Tokenomics is one of the most important aspects of Crypto
If you don't understand tokenomics, you're not gonna make it.
Here’s everything you need to know about Tokenomics🧵
If you don't understand tokenomics, you're not gonna make it.
Here’s everything you need to know about Tokenomics🧵
What we’ll be covering:
• What is tokenomics?
• A deep dive into supply & Demand
• Market Cap & FDV ( + how to use them)
• Unlocks & Emissions
• Demand Drivers
• The questions to ask
Let’s dive in
3/
• What is tokenomics?
• A deep dive into supply & Demand
• Market Cap & FDV ( + how to use them)
• Unlocks & Emissions
• Demand Drivers
• The questions to ask
Let’s dive in
3/
Tokenomics refers to the economics & incentives surrounding tokens.
It’s a broad term that covers:
• How the token works
• Supply & demand
• The mechanisms that govern it
• Incentives, psychology & behavioral aspects
• Game Theory & a lot more.
Economies of a token
4/
It’s a broad term that covers:
• How the token works
• Supply & demand
• The mechanisms that govern it
• Incentives, psychology & behavioral aspects
• Game Theory & a lot more.
Economies of a token
4/
Supply & Demand
Tokenomics = Supply & Demand of a token
Let’s look at the supply side
The lower the supply, the greater the value due to scarcity (assuming demand is constant)
Projects have fixed token supply or aim to reduce it to make it more scarce.
5/
Tokenomics = Supply & Demand of a token
Let’s look at the supply side
The lower the supply, the greater the value due to scarcity (assuming demand is constant)
Projects have fixed token supply or aim to reduce it to make it more scarce.
5/
Bitcoin.
Bitcoin has a fixed supply of 21M. There can only ever be 21M BTC.
If the supply was doubled, price would drop significantly.
Not all BTC is released at once. Today, around 19.1M btc exists.
This is why BTC is considered sound money
6/
Bitcoin has a fixed supply of 21M. There can only ever be 21M BTC.
If the supply was doubled, price would drop significantly.
Not all BTC is released at once. Today, around 19.1M btc exists.
This is why BTC is considered sound money
6/
Mt.Gox Case.
137K BTC was lost 8 years ago due to Mt.Gox ( then popular trading platform)
Now, the money is being returned & it’s going to enter BTC supply.
People are worried that it’ll have a big negative impact on the price.
7/
137K BTC was lost 8 years ago due to Mt.Gox ( then popular trading platform)
Now, the money is being returned & it’s going to enter BTC supply.
People are worried that it’ll have a big negative impact on the price.
7/
Maintaining Scarcity
Ways to maintain scarcity:
• Fixed supply cap
• Burn mechanisms: taking tokens out of circulation
• Lost tokens & tokens sent to the wrong address
Tokens with poor tokenomics have no fixed supply and no mechanisms to reduce supply
8/
Ways to maintain scarcity:
• Fixed supply cap
• Burn mechanisms: taking tokens out of circulation
• Lost tokens & tokens sent to the wrong address
Tokens with poor tokenomics have no fixed supply and no mechanisms to reduce supply
8/
Burning Tokens
Taking tokens out of circulation is known as burning. It’s similar to a company buying back shares.
ETH gas fees are split into a tip to the miner & base fee. The base fee is burnt.
Burning happens in many ways. It increases scarcity & drives up value.
9/
Taking tokens out of circulation is known as burning. It’s similar to a company buying back shares.
ETH gas fees are split into a tip to the miner & base fee. The base fee is burnt.
Burning happens in many ways. It increases scarcity & drives up value.
9/
The total number of tokens isn’t always the most important factor.
Pay attention to:
1. Current supply
2. Rate of release
If only 30% of total supply is in circulation, I wouldn’t be too happy.
Supply will increase by 70%, adding serious pressure to the price.
10/
Pay attention to:
1. Current supply
2. Rate of release
If only 30% of total supply is in circulation, I wouldn’t be too happy.
Supply will increase by 70%, adding serious pressure to the price.
10/
The time frame matters.
If 70% of total is being released in 1 month, that’s bad. It’ll cause huge downward pressure on price.
If it’s over 10 years, the loss of value each month may be small.
