From the perspective of token economics, sort out what you must know before the bull market arrives

Today’s article is about token economics , this may be valuable to you when you are looking for new items to determine if they are worth buying.

Many people talk about token economics, but only a few truly understand it.

If you are considering whether to buy crypto assets, understanding token economics is one of the most useful first steps you can take to make an informed decision. Decide. This newsletter will cover the basics to help you learn how to analyze projects yourself.

In order to understand whether a coin is rising or falling, we must understand supply and demand. To understand this better, let’s take BTC as an example and start with the supply side.

Supply

· How many BTC tokens are there?

Answer: 19.2 million BTC

· How many tokens will there be in total?

Answer: 21 million BTC

· How often are new tokens released to the market?

Answer: The increase in token supply over time is called "emissions," and the speed of emissions is important. You can find information about this in the coin’s white paper.

Every 10 minutes, BTC miners verify a BTC transaction. The current reward per verified block of BTC is 6.25 BTC. Therefore, approximately 900 BTC are released to the market every day.

On average, the rate of block creation will be "halved" (called "halving") every four years until finally, in 2140, The reward for each mined block is only 0.000000001BTC.

In other words, nearly 97% of all BTC is expected to be mined by early 2030. The remaining 3% will be generated over the next century, until 2140.

BTC's inflation rate is currently 1.6% and will gradually move towards zero.

This means that if fewer tokens exist, the token price should increase and vice versa, if more tokens exist, the price should increase decline.

For BTC, this is easy to understand, but when we look at other coins, such as ETH, the situation is a bit more complicated because of the amount of Ethereum There is no upper limit. However, as long as Ethereum's gas fees remain reasonable, it is actually a net squeeze asset.

Important Metrics

· Circulating Supply: The number of tokens in existence today< /p>

· Total supply: on-chain supply minus burned tokens

· Maximum supply Quantity: the maximum number of tokens that can exist

· Market value: today's token price x circulating supply

· Fully diluted market cap: today’s token price x maximum supply

Another important thing to consider on the supply side is token allocation . This isn’t a huge issue when it comes to BTC, but it’s something to consider when evaluating new coins you’re considering buying.

Also:

· Are there any large investors who own most of the tokens?

· What is the unlocking plan?

· Did the protocol distribute the majority of its tokens to early investors in the seed round?

My point is: don’t end up losing money by investing in a crapcoin like KASTA created by The Moon Carl without studying token economics. In my opinion, @UnlocksCalendar and @VestLab are good resources for checking unlocking plans.

For a quick summary of the important stuff on supply, check out:

· Circulation Supply< /p>

· Total supply and maximum supply

· Token allocation

· Unlock plan.

That being said, supply alone is not enough to determine whether a coin is worth buying. So next let’s talk about requirements.

Demand

Okay, we know that the supply of BTC is 21 million tokens, The inflation rate of BTC is about 1.6% and is decreasing every year. So why isn’t BTC worth $100,000 yet? Why only “40K” dollars?

Well, simply put, simply having a fixed supply does not make BTC valuable. People also need to believe that BTC has value and that it will have value in the future.

Let's break demand into 3 components:

· Financial utility (on behalf of Coin’s return on investment)

· Actual utility (value)

· Speculation

Financial utility: How much revenue or cash flow can be generated by holding a token. For proof-of-stake tokens, you can stake your tokens to generate pass yield.

This is not possible with BTC unless you wrap it as WBTC, but then it is no longer ordinary BTC. If holding a token benefits holders by rewarding staking rewards or providing LP in liquidity mining, then demand will naturally increase.

But remember, the gains have to come from somewhere (token inflation), so when you see these really high annualized projects (think 2021 OHM-fork season), maintain some skepticism.

Practical utility: For many projects, the reality is that they have no value. This can be discussed, but BTC is valuable because it serves as a store of value and a unit of exchange. BTC is known as a digital currency that is an alternative to fiat currencies controlled by central banks. Ethereum is a digital currency that has multiple uses through decentralized financial applications (dApps).

You can actually do things with ETH beyond just holding, sending, or receiving it. To decide whether it has practical utility, you have to consider who the team members are, what advisors they have, and their backgrounds. Who are the companies that support them, what are they building, do they solve a real problem, etc.

Speculation: This includes narratives, memes, and beliefs. Basically, it's a belief in the future that other people will want to buy it after you buy it.

