Token Redenomination - Crypto Academy / S4W3 - Homework Post for @wahyunahrul
.jpg)
Hello everyone. This post is my submission to Professor @wahyunahrul's lesson on Token Redenomination. The assignment was given as below:
1). Explain what is Token Redenomination in your personal opinion? What distinguishes it from currency or other assets redenominations?
2). Mention the advantages and disadvantages of Token Redenomination
3). Do all cryptocurrency projects need to do Token Redenomination? Explain in your personal opinion
4). Choose a project that has or is currently doing Token Redenomination and show how to convert old tokens into new tokens. (Screenshot Required)
5). Analyze whether the token from the project you chose in question number 4 is worth investing in. (Screenshot Required)
6). Conclusion.
Explain what is Token Redenomination in your personal opinion? What distinguishes it from currency or other assets redenominations?
The term “Redenomination” can be defined as the re-adjustment of the currency or value of monetary entities due to the repercussions such as the devaluation of the asset’s worth as a result of unbearable inflation. During Redenomination, the exchange rate between the new currency and the old currency is sustained. This event can be true for cryptocurrency assets as it is for fiat entities. As mentioned earlier, extreme inflation of the currency plays a major role as the deciding factor for redenomination, and these hyperinflations come about when institutions are unable to maintain the balance of the asset’s economy. This event, then, leads to unregulated price surges.
The application of redenomination is common among fiat currencies. There have been multiple instances where countries have issued new monetary notes and coins to replace old ones. The newly issued currencies are some of the effective implementations that are designed to reduce the supply pool of the currency, which in turn abates the incidence of extreme inflation. However, it is worth noting that redenomination has cogent merits as well as possible demerits, which can even aggravate the situation that is being sought to be remedied.
An instance of a currency redenomination happened in my country, Ghana, on the 1st of July, 2007. Before this date, the currency of the country was Cedi. There were notes for various monetary values, and this characteristic, in the long term, led to serious inflation. Products worth a paltry amount of money required several Cedi notes, and this situation was even worse with more expensive products. It was so bad that individuals, who went to the bank to withdraw a huge sum of money, had to go along with huge bags to collect the currencies. So in July 2007, a new currency called the Ghana Cedis was issued at the same exchange rate as the old Cedis. 10,000 Old Cedis is equivalent to GHS1. Hence, this redenomination proved valuable in controlling the inflation situation of the country.
Redenomination is as valid for cryptocurrency as it is for fiat currency. Since cryptocurrencies are of monetary value, hyperinflation of the asset can happen on the markets. Cryptocurrencies are well regarded for their volatile nature and can accordingly experience high growth on the market. When this increment of the asset’s value extends beyond a point where scalability becomes a problem, redenomination becomes the solution. To this end, token redenomination is when the inflation of the token on the markets is curtailed by implementing measures that will carry the supply and price of tokens to a more scalable form.
Redenomination is necessary because the high price of the tokens can affect the liquidity of the tokens, as many will not be able to afford these tokens. Also, it will negatively impact the financial stance of the project in the sense investors can shun the project due to its non-economical price points. Accordingly, the team behind the project will carry out a redenomination process whereby the market supply of the tokens is increased at a particular ratio. The number of tokens that holders possess increases respectively, but the value stays the same.
Mention the advantages and disadvantages of Token Redenomination
Merits of Token Redenomination
One apparent advantage of the redenomination of tokens is that the supply pool of the tokens will increase proportionally to the established ratio of the re-calibration process. Taking into consideration that the exchange rate of assets will be maintained, the new amount of tokens will inherit a commensurate price according to the ratio of the division and the price of the old token on the market. This process creates more economical tokens that many investors can afford.
Another advantage is that the liquidity of the asset market increases substantially because there are now relatively more tokens available and also at an affordable price. This would positively affect the number of transactions carried out on the market as there would be more buy and sell orders placed on the market for the acquisition of the asset.
High liquidity is a key factor that attracts investors. So since the tokens will have an increased supply pool and liquidity, these factors will, in turn, have a good outlook on the market capitalization of the asset. The attention of investors will be drawn to the asset, and subsequently commit their financial resources to the project to obtain a number of the tokens.
Also, because the number of tokens grows considerably, the tokens acquire a more scalable form. This trait makes the token appealing to diverse projects within and outside its ecosystem. The token can now be utilized for larger and small projects. The wide adoption of the token for projects will have an immense development impact on the token, which will cause an increase in the value of the token on the market.