The project’s growth over 10 years could outperform loss of value
11/
If 70% of total is being released in 1 month, that’s bad. It’ll cause huge downward pressure on price.
If it’s over 10 years, the loss of value each month may be small.
The project’s growth over 10 years could outperform loss of value
11/
Inflationary Tokens
Inflationary tokens: When there’s:
• No fixed supply
• Increasing supply
• No token removal from supply
There’s loss of value due to increasing supply. This is known as inflation
Doge is an example of this.
12/
Inflationary tokens: When there’s:
• No fixed supply
• Increasing supply
• No token removal from supply
There’s loss of value due to increasing supply. This is known as inflation
Doge is an example of this.
12/
Deflationary Tokens:
• Fixed supply
• Decreasing supply
• Burning tokens
This is good as it drives up scarcity.
13/
• Fixed supply
• Decreasing supply
• Burning tokens
This is good as it drives up scarcity.
13/
Market Cap & FDV
Market Cap = number of tokens in circulation X current price
Fully Diluted Value (FDV) = total supply that’ll ever exist X current price
14/
Market Cap = number of tokens in circulation X current price
Fully Diluted Value (FDV) = total supply that’ll ever exist X current price
14/
Let’s say token A has a price of $1.
100 tokens are in circulation & a total of 1000 will ever exist.
Mcap = $1 x 100 = $100
FDV = $1 x 1000 = $1000
15
100 tokens are in circulation & a total of 1000 will ever exist.
Mcap = $1 x 100 = $100
FDV = $1 x 1000 = $1000
15
Mcap to FDV ratio
This ratio is useful.
If there’s a large difference between Mcap & FDV, it means that a lot of tokens are still locked & will be released over time.
In this case, it would be smart to investigate the release schedule & where they’re going to come from.
16/
This ratio is useful.
If there’s a large difference between Mcap & FDV, it means that a lot of tokens are still locked & will be released over time.
In this case, it would be smart to investigate the release schedule & where they’re going to come from.
16/
I would be very careful with a project that has 70% of its supply locked up.
As supply increases, there’s a downward pressure on price.
If Mcap & FDV are close to each other it could mean that the change in value due to increased supply won’t have as much of an impact.
17/
As supply increases, there’s a downward pressure on price.
If Mcap & FDV are close to each other it could mean that the change in value due to increased supply won’t have as much of an impact.
17/
Supply terms
Max supply: The maximum number of tokens ever
Current supply: Number of tokens that exist now.
Circulating supply on CoinGecko & other platforms doesn’t always reflect current supply
They remove coins staked & locked by users out of the circulating supply.
18/
Max supply: The maximum number of tokens ever
Current supply: Number of tokens that exist now.
Circulating supply on CoinGecko & other platforms doesn’t always reflect current supply
They remove coins staked & locked by users out of the circulating supply.
18/
Unrealistic Expectations.
People invest in shitcoins priced at $0.0005 with 1T supply.
The hope is that the shitcoin will go to $1 & they’ll get rich. This just can’t happen.
19/
People invest in shitcoins priced at $0.0005 with 1T supply.
The hope is that the shitcoin will go to $1 & they’ll get rich. This just can’t happen.
19/
Shitcoins won't be larger than BTC & ETH
If the shitcoin went to $1, the mcap would be 1T, larger than Eth & BTC.
A random shitcoin isn’t gonna be larger than Eth & BTC.
This sort of bias gets countless people rekt.
20/
If the shitcoin went to $1, the mcap would be 1T, larger than Eth & BTC.
A random shitcoin isn’t gonna be larger than Eth & BTC.
This sort of bias gets countless people rekt.
20/
Token Allocation
Tokens are distributed through:
1. Private Sale/Pre mined: The team, investors & other insiders get allocated tokens privately. Usually at a BIG discount.
2. Fair launch: It’s completely fair.
If there’s a private sale, it comes with a vesting period.
21/
Tokens are distributed through:
1. Private Sale/Pre mined: The team, investors & other insiders get allocated tokens privately. Usually at a BIG discount.
2. Fair launch: It’s completely fair.
If there’s a private sale, it comes with a vesting period.
