Token Redenomination - Crypto Academy / S4W3 - Homework Post for @wahyunahrul by @goodspeed22 25/09/2021
Good evening friends. How are we doing? I believe we fine. Below is my post for Home work task season 4 week 3:: Beginner's Level - Token Redenomination.
"Explain what is Token Redenomination in your personal opinion? What distinguishes it from currency or other assets redenominations?"
In my own lay man understanding, token redenomination is a process decided on by the token owner and supported/agreed by investors (community) to divide token into smaller units and at the same time maintaining it's value. This is done so that different categories of investors will be able to have access to the token, then buy and invest.
This situation often take place when a particular token price is on the higher side as a result of increase in the demand of the token. This higher demand will cause the token to be only in the hands of the affluent ones and also only these well-to-do will be in the market. Hence, this will affect the token project adversely as will see later.
As a result, the developer may decide to
redo the token from the former one to a new one, by dividing it into smaller pieces or units without changing it's value. This process will accommodate fresh and low capital investors to get the token.
Before the onwer carryout this redenomination, he will notify the investors (community) through an open letter of other means, detailing the new steps involved and at the same time giving the investors the chance to vote on this decision and to agree on a particular ratio that the process will be based on.
For instance, the redenomination of SUN on Tron blockchain. Justin Sun, the founder decided to simplify the token in order to reduce the high price of SUN Token, which prevented many investors from buying the token and also cause other side effect on Sun ecosystem.
He disclosed this through an open letter to the community, specifying the steps and the changes that will occur on the new token. Some features like name, logo and others. He saw the need for this change - the value of market cap was low compared to it's rival token and other reasons.
Token Redenomination
These factors listed below:
- The decision to redo the token lies in the power of the owner or developer and agreed on by the investors who will be allowed to vote on the ratio of the redenomination.
- It is communicated through an open letter or other means to the investors.
- The aim of redenomination is to remove the barrier that prevent the small investors who have low capital to buy and invest in the token.
- The owner want the ecosystem of the token to grow and as well remove the fear of some investors that the project may not last.
Fiat currency or other asset redenomination
- The decision is from the apex bank that controls the currency, usually the central bank. And in the case of stock, the company may decide to divide or split their shares into smaller units based on a particular ratio.
- The decision is communication to the investors at the general meeting of the shareholders, hence, from those who are present, these will vote either in support or against the decision of the company to redenominate their stock.
The decision to redo the currency is aim at increasing the purchasing power of the people and to reduce the price of commodities in that country.
"Mention the advantages and disadvantages of Token Redenomination."
Advantages
The merits of digital asset redenomination are:
it gives room for many low capital holders who are interested in the token project to buy and invest as the crypto is split into smaller units. As these investors trroop in, the token project will acquire new and more finance to help support the development of the project.
As we know in cryptocurrency market, the larger the number of participants in the market, the better the liquidity of the market and price bargaining power will improve and increase. this condition can be achieved when a token undergoes redenomination as many new investors are added to the market.
Strong market capitalization is a very strong determinant with regards to investor's interest in a given cryptocurrency. Dividing token into smaller units serve as a boost to the market cap of a digital asset, as good number of investors buy and invest into the token project. This will also show the investors that the token is a good one as the market capitalization increase. That was the aim of Sun token, because the owner saw that the market cap is low ($500 million) unlike its rival token, Curve ($5.8 billion). Thus, he plan to go for redenomination, which will therefore be of an advantage to the token SUN.
Project Ecosystem Grows: As more funds are received from fresh investors, it will absolutely have a positive effect on the platform of the project token. it will prove to the investors that this given project will last and thrive as long as more new finance is added to the project.
Disadvantages
It may lead to embarrassment and confusion on the part of the investors that already hold the token before the redenomination. This is because of the changes that must be made to ensure the success of the process.
"Do all cryptocurrency projects need to do Token Redenomination? Explain in your personal opinion"
The answer is no. This is because redenomination on cryptocurrency always have the following objectives:
- Allowing small capital investors to take part in a specific token project as the token price is reduced.
- Increasing the liquidity of the digital asset market as more people come in and add more fund to the project.
- Increasing the value of market capitalization of the token, so that investors will have full confidence in this token - is better one and there will be continuity of the token.
- The platform on which the token is built can be made more stronger.
"Choose a project that has or is currently doing Token Redenomination and show how to convert old tokens into new tokens. (Screenshot Required)"
Image source
The project i choose is DOT Redenomination
DOT the native token of Polkadot blockchain saw a huge change on its ecosystem as it underwent redenomination/split. Although Dot is a recent project, the project developer (Gavin Wood) saw the need for this process, hence he seeks the opinion of the community to vote for this process. By July 27, 2020, the poll was completed and 86% vote was in favor of this division and that was the highest vote as the image below shows.
From the redenomination guide, the following were the processes that was followed that led to success of the transition.
Time line
The date was August 21, 2020 at 16:40 UTC. This split was done within 72 hours.
Ratio
The community were four options to choose - 10M, 100M, 1B and 10B
The ratio was based on 1:100
Block Number
The block number from the check list is:
1,205,128 (transfers enabled)
1,248,328 (Redenomination block)
**Accounting Section: From the base unit of Dot, which is the Plancks, its total number will not change but it is only the total number of decimals or zero that will be changed from 12 to 10 decimal places
This means that for each one (1) DOT will increase 100 times. But the price of Dots will be reduced. To explain further, before the redenomination, the number of zeros or decimal was 12 but after this process, it became 10 zeros instead of 12. As shown from the image below, from the holders wallet balance, the number of DOT increased while the price of each reduced.
Note.that the redenomination does not change the stake of any DOT holder in the ecosystem.
Token Representation
In order to identify with this changes, wallets and the exchanges on which DOT is listed will use this symbol:
"DOT (old)" = original denomination.
"New DOT" in italics - to represent the current one after the redenomination. Also users must add a note besides this symbols indicating the reason for this change.
The communication section gave a sample wording to be used for this notes besides the symbols.. The community will be informed when to start using the normal "DOT" symbol again.
"Analyze whether the token from the project you chose in question number 4 is worth investing in. (Screenshot Required)""
From the above-mention redenomination process on DOT, the token saw itself skyrocketed to among the top ten cryptocurrencies - number seven., with market capitalization of over $3.7 billion.. Before this process, it was at $2.92 to $6,84 by September 1st. It has made of a huge profit after the redenomination.
From this analysis, DOT is a good and better project that one can invest in as it keeps rising. The findings from the coinmarketcap also shows that. See the image below
"Conclusion"
.From the above explanations on token simplification, I readily conclude that the process is worth looking into especially with regards to those tokens that needs improvements on all aspect of its project. The owner should always be quick to make plans if the token price is high and market cap is low compare to other tokens and other factors that may inhibit the growth of his token project.
Best wishes to my professor @wahyunahrul..
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cc:@wahyunahrul