Good token economics can help a token grow 100x in a year, while bad token economics can cause a token to drop 90%. Understanding token economics is the most important skill in the crypto space. If you don't understand token economics, it's hard to have a successful investment. Learning is crucial, don't trade blindly, otherwise you might end up losing money. Crypto KOL cyclop gave an overview of token economics, here is a complete guide to token economics.
When you first start looking for a potential token, for example on CMC, you’ll see something like this:
Market capitalization (MC)
Total Supply
Circulation
Fully Diluted Value (FDV)
These are the basic supply indicators:
Circulation: Tokens currently in circulation
Total Supply: The total amount of tokens that can exist
MC: Total value of circulating supply (in USD)
FDV: Total value of total supply (in USD)
Understanding these metrics allows you to assess the potential of a coin. But to do this, you need to understand more than just the nominal concepts. You also need to understand how they work, and how they affect the price.
Let’s start with supply. There are two paths for tokens:
Inflation
Deflation
Inflation Tokens: The supply of tokens can be increased, known as emission.
Release is a negative factor as it usually results in a decrease in value, however if the release is slow and small then it will not have a significant impact on value.
Deflationary Tokens: A situation where the supply of a token decreases over time. This happens when a project buys back tokens and burns them. In theory, reducing the supply should increase the value, but this is only in theory.
Now let’s discuss the main factors that determine token issuance and lifespan: allocation and distribution.
There are two ways:
Pre-mine (distribution among early investors, team, advisors, etc.)
Fair launch (everyone has equal access to buy)
Most projects adopt the pre-mining method.
Why is this important?
Because if the TGE is 100% and 50% of the tokens are allocated to investors, then investors can sell tokens at any time, and retail investors may become the receivers of the exiting liquidity. This is why you need to understand:
TGE Allocation
Vesting
Cliff
Token distribution usually has the following recipient types:
Private sales (investors, KOLs, etc.)
Public offering (retail investors)
· marketing
Ecosystem (rights, rewards, etc.)
Airdrop
How did they sell the tokens?
The day when the tokens are issued is called the TGE.
TGE allocation is the percentage of tokens allocated to all the above individuals (10-20%)
Cliff is the period after TGE and before the next vesting
Vesting means gradually releasing a certain percentage of tokens every month
Recent projects have adopted an approach with a smaller TGE percentage (up to 20%), followed by a few months of cliffing and more than 12 months of vesting.
This approach is better suited to the long-term success of a project, so it is important to verify all of these details before investing.
Another key factor for any token to be successful today is demand. This is why projects incentivize retail investors to buy specific tokens. For example, despite high inflation, people still buy USD because they need it to live.
Generally speaking, there are 4 factors that drive demand for tokens:
Store of Value
Community-driven
Practical effect
· Value accumulation
Store of Value
Cryptocurrencies can be used as a store of value. Many people buy cryptocurrencies just to store their money, such as Bitcoin, which is often compared to gold.
Community Driven
As this cycle has shown the public, communities can strongly drive demand. The rise of Memecoins is entirely due to the community. People will buy things they think they can make money on.
Practical effect
Demand is stimulated when holding a token provides some utility, e.g. in order to stake a token, you need the token of a certain network, etc.
Value Accumulation
Incentivize stakeholders
People also want tokens to provide some value. This is called staking. You can lock up your tokens to get rewards periodically. This is beneficial to all parties and relatively low risk.
Incentivize holders
Another option is to hold. Projects often offer rewards/airdrops to holders, which is good for everyone. There are many other ways to reduce selling pressure by holding:
VeToken
You can obtain VeToken by holding tokens
“Ve” stands for voting escrow, meaning that by locking up your tokens, you gain voting rights
The longer you hold, the more voting power you accumulate
Mining
Holding can also improve your mining efficiency
The more you hold, the higher your return ratio will grow.
Also understand that no matter how high the demand is, it is important to understand who is holding. Is it a strong community or dumpers. It is more challenging to figure this out. You need to engage with the project’s community and analyze it.
Also, there is a chance that a token could go up despite bad token economics, or vice versa. Always consider this possibility. Here is a list of things to check before investing:
Total Supply and Circulating Supply
Allocation and distribution
Lock-up period/unlock date
Release percentage
· need
After such analysis, you can basically determine whether this project is worth investing in.
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