21/
Vesting Period & Unlocks
Tokens allocated to the Team & VCs come with a vesting period.
These tokens are locked for a period of time, during which they cannot sell them.
Knowing when it unlocks. When large quantity of tokens is unlocked & enters supply, price falls.
22/
Tokens allocated to the Team & VCs come with a vesting period.
These tokens are locked for a period of time, during which they cannot sell them.
Knowing when it unlocks. When large quantity of tokens is unlocked & enters supply, price falls.
22/
Emissions
Emissions refer to how quickly a token is released. The emission schedule includes info on unlocks.
You won’t find this on CoinGecko or CoinMarketCap.
Instead, search through the docs.
23/
Emissions refer to how quickly a token is released. The emission schedule includes info on unlocks.
You won’t find this on CoinGecko or CoinMarketCap.
Instead, search through the docs.
23/
Example:
Current supply: 100. 1st Month 5 tokens unlock | 2nd Month 10 tokens unlock.
This means that inflation is 2x in month 2.
Tokens that unlock in month 2 would have a higher incentive to sell immediately, because inflation is higher & they got a discount.
24/
Current supply: 100. 1st Month 5 tokens unlock | 2nd Month 10 tokens unlock.
This means that inflation is 2x in month 2.
Tokens that unlock in month 2 would have a higher incentive to sell immediately, because inflation is higher & they got a discount.
24/
VCs dumping unlocks.
This isn’t to say that every VC is looking to dump
Consider these:
• We’re in a bad market, VCs want liquidity
• VC’s solvency situation
• Inflation at unlock
• Emissions schedule
In a bad market, there’s a greater incentive to dump at unlock
25/
This isn’t to say that every VC is looking to dump
Consider these:
• We’re in a bad market, VCs want liquidity
• VC’s solvency situation
• Inflation at unlock
• Emissions schedule
In a bad market, there’s a greater incentive to dump at unlock
25/
Initial Supply:
The % of total supply released at launch plays a big role.
If only 10% of the total supply is released, 90% will be released over time. Then, early Investors will get hit hard by inflation.
Conversely, if 50% is released, inflation will be less impactful.
26/
The % of total supply released at launch plays a big role.
If only 10% of the total supply is released, 90% will be released over time. Then, early Investors will get hit hard by inflation.
Conversely, if 50% is released, inflation will be less impactful.
26/
Supply Side questions
In your analysis, here are some things to look for on the supply side.
• Number of tokens in circulation
• Whether there’s a fixed supply
• When the tokens unlock
• Rate of release
• Burn mechanisms
27/
In your analysis, here are some things to look for on the supply side.
• Number of tokens in circulation
• Whether there’s a fixed supply
• When the tokens unlock
• Rate of release
• Burn mechanisms
27/
Supply Side questions
• How tokens leave supply
• Rate of inflation
• Incentives to sell due to increasing supply
• Inflation at unlock
28/
• How tokens leave supply
• Rate of inflation
• Incentives to sell due to increasing supply
• Inflation at unlock
28/
The Demand Side
No matter how scarce something is, without demand it has no value.
My jar of dirt is 1/1 but no one’s wants it.
Demand can come in multiple forms:
• Value & Yield
• Utility
• Speculation & Memes
29/
No matter how scarce something is, without demand it has no value.
My jar of dirt is 1/1 but no one’s wants it.
Demand can come in multiple forms:
• Value & Yield
• Utility
• Speculation & Memes
29/
Utility
Utility comes in many forms:
• Service/product that actually solves a problem
• Gas fees
• Token being used in a protocol
• Fun - GameFi & Music
• Great Community & Events- BAYC
30/
Utility comes in many forms:
• Service/product that actually solves a problem
• Gas fees
• Token being used in a protocol
• Fun - GameFi & Music
• Great Community & Events- BAYC
30/
Yield & Value - Staking & Rewards
Being rewarded for holding the token.
Staking your ETH in Rocketpool gives you 4% APR
Tokens reward holders for holding them in order to increase demand.
31/
Being rewarded for holding the token.
Staking your ETH in Rocketpool gives you 4% APR
Tokens reward holders for holding them in order to increase demand.
31/
Governance
The only benefit of holding some tokens is governance.
