Token Redenomination - Cryptocurrency Value Simplification || Crypto Academy / Season 4, Week 3 - Homework Post for @wahyunahrul
Question (1)
Explain what is Token Redenomination in your personal opinion? What distinguishes it from currency or other assets redenominations?
- What is Token Redenomination?
When I heard the Term redenomination I taught it applied only to normal fiat currencies that are used by various governments because it was common with nations like Hungary and Zimbabwe whose currency was devalued due to hyperinflation thereby forcing their hands to redenominate their currency because then only the wealthy could purchase goods and services after their currency was devalued the poor mass were able to make uses of the currency, but this change was futile because they had a poor economy which kept depleting thereby making the country to ditch their currencies, they then adopted the Euro and the Dollar respectively. It was until I started my research on this lecture that I discovered this applied to cryptocurrencies.
Every day there is a step taken towards an increase in the development of new Blockchain Technology, these new Blockchain inventions come with a new creation of Tokens which are used for operations on that Blockchain.
Every Blockchain has a project in mind and also a solution to tackle issues in the cryptocurrency ecosystem. These projects can sometimes perform well thereby attracting investors to invest in the project by purchasing the primary token of the Blockchain, by doing so the price of that token will start having an increase in value.
Because of how good this project has performed the value of the token will increase due to the large influx of investors with huge capital, doing so the purchasing power of that crypto asset of the token will drastically reduce due to the high value of that coin, also this might stagnate the scalability of the project because a small group of investors who wield large capital are the ones controlling the price action of that crypto asset or token. This is why certain crypto projects decide to redenominate their tokens.
Redenomination in crypto is similar to fiat currencies, but in crypto, the Tokens might be redenominated either because the Token has high inflation with a low Market Capitalization or Due to the single units of the Token being so low in valuation, therefore an increase or decrease to the supply of the token has to be put in place, making it possible for large or retail investors to have more purchasing power towards that crypto asset. The process of token redenomination has to be supported by its investors and Exchanges in which these projects are being listed or traded.
- What distinguishes it from currency or other assets redenominations?
A Currency is an issued legal tender by the Government or which is used by the masses of that country to purchase goods and services, while a crypto Token is a digital asset that is used on a Blockchain to carry out operations on the Blockchain, the Token can also be bought, sold or used in the as a means of exchange in countries where they are approved to be of use(e.g the legalization of Bitcoin in El Salvador).
In terms of Redenomination of Currencies, the users are not informed beforehand, and they are not even given the choice to decide on the amount of decimalization that should be issued towards the currency, but this does not apply to crypto Tokens whereby investors are informed beforehand through public letters and in most times given the choice to make decisions on whether it is ideal for the Token to be redenominated or the decimalization that should be issued to the Token.
Question (2)
Mention the advantages and disadvantages of Token Redenomination
The advantages of Token Redenomination
- Increase in Number of Investors
When a token has been redenominated it means that the value of a single unit of that Token has been reduced, thereby creating room for more purchasing power for retail investors who did not take part at the early stages of the Token release. This will attract more investors to the project as long as it is doing well.
- Increase in Market Liquidity
With the Redenomination taking place various exchanges where that crypto Token is listed or being traded has to support the crypto redenomination process by creating more liquidity of that crypto asset in its platform, by doing so investors or traders will be able to purchase and sell multiple units of that crypto asset, thereby increase the trading volume of the asset.
- Increase in Market Capitalization
Market Capitalization is calculated by multiplying the value of a single unit of a crypto asset or Token with the total of its supply. Therefore if a Token is Redenominated and there is an influx of investors this will increase the value of or price of the Token thereby increasing its Market Capitalization, this signifies that the project is doing well.
- More Capital For the Project Developers
Every Crypto Project demands a lot of capital to have a major growth or increases in its development, by redenomination there will be an increase in the value of the Tokens held by the development team, therefore enabling them with more capital to carry out other expensive development that will help the Project grow.
