Incentives drive inflation in token economies.
But with proper growth rate, protocols can thrive despite inflation.
Discover how to analyze fundamentals vs. tokenomics for winning strategies โ
But with proper growth rate, protocols can thrive despite inflation.
Discover how to analyze fundamentals vs. tokenomics for winning strategies โ
In essence, you'll only need two tools to navigate this research framework:
โข A tool for checking fundamentals like @tokenterminal, @MessariCrypto, or @DefiLlama
โข A tool for reviewing tokenomics such as @Token_Unlocks (or the protocol's own tokenomics).
โข A tool for checking fundamentals like @tokenterminal, @MessariCrypto, or @DefiLlama
โข A tool for reviewing tokenomics such as @Token_Unlocks (or the protocol's own tokenomics).
According to this theory, it is assumed that protocol's inflation can be compensated by a proportional increase in the protocol's fundamentals such as the number of users, token holders, TVL, trading volume, market share, etc.
Let's delve into the abstract tokenomics of Protocol A to clarify this concept.
Token A: Released at 8% of the total supply, will increase to 38% within a year โ a 478% annual inflation rate. Most of this unlocked supply consists of incentives, adding to the selling pressure.
Token A: Released at 8% of the total supply, will increase to 38% within a year โ a 478% annual inflation rate. Most of this unlocked supply consists of incentives, adding to the selling pressure.
Next, let's examine the fundamentals for Protocol A.
โข TVL in February (at token launch) was $100M.
โข By May (3 months later), TVL had increased to $150M.
** I've used TVL as an example here, but the more fundamentals you analyze, the better.
โข TVL in February (at token launch) was $100M.
โข By May (3 months later), TVL had increased to $150M.
** I've used TVL as an example here, but the more fundamentals you analyze, the better.
Next, we assess the protocol's potential for growth. To do this, consider the following questions:
โข Where does the protocol stand within its native ecosystem?
โข Is it aiming to expand into new ecosystems?
โข What level of market share could it achieve?
โข Where does the protocol stand within its native ecosystem?
โข Is it aiming to expand into new ecosystems?
โข What level of market share could it achieve?
Let's say Protocol A is on Chain B only with limited ability to be deployed on other chains and it's currently a top-2 dApp in its category (i.e. Lending).
Then we check its competitors: Can Protocol A gain a higher market share and attract new users and TVL?
Then we check its competitors: Can Protocol A gain a higher market share and attract new users and TVL?
Here, we need to review Protocol A's roadmap, development plans, announcements, and maybe even consider the overall sentiment of Chain B and its ecosystem expansion plans.
With this additional context and understanding, only one question remains.
With this additional context and understanding, only one question remains.
Will Protocol A be able to achieve 478% annual growth rate to compensate for inflation?
In terms of TVL, it would mean reaching almost $500M in TVL.
The answer definitely depends on context.
In terms of TVL, it would mean reaching almost $500M in TVL.
The answer definitely depends on context.
For example:
โข If Chain B was Sui, achieving such a growth rate seems unlikely, especially without expansion plans.
โข If Chain B was Arbitrum, this scenario is more plausible, considering the overall ecosystem activity.
โข If Chain B was Sui, achieving such a growth rate seems unlikely, especially without expansion plans.
โข If Chain B was Arbitrum, this scenario is more plausible, considering the overall ecosystem activity.
Of course, this framework is no magic wand. In reality, hype, marketing, and narrative often drive illogical market behavior.
However, from a long-term perspective, this framework performs quite well as it evaluates protocols as pure businesses.
However, from a long-term perspective, this framework performs quite well as it evaluates protocols as pure businesses.
These days, airdrop events and TGEs play a key role in attracting TVL and user activity to protocols. Thus, many dApps with high inflation rates struggle to show sustained growth post-TGE and often do not achieve the same fundamentals as they did during their airdrop days.
I hope this thread has provided you with an additional evaluation tool for your arsenal.
Feel free to share the results of your research using this framework in the comments or join my Telegram community to showcase it โ
t.me
Feel free to share the results of your research using this framework in the comments or join my Telegram community to showcase it โ
t.me
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