividends and capital gains, on which taxation scheme of things gets imposed. In the case of dividends, the capital earned is tax-free and is directly handed to investors in case of debt, equity, and balanced funds. However, the Dividend Distribution Tax (DDT) generally varies in each category. For equity, DDT is 10%, whereas the debt category has a much higher DDT of 25%.