Why Token Economics Matter

When you’re considering whether it’s a good idea to buy a cryptocurrency, one of the most important questions to ask is what purpose it serves. The way you go about answering this is by looking closely at the cryptocurrency’s token economics.

For some ICOs, a cryptocurrency is merely created to generate funds instead of aiming to solve a problem or utilize new technology. This is in no way beneficial to the larger crypto community, therefore any ICO which has a cryptocurrency merely for vanity purposes should be viewed with skepticism.

A platforms token economy is a description of how that token will be used on the platform, and if it’s only used for fundraising then the need for it will quickly diminish after the fundraising around and there is no reason for users to hold onto these tokens. But, if tokens serve several purposes, both during any fundraising and afterward, then their value has more potential for the long-term and are worth a closer look. Basically, the more ways there are to use a token, the more useful it is, extending even beyond the platform that developed it, which means it can compete against other tokens focused on the same products or elsewhere.

Additionally, if a token is important to the governance of its platform then it plays a part the decisions are made. If a platform works on the basis of decentralized governance, it can make decisions based in part on the input of the community, so anyone holding these tokens has a voice and a vote, similar to stockholders.

So, with those aspects of token economies in mind, you can then continue to evaluate a potential cryptocurrency investment based on other factors, such how the tokens are distributed, what micropayments are offered, the impact of the tokens on any games or projects built on the platform, and the method of buying-in.

A strong token economic model will offer benefits to investors, users who come onto the platform after the ICO, developers, and allow everyone to take part in the growth of the platform. Therefore, any platform that does not take the time to create a solid foundation for their token economy is not one that is intended to be around for very long, while one that offers complex layers of protocols and a roadmap for further develop is in a position where a robust community can take it to the next level and help it succeed.