The disadvantages of Token Redenomination
- Loss of Investors
The token Redenomination process involves a vote casting by investors after which the majority of those in support of the process staying while those not in support might leave the project. Also, the process of transition from the old Token to the New token might cost investors thereby making them accommodate unnecessary losses.
- Stagnation in the Price increase of the Token
Let's take for example the Cardano which has a price of over $2, a supply of over $32 Billion and has a Market Capitalization of over $60 Billion, this means that there is little room for growth in price due to its high supply.
This also applies to Tokens that have been Redenominated, their high supply tends to affect their growth in price due to its large supply. This will in turn deter the Token holders from holding the Token because there will be little growth for the desired profit.
Question (3)
Do all cryptocurrency projects need to do Token Redenomination? Explain in your personal opinion
Personally i do not think all crypto currency Projects need to do token redenomination because of the following reasons below:-
Lack of Investors
The CRyptocurrency ecosystem has a Market Capitalization of over a Trillion Dollars and Bitcoin Market Capitalization was once over a Trillion dollars, so imagine if Bitcoin were to redenominate, it would drown out other crypto assets in terms of market Domination because a lot of investors will rush into it thereby cause other crypto-assets to have a stagnated or decreased value.Too much Liquidity
Liquidity is good for the market to accommodate investors, but when it is too much and there are few investors, it can hamper the growth of that crypto Eco-system or the market Capitalization in general.
Question (4)
Choose a project that has or is currently doing Token Redenomination and show how to convert old tokens into new tokens. (Screenshot Required)
The Pundix Token which was formally known as NPXS Token is the primary token used on the Pundix Blockchain.
To Swap the NPXS, simply go to the Play Store Or Apple Store and download the F(X) application which is used to swap send and receive Crypto assets on the Pundix Blockchain.
The next step is to create your wallet and then click on the circle icon below, this will pop up Options of the different activities that you can execute as a user.
Click on Swap Tokens, this will bring up a page where you will insert the token of choice which you want to Swap. Input the Token of choice which in this case is the NPXS and Pundix.
Input the Number of NPXS which you want to swap, of which the equivalent in Pundixs will show below. when you are done click on Approve. Unfortunately, I do not have NPXS assets that are why I am unable to complete the transaction.
Question (5)
Analyze whether the token from the project you chose in question number 5 is worth investing in. (Screenshot Required)
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The Pundix is a Blockchain device provider that hopes to revolutionize the transaction and payment ecosystem of the Retail Business. They created the XPOS which partnered with exchange and transaction platforms to create a decentralised exchange ecosystem that hopes to manage the assets of its users and also provide a faster transaction system and security for its users.
The Pundix was created in 2017 by founded by Zac Cheah and Pitt Huang. They also created the Xwallet application which will be used for the transfer, receiving and swapping of tokens.
The PUNDIX (old)
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The Pundix initially created a native coin for the Platform which was called the NPXS or the Pundix (old), the Token had a value of 0.004428 dollars and a total supply of over 235,514,908,115 NPXS, but over time its value decreased because of a lack of investors.
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The PUNDIX (New)
On the 30th March 2021, the Pundix Team had a poll vote and it fell in the favour of Token supply reduction, this prompted the transition from the NPXS token to the PUNDIX Token which was at a ratio of 1000 to 1 respectively. Currently, the Pundix (new) has a value of $1.35, a Market cap of $348,128,447 and a Max supply of 258,526,640 PUNDIX.
Since the Redenomination of this Token there was a short burst in price increase, but after a little, while there became a lot of decrease in price due to lack of investors.
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I think that this project has performed poorly and thereby making it less worthy of an investment. Since the creation of this project, they have gone through Redenomination twice and each of them has not has been futile, because they always tend to have a huge decline in price which is a result of a general lack of trust from investors towards the project.
Conclusion.
Token Redenomination is a process of rebranding a Token by increasing or decreasing the supply of the Token thereby affecting its decimalization. This is done either to create more liquidity in the market thereby encouraging retail investors and also creating room for the growth of the project and its Market Capitalization. TokenRedenomination should not be done by every Crypto Blockchain, because it is sometimes less favourable if the project is not trusted.