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Following Part 1, in Part 2, we invite you to practice the Tokenomics analysis steps of the Ethereum (ETH) project!
5. Ethereum Tokenomics Analysis
In order for you to understand how to do it, in today’s article, I will analyze Ethereum’s Tokenomics.
As a typical Layer-1 project with an infinite supply, ETH is one of the great examples for us to analyze together.
First, you can use CoinGecko to find out general information about the project.
Via CoinGecko, you immediately get information about Circulating (circulation), Total & Max Supply of ETH. Next, we’ll go deeper into three important elements: Use Case, Allocation, and Release.
5.1. Token Use Case
Usually, to learn about token use cases, I will often read on the project homepage or documents like Whitepaper.
ETH has the following main functions:
- Mining & Staking Reward: Previously, Ethereum used Proof-of-Work, so ETH was used to reward miners. With the launch of ETH 2.0, Ethereum has moved to Proof-of-Stake, ETH will be rewarded to Validator Nodes.
- Fees: ETH is the native-coin of the project, so it is also used to pay for all transaction fees that interact with the Ethereum network.
- Staking: With the gradual shift to Proof-of-Stake, ETH is adding an important feature that is staking.
- Burn: after the EIP-1559 proposal, an amount of ETH in transaction fees will be burned to reduce inflation.
However, if we just stop at the level of evaluating ETH use cases, it will be a big shortcoming. As the coin with the top 2 market capitalization, you need to dig deeper into the features of ETH:
- Collateral: DeFi protocols such as AAVE, MakerDAO, Compound… all allow the use of ETH as collateral for loans. More specifically, MakerDAO or Liquidity both allow using ETH to mint stablecoins.
- Payment: Almost to participate in buying and selling NFT on Ethereum, you always have to use ETH. Besides, ETH is also a coin used by large organizations to provide services (for example, to join some DAOs, there will be a certain minimum ETH requirement).
- Create new asset classes: With its development, many support services have appeared to support the Ethereum project, including Lido Finance. Lido made it easier for users to join ETH 2.0, and created a new liquid asset called stETH.
- Investing and storing assets: Many crypto and traditional investment funds have portfolios of buying and holding ETH. ETH has also become a place to store assets and invest.
As such, we can easily draw the following conclusion:
ETH, in addition to the basic use cases for Ethereum, there are many other use cases for the Crypto market.
Therefore, the demand to buy, hold and exchange ETH has always existed and is extremely large. This is one of the important things to help ETH always have a position in the market and have a good bull-case.
As you can see, Ethereum has a 24-hour trading volume of up to $18.1 billion, just behind USDT and BTC according to June 21, 2022 data.
5.2. Token Allocation
Open for sale CrowdSale: ETH was opened for public sale by the Ethereum Foundation from July 22, 2014 to September 9, 2014, resulting in the sale of 60M ETH (80% of the 72M ETH was initially offered for sale). This amount of ETH will be unlocked after Genesis Block launches (July 31, 2015). In this round the price of ETH was set at 1 BTC = 2,000 ETH from July 31, 2015 to August 5, 2019, before increasing linearly to 1 BTC = 1337 ETH. During this round, about 31,000 BTC were raised, equivalent to 18.3 million USD.
The remaining amount of 20% ETH, equivalent to 12M ETH, is allocated as follows:
- 3M ETH for a long-term investment (unknown).
- 6M ETH distributed to 85 investors in pre-CrowdSale rounds.
- The remaining 3M ETH is reserved for Team developers, allowing them to purchase this ETH at a crowdsale price.
Thus, at the time of 2022, Ethereum’s initial token allocation is still of little use value (because the allocation and unlocking time is too long). In this case, if you rely on the original allocation, it will be very unfounded.
In this case, we can only draw conclusions:
Previous rounds of selling will not have much of an impact on the current ETH price.
So we need to use other tools.
First, I will use Etherscan – Ethereum explorer to check the top of the largest wallets holding ETH:
You can see that the amount of ETH locked in ETH 2.0 accounts for more than 10% of the total circulating ETH. In addition, mainly in the top 20 are wallets of major exchanges such as Binance, Kraken, Bitfinex, FTX…
We also need to pay attention wallet number 11 (Compound) and wallet number 16 (Liquity). These are 2 wallets that users deposit ETH into as collateral, so if the price of ETH in the market falls, it is possible that this amount of ETH may be liquidated (market sell), partially affecting the market. ETH price in the short term.
