Bitcoin as like any other crypto currency is a digital currency that functions on a block chain. It acts as an alternative to any physical fiat currency issued by the central bank of a country. The value of Bitcoin has experienced an exponential increase since 2018. While there have been fluctuations in the price value of bitcoin, it still continues to increase over time. Almost a decade ago the value of bitcoin was around $14. Compared to the current value of bitcoin, this is a massive increase. Such increase in value has motivated investors and they keep pouring money into Bitcoin and other crypto currencies. But this brings us to a question, how is bitcoin able to have a value?
Either be it a digital currency or a physical one, any currency holds a value because people decide and agree to the ascribe value of that currency. In simpler terms, a $20 note is apparently a piece of paper but since that specific piece of paper is agreed to have a value equivalent to $20, you can buy goods and services worth that amount from that note. Similar to this bitcoin is also a fiat currency that borrows its value from the heightened demand and scare supply it has. Bitcoin has some unique attributes that make it valuable. To begin with, it only has a limited supply. There are a total of 21 million Bitcoins, hence there would be no more Bitcoins after 21 million. Alike any other currency, a bitcoin cannot be copied. While there might have been instances where physical currencies might have been copied or fraudulently produced, bitcoin is far from that. Bitcoin operates using a block chain ledger and therefore, the system keeps a complete record of everything and it is impossible to circulate a fake bitcoin as it would be immediately identified by the system. Moreover, it is transferable. It can be easily transferred from one wallet to another. Therefore, it can also be used as a medium of exchange. You send bitcoins to merchants in exchange of the goods you buy from them. This is where tokenomics comes in.
Tokenomics is a buzz word these days. Everyone uses it regardless of the fact that they completely understand the idea behind it. To understand tokenomics, let’s see what a token is. A digital unit of currency that is backed by a fungible and tradeable asset is called a token. These tokens have an inherent value based on the blockchain they are generated on. Generally, tokens are generated when a blockchain or a company is going through the phase of initial coin offering. Tokens help the company or the blockchain to raise funds by inducing investments. This not only helps them to generate capital but also allows for development of new projects on the blockchain.
Therefore, tokens are a subset of a larger blockchain. Each blockchain has its unique currency and thus has a unique crypto token as well. Now here is when things get interesting, Tokenomics is the economics of tokens. In other words, it is the demand and supply of the cryptocurrency that is affected through block chain tokens. As we known that Bitcoin has a supply of 21 million. As bitcoin is becoming more popular, the supply of its tokens is decreasing. This applies an upwards pressure on the prices of the coin. While this is happening, the demand of the tokens is increasing day by day. This allows the coin to not only hold its value but when a pressure is applied the value of the coin also experiences a rise.
But there is more to it. Apart from asset backed tokens there are multiple types of tokens used on a blockchain, some of them are listed below.
Platform tokens are a core element of a blockchain. They enable the user to access and use applications constructed on the blockchain infrastructure. Moreover, platform tokens are also used for advertising and marketing. Additionally, platform tokens serve as a medium of exchange between users for trading digital collectibles on the platform.
Security Tokens are similar to real world securities. They are similar to a digital version of bonds and securities that are issued in a real-world economy. Security tokens are used to finance the development of both new and existing projects on the blockchain. Hence, they are a financial instrument that act as an alternative to crowdsourced funding and other fund-raising methods. In case of security tokens, the value of the token is asset backed and directly represents the market value of the asset.
As the name suggests, governance tokens are used for governing the blockchains. Blockchains are expanding vertical as well as horizontally. There are periods of exponential growth that are needed to be sustained otherwise there are chances of loss. Governance token allow for effective decision making. People that have a token can influence the activities conducted on the blockchain. Since, people themselves are given the right to make decisions, it is highly unlikely that anything but decisions favorable to the blockchain and the people would be taken.
Last but not the least, NFT (Non-Fungible Token). These are used to acquire real-world as well as digital art. NFTS act as a medium of exchange. Since all NFT’s are unique there are also little to no chances of people copying your artform.
All in all, tokens play a vital role in the crypto market and help the blockchain to increase its functionality. Furthermore, they are a direct determinant of the value of the cryptocurrency. It is also expected that in the future, tokens would decide the value of each digital asset.