Holders can bring up & vote on proposals.
However, this alone isn’t very exciting.
32/
The only benefit of holding some tokens is governance.
Holders can bring up & vote on proposals.
However, this alone isn’t very exciting.
32/
High APYs & Locking
To seem attractive, protocols open up with HUGE yields - 5000% APYs
As more people come, the yield reduces.
Some protocols promise large APYs if you lock your tokens with them.
33/
To seem attractive, protocols open up with HUGE yields - 5000% APYs
As more people come, the yield reduces.
Some protocols promise large APYs if you lock your tokens with them.
33/
Risks of locking tokens
This is a bad idea because yield drops quickly: token price drops as everyone left for the next big thing.
But you’re still stuck holding trash & you can’t sell.
34/
This is a bad idea because yield drops quickly: token price drops as everyone left for the next big thing.
But you’re still stuck holding trash & you can’t sell.
34/
Rebasing
This is something Olympus introduced. It’s similar to a stock split.
When a holder holds & stakes a token, they get more of that token.
While there’s a constant increase in supply, you get rewarded in that token
Effectively, the % you’re holding remains the same
35/
This is something Olympus introduced. It’s similar to a stock split.
When a holder holds & stakes a token, they get more of that token.
While there’s a constant increase in supply, you get rewarded in that token
Effectively, the % you’re holding remains the same
35/
Airdrops
Staking tokens makes holders eligible for airdrops.
This is popular in the Cosmos ecosystem. New protocols airdrop their tokens to holders/stakers.
Some of them are quite lucrative.
36/
Staking tokens makes holders eligible for airdrops.
This is popular in the Cosmos ecosystem. New protocols airdrop their tokens to holders/stakers.
Some of them are quite lucrative.
36/
Staking tokens
When you lock or stake tokens, protocols give you an x token.
If you stake 1 Eth with rocketpool, you get 1 rETH in exchange.
People don’t want to be illiquid by staking/locking.
37/
When you lock or stake tokens, protocols give you an x token.
If you stake 1 Eth with rocketpool, you get 1 rETH in exchange.
People don’t want to be illiquid by staking/locking.
37/
X tokens
x tokens allow holders to deposit the token & earn rewards, while being liquid through the x token.
rETH is 1:1 with ETH.
Stakers can utilize their rETH to borrow, lend & earn rewards.
38/
x tokens allow holders to deposit the token & earn rewards, while being liquid through the x token.
rETH is 1:1 with ETH.
Stakers can utilize their rETH to borrow, lend & earn rewards.
38/
Memes & Speculation
Crypto is largely driven by memes. Don’t fade them.
Doge has poor tokenomics & is fundamentally a shitcoin.
But it’s still the 10th largest token.
Crypto is community driven. A community’s weapon of choice is memes.
39/
Crypto is largely driven by memes. Don’t fade them.
Doge has poor tokenomics & is fundamentally a shitcoin.
But it’s still the 10th largest token.
Crypto is community driven. A community’s weapon of choice is memes.
39/
Memes are a fundamental driver
We should include memes as a fundamental force.
Sometimes memes > tokenomics.
Investigate the community.
• Is there strong love for the project?
• What’s the discord like?
• Is there excitement, loyalty & hype?
40/
We should include memes as a fundamental force.
Sometimes memes > tokenomics.
Investigate the community.
• Is there strong love for the project?
• What’s the discord like?
• Is there excitement, loyalty & hype?
40/
Humans are speculators
The market is not perfectly rational, just like us.
We love buying what others are buying
We love buying what influencers are buying
We FOMO a LOT
Don’t fade the memes. It could be speculation, faith or just Lols.
41/
The market is not perfectly rational, just like us.
We love buying what others are buying
We love buying what influencers are buying
We FOMO a LOT
Don’t fade the memes. It could be speculation, faith or just Lols.
41/
I hope this guide on tokenomics was useful!
• Give this a RT
• Follow me
@Cov_duk for more
• Subscribe to my Youtube for guides, demos & interviews!
youtube.com
• Give this a RT
• Follow me
@Cov_duk for more
• Subscribe to my Youtube for guides, demos & interviews!
youtube.com
Give this a retweet!
Loading suggestions...