Tokenomics 101 (Part 1) – Understanding, analyzing and evaluating effective Tokenomics

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2022-06-22 22:49:40

Tokenomics is a combination of “token” and “economics”, demonstrating economics in the design and use of tokens – the most important and pivotal asset of a crypto project. For me personally, learning and evaluating Tokenomics is almost a mandatory step before investing in any project. In today’s article, let’s learn about Tokenomics and how we evaluate Tokenomics effectively!

1. Learn about Tokenomics

In essence, when a token is created, it has absolutely no economic investment value. Only when the token is attached to the elements of supply, distribution, value of use …, will the token create excitement to buy and hold from investors.

Tokenomics is an important concept that must be considered when making investment decisions, since after all, when we invest in a project, in essence, when we invest in a project, we are actually holding the token and expecting it to rise in value. Future. Therefore, a project with smart measures to encourage investors to buy and hold long-term, and at the same time reasonably designed will have a better room for growth.

2. Token Key Features

Depending on the field of the project, goals, fundraising, etc., each project will have separate Tokenomics designs.

2.1. Mining & Staking Reward (Mining or Staking Reward)

For Blockchain Layer projects such as Ethereum, Bitcoin, Avalanche, mining & staking is the core motivation for the project to build a decentralized network, thereby ensuring the authentication of transactions, maintaining security and network security. Through this feature, the project can reward new tokens for those who have invested in computing hardware and software to validate, generate new blocks on the chain, record data on these blocks, etc.

You can understand that the token will be rewarded to Miners for the network using Proof-of-Work or to the Validator Nodes for the network using Proof-of-Stake.

2.2. Yield (Yield)

Normally, a token with Yield feature will often be associated with DeFi projects (such as Uniswap, AAVE, MakerDAO, 1inch…). At the beginning of development, one of the important issues of DeFi projects is user and liquidity.

In order to attract users and liquidity, projects often deploy incentive programs with high yields to let cash flow into the project. Yield deployment can be through Liquidity Pool (incentive to provide liquidity) or Farming Pools.

2.3. Payment (Payment)

This is also a fairly common feature of tokens. Almost all projects operating under the service and fee-for-service model have built this feature for their tokens.

For example, BNB is a payment function token, with users having the option to pay transaction fees in BNB; or UniWhales project will require users to buy and hold UWL tokens to participate in special service packages…

2.4. Governance (Admin)

If in the past, the decision on the development and adjustment of the project belonged to the dev team or investment funds, but now, the DAO – decentralized governance model has almost become very popular. Allows users to participate in decisions that are important to the project.

Brothers after buying and holding tokens can participate in voting. In some cases, you need to lock your tokens in order to vote. The perfect example of using the Governance feature is Curve’s veCRV model.

However, the token’s governance feature is facing a lot of controversy and mixed opinions recently. To learn more about this feature, you can read more at:

2.5. Burn

Some tokens will be burned during use (e.g. a portion of fees on blockchains like Avalanche, Ethereum 2.0 will be burned), permanently removed from circulation to reduce token supply.

According to the law of supply / demand, reducing the supply of tokens will make the token more scarce => the token price will react more positively.

In addition, tokens can also be added with many other features such as:

  • IEO, IDO: users can hold tokens to participate in programs to open and sell projects on launchpad, launchpool…
  • Claim with NFT tokens

3. Factors to consider when analyzing Tokenomics

When talking about Tokenomics, most of us will only be interested in 3 basic factors:

Token use case (application of the token)

Tell us what the token can be used for, thereby analyzing its ability to attract investors to buy and hold for the long term.

Token allocation (token allocation)

Tell us who are participating in token holding other than retail investors? What is the holding level? Is it enough to influence the price?

In addition, in many cases, we need to consider changing the allocation of large wallets to know whether the moves of these whales are selling or buying…

Token Release Schedule (token payment schedule)

Usually, most projects have a schedule to pay tokens in the form of gradually unlocking for large investors in seed, private, team, advisory teams, even an unlock schedule for bonus tokens, airdrops… to avoid creating selling pressure. This is important information that we need to monitor in order to predict sensitive times.

4. Some notes when learning about Tokenomics

4.1. Limited supply and unlimited supply

This is one of the important notes that I want to mention first. Depending on the project type, the project’s tokens can be limited to a maximum total supply (like Bitcoin with 21 million BTC) or an infinite total supply (like Ethereum which will have an unlimited total supply of ETH).

Almost everyone is looking for a Tokenomics that is deflation, so more attention will be paid to projects where the token has a limited total supply. However, the fact that the total supply is limited does not mean that the token will be deflationary. The clearest proof is that ETH is still growing very well from the time of launch until now.

To explain this, we need to pay more attention to the so-called “buy and hold demand”.

– A token that has a limited total supply, but does not develop a product, does not create buying demand and holds long-term confidence for investors, there will be no cash flow, from which the token will not price can be increased.

– In contrast, projects like Ethereum, despite having an unlimited total supply, but the inflation rate of ETH is to serve the project (legitimate) and has a suitable roadmap, while the ecosystem Ethereum is well developed and trusted by many large funds, whales or retail investors => demand for buying and holding is greater than emissions => ensuring demand is greater than supply => maintaining growth in the future long term for ETH.

4.2. Distinguishing Circulating Supply, Total Supply and Max Supply

Example of three separate token parameters on Serum

Usually, you will only remember Circulating Supply and Max Supply. However, because of the needs of the project, some Tokenomics we need to pay attention to Total Supply.

i) Circulating Supply

It is understood as the total number of tokens currently circulating in the market and tradable. This is the number of tokens used to calculate the Circulating Market Cap (market capitalization of the project).

ii) Total Supply (Total Supply)

It is understood as the total number of tokens that have been generated from the project after subtracting the burned tokens (if any).

So:

Token Supply = Token on-chain – Token Burned

iii) Max Supply (Maximum Total Supply)

It is understood as the maximum number of tokens that can be created in theory. However, because of its needs, the project can decide whether or not to use this amount of Max Supply tokens.

In the example of Serum, you can see: SRM’s maximum Max Supply can reach up to 10,161 billion tokens, but with its growth rate and demand, Serum currently only provides the market with a large quantity. SRM reached 1,092 billion (less than 1/10 of the maximum total supply).

So, if the expansion continues, the amount of SRM inflation in the future is very high and may affect the price of this token.

-> Tokenomics 101 (Part 2) – Ethereum Tokenomics Analysis

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