Token Redomination - Crypto Academy / S4W3 - Homework Post for @wahyunahrul
Thank you professor @wahyunahrul for introducing this subject to us. In this assesment task, permit me to go straight to the point.
Q1
Explain what is Token Redenomination in your personal opinion? What distinguishes it from currency or other assets redenominations?
WHAT IS TOKEN REDENOMINATION.
Token re-denomination refers to the re-adjustment of the numeric value of a token by reducing or increasing the decimals ( usually zero) without reducing the value of the asset.
In fait, re-denomination is usually done due to a hyperinflation or devaluation of a currency. For example, a country's currency may be devalued against another. Take for instance, 550 Nigerian naira is equal to a dollar. Which means that what 1 dollar bill will afford will require 550 Naira. Suppose the devaluation continue and 1 dollar equals 1000 naira, Nigeria may choose to do re-denomination by removing zeros from the naira, if two zeros was removed, 1 dollar bill will equal 10 naira.
A new note could be introduced with a different name ( let's say "new naira") that represents the current adjustment. Citizens could be asked to exchange their old note to the new one. That means a citizen with 1000 naira can exchange it with 10 "new naira".
The purpose this serves is to reduce the number note in circulation, it does not reduce or increase the value of the currency. Take for an example, if a bunch of banana is worth 1 dollar in Nigeria, it simply means that with the new adjustment, the bunch of banana could be purchased with 10 naira. It didn't change the value of the currency, it simple reduced the quantity of currency note required to purchase the commodity.
Re-denomination can equally be done when a country joins a new union and may choose to use a different currency. An example is when European union member countries decided to use Euro instead of their countries currency. The old currencies were exchange at fixed rate to the Euro without affecting their value.
Cryptocurrencies equally do token re-denomination. This is basically a re-decimalization. The purpose of that could be to reduce or increase the number of token in circulation without affecting the real value of that token.
Let's sight an example using Bitcoin, a popular crypto. 100 million Satoshis equals 1 BTC. If Bitcoin want to do re-denomination it can choose to reduce the number of Satoshis that equals a BTC. Let's say the BTC reduced 2 zeros:
BTC = 1 - 100,000,000 (previous)
BTC = 1- 1,000,000[00] (adjusted)
Now we have 1 BTC to equal 1 million Satoshi.
Previous BTC can be given a new name let's say "btcold", and the new value can answer BTC. Or the new BTC can be renamed.
Holders of the old BTC will be asked to swap their old coin with the new in an exchange.
what are the implications?
It simply imply that a holder of 100 million Satoshis which amounts to 1 BTC will thereafter have 1 million Satoshi for same 1 BTC. The value of BTC do not depreciate but only the number of the digits making up 1 BTC where reduced.
Most of the times, token re-denomination happens in the opposite of the example cited. It involves the simplification of the token value to accommodate new investors by adding to the denominators ( usually zero). Borrowing from the cited example, If BTC happens to be 1 million Satoshi to 1 BTC, re-denomination often occurs when the platform decides to add to it's decimal places to make it more affordable, so that new investors can join the platform.
What distinguishes it from currency or other assets redenominations?
The difference between the token re-denomination and that of fiat currency lies on the purpose. Fait currency re-denomination happens due to the devaluation of the currency. However token re-denomination occurs for some reasons:
When a token is highly valued or costly and there are no much denominators. Take for example, suppose 100 Satoshi equal 1 BTC and now BTC is $ 52,000 per one, which means a user whom do not have up to $ 520 to invest cannot Venture into BTC market. Re-denomination becomes a way to encourage more investors and add liquidity to the project.
The inflation of other assets are due to the asset or the currency loosing worth and a re-denomination is done to reduce the number of note for a bill whereas the inflation of crypto results in the asset gaining worth and may not be affordable to new investors. Re-denomination therefore in this case is the breaking down of the token into simpler units where everyone can afford it.
We have a use case in cryptocurrency where re-denomination occurred to reduce the number of the token in circulation. For example, re-denomination done by polkadot was re-decimalization to reduce the number of token in circulation.