Demerits of Token Redenomination
The event of Redenomination usually results in the change of the token’s name. If proper public education on the change is not done, unaware investors will mistake the product for another form and may not invest in it. Even worse, such investors may regard the re-denominated tokens as a scam and utterly avoid them together.
Before the redenomination of the token happens, a consensus must be reached among the participant of the asset’s ecosystem. The dominating response becomes the final vetted decision. So there is the chance that some of the participants who do not concord with the development will cash out and leave the asset’s ecosystem due to the conflict between the final decision and their perspective as well as expectations.
Another disadvantage of the redenomination of tokens is that old tokens will have to be swapped for new tokens. The exchange process demands gas fees, which are proportional to the number of tokens being swapped. Investors with a minute amount of tokens may not suffer significantly from transaction fees. However, users with larger holdings of the tokens will spend a significant amount of money on the gas fees for the swap.
Do all cryptocurrency projects need to do Token Redenomination? Explain in your personal opinion
The answer to this question is simply NO. Redenominations are advisable for cryptocurrencies that are experience uncontrollable price inflation. This inflation, generally, makes the cryptocurrency asset exorbitant for investors to acquire, and it also degrades the scalability of the asset. Not all cryptocurrencies are experiencing inflation.
Some cryptocurrencies still have economical price points that make them affordable and highly scalable. So for such projects, there is no need to re-denominate the cryptocurrency asset. An unnecessary redenomination procedure for a cryptocurrency can further derail the development of the project and make it unattractive to investors and participants.
Choose a project that has or is currently doing Token Redenomination and show how to convert old tokens into new tokens.
The PUNDIX token is currently one of the tokens that are undergoing a redenomination. The event commenced in late March of this year and is still running. A consensus was reached among the participants of the PUNDIX ecosystem through a poll. The decision made was that a redenomination was necessary to correct the market condition of the project. Accordingly, the new denomination NPXS was created at an exchange ratio of one thousand NPXS to one PUNDIX token. The steps involved in carrying out this conversion is explained below:
- First, visit the PUNDIX Website and click on the Swap Now button on the far right corner of the landing page.
- There will be alternatives shown as in the image above. Users can select their preferred method of carrying out the transaction. I selected the Metamask wallet, as highlighted in blue.
- I approved various pop-ups in the Metamask wallet in order to continue with the exchange.
- I had no PUNDIX in my wallet so I was unable to see the process through. However, an image from the blog of PUNDIX highlights the remaining steps. That image is the next one and is duly referenced.
.jpg)
- Since the redenomination occurred at a 1000 NPXS to 1 PUNDIX ratio, 10 PUNDIX, in this case, fetched 10000 NPXS. Click on the Approve Buton and Place Order button respectively when available to successfully completed the swap. A proportionate amount of Ethereum gas fee will be charged as well.
Analyze whether the token from the project you chose in question number 4 is worth investing in.
The price of the new PUNDIX tokens was $1.25, at the time of the screenshot. Its maximum supply is roughly two hundred and sixty million tokens and all virtually all these tokens are in circulation. This means that the circulating supply pool of the token is equivalent to its maximum supply limit. It has a market capitalization and a fully diluted market capitalization of $324 Million dollars. The 24 hours volume of the new PUNDIX is around 26 Million Dollars. It was also ranked 235 at the time of visit.
A look at the chart of the new PUNDIX token shows consistent price fluctuation. This is evidence of the fact that there is high liquidity for the market of the new PUNDIX token. There are active buyers and sellers impacting the performance of this asset.
Taking the information above into consideration as well as the fact that the underlying framework of the token is the Ethereum blockchain makes this a promising one. The Ethereum blockchain is known for its high security and scalability characteristics. Since the PUNDIX is operating on the Ethereum blockchain, it means investors can be reassured of the high security of their holdings.
The price of the token is also very economical and does not deter potential investors from acquiring some. I believe many cryptocurrency enthusiasts can afford to pay a dollar and a quarter to obtain their first cryptocurrency asset. The PUNDIX project also has personal and realistic uses cases such as the purchase of items and many others. All in all, the PUNDIX token is worth an investment because it has a solid foundation and a bright future.
Conclusion
Token redenomination when necessary can help put the financial asset back on a good economical track as it will increase the availability of tokens and pave way for more investors to make entry into the market. Though it is a great course of action, it certainly has its fair share of some disadvantages. Hence, a careful analysis of the market condition of a token needs to be done first before participants can concur on carrying out such a development.
When done right, the token denomination will have a good impact on the scalability and investment outlook on the token. This will increase the token’s appeal for its integration into various internal and external projects in the ecosystem.
I thank Professor @wahyunahrul for this educative and eye-opening lecture.