Tokenomics
Tokenomics, the fusion of "token" and "economics," refers to the study of how cryptocurrencies are designed, created, and managed. In this section, we'll delve into tokenomics and its effects.
What is Tokenomics?
Tokenomics encompasses everything that influences a token's value, including token creation and distribution, token burn schedules, and incentive mechanisms. These factors can be grouped into two main categories: supply and demand. A project may be excellent, but it can be a poor investment if its token has unfavorable tokenomics. Tokenomics can be divided into two main parts: Supply and Demand. Let's explore them.
Supply
Understanding Supply in Tokenomics
Supply refers to the number of tokens, with circulating supply representing the number of tokens publicly available in the market, and max supply indicating the maximum number of tokens that will ever exist. Once the maximum supply is reached, no new tokens should be minted or mined.
Key Aspects of Token Supply:
Circulating supply: The number of tokens currently available in the market.
Max supply: The maximum number of tokens that will ever exist. Once the maximum supply is reached, no new tokens should be minted or mined.
Allocations: Token allocations describe the distribution of the initial token supply among various parties, including team members, early investors, and the community. Token allocation is important because it can impact initial token prices, vesting periods and potential token dumps.
Supply schedule: A token's supply schedule outlines when new tokens are released into the market. Understanding a token's supply schedule is essential, as unlocked tokens can lead to increased supply, lowering the token's price. Additionally, tokens held by early investors may be sold, causing a price drop.
How to Find a Token's Supply, Allocations, and Supply Schedule:
Several tools are available to find a token's supply, allocations, and supply schedule, including:
CoinGecko: CoinGecko offers data on various cryptocurrencies, such as supply, circulating supply, max supply, allocations, and supply schedules. To find this information, search for the crypto project and click on the "Tokenomics" tab.
Token Unlocks: Token Unlocks provides information on token supply schedules and unlocks.
Case Study: Axie Infinity's SLP
Axie Infinity is a popular game in which players can earn SLP tokens by battling other players with their team of three Axies. The game introduced a method that allowed anyone to start earning money without investing anything. However, the SLP token had an infinite supply and no actual reason to hold onto it, resulting in rapid inflation and a decline in its price.
Why Does Supply Matter?
Supply affects a token's price. Generally, low supply leads to price appreciation, while high supply leads to price depreciation. For instance, if you bought a Crypto Punk (a limited collection of 10,000 unique digital art pieces) and the creators minted 20,000 more, the value of each individual piece would decrease due to the increased supply. This was an example with NFT, but the same concept applies to tokens.
Factors Affecting Token Supply:
When evaluating a token, consider the initial allocation distribution between the team, early investors, and the community. Early investors often buy tokens at much lower prices than the general public and have a vesting period during which they cannot sell their tokens. When these tokens are unlocked, they can be dumped on the market, affecting the token's price.
When are Tokens Supplied and Unlocked?
Generally speaking, the initial supply of a crypto token is determined at the time of its creation, and the tokens are typically made available through an initial coin offering (ICO) or initial token offering (ITO) event. After the initial supply has been distributed, subsequent token supply can be generated through various mechanisms, such as mining or staking rewards.
The unlocking of tokens typically refers to the release of tokens that have been subject to a lock-up period, during which they are restricted from being traded or transferred. This lock-up period can be imposed by the token issuer or the platform that the token is traded on.
What is Vesting Period?
A vesting period in the crypto world refers to a predetermined length of time during which tokens or assets are gradually released to their recipients. This mechanism is commonly used in the distribution of tokens to founders, team members, or investors, ensuring that they remain committed to the project over an extended period. By staggering the token release, the vesting period helps prevent sudden token sell-offs that could negatively impact the market price, promoting long-term stability and growth for the project.
What is Token Dump?
A "token dump" in the crypto world refers to a situation where a large number of tokens are suddenly sold off in the market by one or more holders. This often leads to a rapid decrease in the token's price due to an oversupply compared to the current demand. Token dumps can be caused by various factors, such as the end of a vesting period, panic selling, or market manipulation. The sudden influx of tokens for sale may result in a temporary or long-term decline in the token's value and can impact investor sentiment and confidence in the project.
Demand
What is Demand?
Demand refers to how much of a token people want and the reasons behind their desire for it. Imagine you have something that everyone wants; that thing has high demand. In the world of cryptocurrencies, the reasons people want a specific token can vary, and we'll cover some of these reasons in this section.
Why does demand matter?
Demand is essential because it works hand-in-hand with supply to determine a token's price. If people want more of a token but there's not enough available, the token's price will likely go up. On the other hand, if people don't want a token, its price might go down. So, when there's high demand, the token's price appreciates, and when there's low demand, the price depreciates.
What affects token demand?
Some factors that can affect the demand for a token include:
a) Yield: Holding a token can generate income, known as yield, making it more attractive to investors. Yield can come in two forms:
i) Inflationary yield: This type of yield comes from new token emissions.
ii) Real yield: This type of yield comes from the revenue generated by a crypto project, which is then shared with token holders.
b) Utility: If a token has utility or a use case, it means it can be used for specific actions on a project's protocol, network, or application. The more uses a token has, the higher its demand.
c) Governance rights: Some tokens give their holders the right to vote on changes to a project. People who want to influence these decisions will buy these tokens.
Estimating demand
To estimate the impact of yield, utility, and governance rights on token demand, consider the following questions:
a) Yield: i) What is the token's annual percentage rate (APR)? Higher APRs are more attractive, and demand should increase with the APR.
ii) What percentage of tokens are currently staked for yield? More tokens locked for yield means more tokens are out of circulation, but also means revenue is shared among more token holders, potentially decreasing the APR and demand.
b) Utility: i) What is the token's use case? Demand for the token will depend on the demand for its use cases.
ii) How many daily users does the application have? Demand for a token with utility is proportional to the number of people using the token's utility.
c) Governance rights: i) What type of changes are in scope? Demand for a token depends on the potential changes that can be made through governance votes.
ii) Are token holders using their votes, or are they apathetic? If token holders don't participate in governance proposals, demand might be low.
Advanced Considerations
For a more advanced analysis of a crypto project's tokenomics, consider the following factors:
Token's launch: Was the token pre-mined or released on fair-launch?
Emission rates: Is it inflationary, deflationary, or fixed?
Buy and sell taxes
Token buybacks
Conclusion
Understanding tokenomics is crucial for anyone looking to invest in cryptocurrencies. By examining a token's supply, allocations, and unlock schedule, you can make more informed decisions about the potential value and risks associated with a particular crypto project. Remember, a great project can still be a bad investment if its token has poor tokenomics. Always conduct thorough research before investing in any cryptocurrency.
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