Q2
Mention the advantages and disadvantages of Token Redenomination.
ADVANTAGES.
One advantage of token re-denomination is to add liquidity. When a market is liquid, that is , there are much people buying and selling the crypto, it adds to the market cap. Higher market cap affects the token market ranking. When there are only few buying due to high cost of the token it affects liquidity and therefore market capitalization.
Another benefits is that it encourages investors. Many who may be desirous of making an investment may meet an impediment due to high cost of the token. Re-denomination therefore affords new investors with an opportunity to have a share in the token buy.
Re-denomination when done to reduce the number of the token in circulation may in the long run affect the token worth and possible appreciation.
DISADVANTAGES.
One disadvantage of token re-denomination may be on psych of newbies. They may misunderstand re-denomination to devaluation and this may affect their moral. If for example a 10 unit token which was worth $100 now becomes 100 unit to $100, although the monetary worth did not change, the decimal change may affect the new crypto investor's psychology.
Q3
Do all cryptocurrency projects need to do Token Redenomination? Explain in your personal opinion.
In my very opinion, the answer to that question is no.
Most reasons for re-denomination is usually to add liquidity. A crypto project with high liquidity may not need re-denomination.
Another reason is decimalization. When a crypto decimal do not encourage hyperinflation, there may be no need for re-denomination. An example is BTC which has eight 0 denominations and also has high liquidity.
Q4
Choose a project that has or is currently doing Token Redenomination and show how to convert old tokens into new tokens. (Screenshot Required)
One of the token that did token re-denomination is polkadot token. Such as Satoshi is to Bitcoin is "plancks" to polkadot.
To get 1 dot token will require 1 000000000000 plancks. The re-denomination which was voted by dot token holders and the developers was to reduce the number of decimals from 12 to 10.
Just as explained above, there are no changes to the value of the token, only that when it requires 1.000,000,000,000 to equal 1 dot it now requires 100.000,000,000 to equal 1 dot token.
A user with 1 dot (old) worth of token, will see 100 (new) dot reflected in his account. Suppose the price of dot (old) is $100 per unit, a user will still maintain the $100 worth in his account; the difference now being that the user will have $1 per unit ( new dot) × 100 units which the account now reflects.
The previous value if polkadot is referred to as dot old whereas the new dot is referred to as dot.
show how to convert old tokens into new tokens. (Screenshot Required)
Polkadot re-denomination was simply decimal simplification. The exchange or migration was automatic.
However, to exchange polkadot, one can trade and swap the coin in any exchange platform.
In this exercise, I will use binance exchange.
Goto binance platform, locate wallets.
Then search for polkadot in the search box.
Click on it. See below image.
Then goto deposit as shown below.
Copy the wallet address as shown below.
Goto your wallet where you stored your crypto. Open to transfer. Follow below procedure.
Paste the address in the receiving address and click send. The money should reflect in the your binance account.
Now we are ready to swap.
From our binance app, goto markets. Search for dot and the desired crypto we want to exchange. In the example below. I want to swap to usdt.
Next, click on "sell" to exchange.
We are done.
Q5
Analyze whether the token from the project you chose in question number 5 is worth investing in. (Screenshot Required)
Polkadot market cap as at the day of doing this task is $1,879,135,427,202. This shows high liquidity. High liquidity is a good sign to show that a coin is doing well.
Polkadot is a strong project. The most upsides of polkadot includes strong security. For the present, no other network has beaten them in terms of security.
Another great plus for polkadot is interoperability. The network allows for inter- Blockchain connections.
Polkadot is selling $30.15 and ranked #9 in coin market cap.
Conclusion.
Token re-denomination is usually the restructuring of the number of decimals that make up a token without affecting the value.
Major purpose of re-denomination is to allow more investors into a network and therefore adding liquidity.
Re-denomination can happen in either way : adding to the decimals especially when inflation hits a token causing low liquidity or removing some decimals.
Polkadot is one of the coins that did re-denomination; high liquidity of polkadot and it's project makes it a coin to invest in.