Next, we will look at wallets without stickers (usually funds wallets, whales…) to see what they are doing? Simple way to check: You click on that wallet, then select the Analytics section.
Top 5 wallet
You need to distinguish: the blue area is the data on the amount of ETH, while the black line is the USD value.
Here, throughout 2019 until now, this wallet has only bought more ETH, and although the profit achieved (black line) has increased tremendously, this wallet has not sold much and still holds. Last time the market dropped (black line goes down), this wallet is still moving hold and wait.
Top 21 Wallet
The top 21 wallets, after being sold out around June 10-13, have now immediately bought back in larger quantities. I guess the owner of this wallet made a short term trade and currently profitable pretty big.
Top wallet 23
Next, I will check the top 23 wallet. You can see that even though ETH has dropped significantly in the last week, this wallet is still defying to increase the amount of ETH and is reaching the ATH of the amount of ETH held in the wallet. Thus, wallet number 23 has a move “collect goods”.
Similarly, I continue to check some wallets, the top 27, 29 and 30 wallets have no action to buy or sell, still in the state wait.
From the above data, you can draw comments:
- This price zone is not the price range where the big hands sell anymore.
- Some whales have started buying.
To learn more about ETH data posted on exchanges, you can use the tool on Nansen. From the data on the picture, you can see that ETH is currently being posted to Coinbase the most, followed by Binance, Germini and Bitfinex. These are all high liquidity exchanges. Besides, we can see from Jan 22, 2022 to Jun 21, 2022, during the market dump, there are always ETH withdrawals from very large exchanges (blue bars) . This shows that there are still “big hands” who, after buying ETH on the exchange, immediately withdraw and hold for a long time.
5.3. Token Schedule Release
Usually with new projects, you will have to pay attention to the Token Schedule Release to understand the times when investment funds are unlocked a large amount of tokens. The token payment schedule will usually be shown in the form of a chart as follows:
So, what if ETH has already paid off the tokens for the previous rounds? We will be interested in the story inflationary and burn this time.
To search for data, I use WatchTheBurn:
In the picture above is the data on the amount of ETH burned, the amount of ETH as a reward, etc. since EIP-1559 was deployed.
You can see the amount of ETH burned is about 2.4M, while the reward (including Rewards and Tips) is about 4.7M. Therefore, ETH is still having inflation. However, it cannot be denied that with ETH being burned a lot through the EIP-1559 proposal, it has contributed to reducing the inflation rate of this coin a lot.
One of the reasons for high ETH inflation is still because Ethereum has not fully transitioned to Proof-of-Stake. In the future, when fully upgrading to ETH 2.0, the reward inflation will decrease => this is a long-term bull-case for ETH.
Thus, together we have analyzed the Tokenomics of ETH quite in detail and saw some short-term bull-cases for this coin at the price of 900 – 1000 USD. You can apply the same to analyze other projects.
6. Some tools used
To summarize for your convenience, I will list the tools that I often use to analyze Tokenomics:
- Token data aggregators: CoinGecko, CoinMarketCap…
- Websites with available information about the project: CHKCHK…
- Information about the token payment schedule: Vestlab
- The project’s explorers: Etherscan, Avascan, Solscan…
7. Some notes when analyzing Tokenomics
Tokenomics analysis is very important, but it is not all to help you make good investment decisions.
Basically, you need to put your analysis in the right and proper context. In addition to Tokenomics, you also need to evaluate:
The nature of the project
Is the project good? Does the product have actual users? Does the project make a profit to survive the tough times? How does it compare to projects in the same niche?
Position of the parties
As I said, whales are willing to hold for 5-10 years, because their capital is very abundant, but not all retail investors can do that. So, if you want to swim with the whale, you need to prepare a lot.
How investment funds play
If you are observant, you will realize that some projects when unlocking tokens instead of sharply decreasing prices are “pushed” quite a lot. The reason is understandable because when the funds are unlocked, they will want to sell that part of the token at a high price. At the same time, to reduce selling pressure, projects will timing the unlocking time to release good news => the price increases, not decreases. Therefore, you need to observe and monitor to realize how the game is suitable for each type of project. This requires experience.
Above are some sharing about my own Tokenomics analysis experience. Hope this article helps you in your investment journey.
Don’t forget to share to support CHK! See you guys in the next posts.
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