Cryptocurrency Analysis: Tokenomics

Crypto Fundamental

In the past few years, "tokenomics" has become a popular term for evaluating cryptoassets. The term includes the economic properties, the mechanics of how the asset works, and the psychological or behavioral factors that can affect its value in the future.

Supply and Demand in Tokenomics

As in conventional economics, we are most interested in two forces: supply and demand. We need an understanding of how they are embedded in tokenomics. This will give us a good idea of how in demand a token or coin can be.

Supply: issuance, inflation, and distribution

Let's start with supply, since that's a little easier to understand. The main thing you have to figure out is whether the supply is inflated?

The price of tokens will increase if there are fewer of them - this is called deflation. A token will fall in price if they are released in large numbers - that's inflation. When you're evaluating the supply, you don't need to consider things like the utility of the token or whether it will generate revenue for its holders. You're really just looking at the supply and how it will change over time.

The questions to ask here are as follows:
  1. How many of these tokens are being issued right now?
  2. How many will be released in total?
  3. How fast will new ones come out?

Bitcoin was created with a simple supply curve, and its issuance will last about 140 years.

Bitcoin's annual inflation rate.

The final number of bitcoins will be 21,000,000 - and that number is constant. Coins are produced at a rate that halves every four years (halving). That said, 19,000,000 coins have already been mined. So only 2,000,000 bitcoins will hit the market in the next 120 years.

This means that 90% of the supply is already in circulation, and in 100 years there will only be 10.5% more bitcoins, so we should not expect any serious inflationary pressure lowering the value of the coin.

What about Ethereum?

There are about 118,000,000 coins in circulation, and there is no limit to their number. But they have recently adjusted the issuance through a combustion mechanism to achieve a stable supply, or perhaps even deflation. Given that, we shouldn't expect much inflationary pressure on ether either. There could even be deflation.

Dogecoin also has no supply constraint and now has an inflation rate of 5% per year. Hence the conclusion that inflationary tokenomics will undermine Doge's value more than Bitcoin or Ethereum.

Distribution is important to consider in the proposal as well. The following facts are worth noting:

  • If, a few investors have a large number of tokens, how soon will they be unlocked?
  • Has the protocol given most of its tokens to the community?
  • How fair does the distribution seem? If a bunch of investors have 25% of their coins in hand and they unlock them in a month, you need to think carefully before you buy.

Let's take a couple of DeFi tokens as an example. Yearn, it's a DeFi protocol that has a fixed reserve of 36,666 YFI. There is no issuance or inflation, so you shouldn't expect the value of 1 YFI to drop because of inflationary pressures.

The Olympus protocol, meanwhile, has an insanely inflationary issuance schedule with a huge number of new OHM tokens being issued every day. So theoretically, we expect that holding OHMs is a bad idea. But I'll explain below that there are other parameters to look at besides the supply.

Those were the basic thoughts on supply. Now let's move on to demand - that's where things get interesting.

Demand: ROI, memes, and Game Theory

I can go out to the yard, break some bottles, and then say these are the only bottles I will ever break and put them up for sale. I have a fixed supply of 10 bottles. And zero inflation. Does that mean the stones must be worth millions?

Well, no, because no one wants my broken bottles.

On that simple level, there is no difference between my rocks and bitcoins. Having a fixed supply alone does not make something valuable. People have to believe that an asset has value and will have value in the future.

Back to demand. If you want to know if a token will be in demand in the future, consider return on investment (ROI), memes, and Game Theory. Let's start with ROI, since that's the easiest.

ROI (return on investment)

ROI in this case is not how much you think the price of an asset will increase. It is how much income or cash flow (cache-flo) a token can bring you if you hold it.

For example, if you have ether, you can stash it in a Proof of Stake contract. In return, you will receive a reward of about 5% of the amount tokenized.

Some tokens allow us to profit not from the tokens, but from the protocol they represent. If you hold SUSHI, you can stake them to get a share of the profits from the Sushi protocol (which is currently about 10.5% p.a.).

Staking on SUSHI.

Another form of ROI comes from "rebasing". The idea is that we lock a token into a protocol, and we get a share of that protocol. So even if the market price of the token falls below the original purchase price, the increase in the balance of the stacking can lead to an increase in the total value of your digital assets. Olympus, for example, operates under such a scheme. That's why their high inflation rate isn't necessarily a bad indicator, since you can keep the share of the protocol you own.

It is extremely important to consider ROI. After all, if a token doesn't have an internal ROI or cache-flo, it's harder to believe. You have to make sure that other people believe in the profitability and that their numbers are enough to sustain growth.

Or the other option is that you have to believe the memes.


Another reason people might want a token is simply to believe that other People want the token and will want it in the future.

You can call it a belief, a belief, or a meme, but whatever you call it, the mechanism that generates belief in future value growth will always be an important factor.

And how do you measure that? Everything else in tokenomics can be measured, but memes? That's where you have to get into the community and get a feel for it.

  • What's the environment like on their Discord?
  • How active are they on Twitter?
  • Do people make that token or protocol part of their identity?
  • How long have people been active in the community?

Belief in future value is often one of the most powerful drivers of demand. Bitcoin has no cache-flow, no stacking rewards, nothing. There is simply the belief that VTC will become a long-term savings vehicle, and will rival gold. Or even more ambitious beliefs about hyperbitcoinization.

So beyond pure analytics, don't discount emotion and faith. Believe me, a token with faith, clever memes, and cult followers can go a long way.

There is a third element here that combines elements of memes and elements of ROI. Let's call it Game Theory.

Game Theory

Game Theory asks you to think about what additional elements in tokenomics help increase the demand for a token. This is where tokenomics can get particularly complicated.

But there is one very popular token game theory. Its essence is blockchain. The protocol creates an incentive to lock your tokens into the contract.

The classic example is Curve.

Curve liquidity pool

As with Sushi, you can lock your CRV tokens, and get a share of the revenue from the protocol. But the longer you lock your tokens (there the term is up to 4 years), the higher your rewards.

In addition, the more tokens you block and the longer you have them blocked, the lower your commissions when using other services on the Curve exchange.

Thus, Curve has exceptionally strong incentives and Game Theory to maintain your token. You get a decent ROI from steking, and a higher ROI in all other app services. And you make the most when you lock in your tokens for 4 years, which drastically reduces the incentive to sell CRV.

Bottom line

This should give you a good starting point for evaluating any new project you encounter. After reading the documentation or white paper, you should get a clear idea of what the supply of tokens is here and what forces will drive demand.

Cryptoassets are highly correlated and move in sync. So if you're storing something beyond the large base coins, it should be based on the belief that its tokenomics and utility will outweigh the value of the base currencies on which it's built.

Keep your nose to the wind and know that Fortune, Luck and Success will always favor you,

when you are with us!

Always yours C.J.

All the above is not financial advice, but only a subjective opinion of the author. If you doubt something, do your own research and double-check the information yourself.
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