The speculative aspect of the demand side is difficult to analyze and predict. BTC has no ROI and no staking opportunities, but it has a super strong narrative. People believe it could be a long-term store of value. BTC also has the huge advantage of being the first cryptocurrency.

When you hear people talking about cryptocurrencies, the first thing they mention is BTC. A strong community drives demand, so always remember to research the community on Twitter and Discord before investing.

In my opinion, the speculative aspect is one of the biggest driving factors in cryptocurrencies. Don’t underestimate how far a token can go with the right narrative, memes, and followers. Think DOGE, SHIB, ADA, and XRP.

Most crypto tokens are highly correlated and move together. If you are holding anything other than BTC and ETH, then it should make you think it will outperform based on the supply and demand side of the token economics.

Another important aspect when valuing a token is the trilemma of token economics: the balance between returns, inflation, and lock-up periods: Proof of Stake Projects want to give their tokens high staking yields to attract users, but high annualized percentages can lead to inflation and selling pressure. On the other hand, if the staking rewards are not attractive enough, it may be difficult to acquire users.

The way to get people to hold the token is to provide higher returns over a longer lock-up period, the disadvantage is that if the lock-up period is too long, people will simply avoid it Participate in projects. Another thing is that the day the unlock happens will happen, it will cause a huge sell-off as investors want to withdraw their profits.

If you think supply/demand is hard to understand, just try thinking in simpler terms:

What would happen if the Ethereum Foundation decided to print 100 million new ETH tokens tomorrow? Answer: Prices will collapse due to increased supply and decreased demand.

What would happen if Michael Saylor announced that he wanted to buy 100,000 BTC in the next 6 months? Answer: Prices will increase because supply will decrease and demand will increase.

Just consider this model:

Price will always tend to balance according to the supply and demand curve.

Is ETH worth $100 or $10,000? Is BTC completely worthless or worth $300,000?

No one really knows, and since cryptocurrencies have no underlying value compared to, say, stocks, determining prices remains very difficult for investors.

This makes crypto assets very volatile and speculative. But it also presents a huge opportunity for those few who actually take the time to participate in cryptocurrencies.

What should a new project or protocol focus on?

Let's take a look at the structure of Curve (CRV).

Essentially, Curve provides incentives for LPs to encourage participants to participate in governance through their token economics. And for Convex, the ultimate goal here is to get as much veCRV as possible to maximize the CRV reward.

After clearly setting the goals, the founders of the project should further research the actual value proposition of the token and what participants holding the token can gain from it. value? For example:

· Pledge

· Governance

· Store of value

And more. Today, it’s common to see founders propose tokens that consist of multiple value propositions. Of course, this could lead to higher demand for the token.

A perfect example is GMX, a token with multiple value propositions such as governance (the ability to inspire participants’ true preferences), claims (will be escrowd) The ability to convert GMX into GMX over a period of time) and hold (to receive protocol income).

Along with these value propositions, there are functional parameters, which are related to the variables that determine the textual function of the token, the simplest example being transfer or destruction. It is absolutely critical for the team to ensure that the functional parameters of the token do not conflict with its value proposition. For example, the purpose and value proposition of a token used for value transfer should have features that ensure its fungibility. Here are some functional parameters of the token:

· Transferability (transferable + non-transferable): GMX and esGMX respectively.

· Destructibility (destructible + non-destructible): BNB and SBTs respectively.

· Fungibility (fungible + non-fungible): ERC20 and ERC721 (NFT) respectively.

· Exchange rate (floating + fixed): MKR and DAI respectively.

Sometimes, teams intentionally decide that a token is assigned a conflicting value proposition or functionality. In this case, tokens can be divided into two or more types. The famous case of AXS is a prime example of this, moving from an initial single-token model to a multi-token model.

Initially, AXS has 3 value attributes: value transfer, governance and holding. The conflict here stems from the fact that if participants decide to transfer the value of AXS within the game, it means giving up governance and holding rights, which causes problems for the game economy. To solve this problem, they released a "new" token, SLP, which then became the preferred value transfer tool within the game. You may remember the same dual system in STEPN's GMT and GST.

However, implementing a dual-token system may overly complicate the token economics design, and sometimes it may be important to consider external tokens as secondary tokens, to ensure smoother interactions. A typical example is ARB, which is mainly used for governance.

To ensure smoother interaction, ARB uses ETH as a means of paying transaction fees, as transactions that occur on L2 are bundled together and sent to the L1 state . If this external token (ETH) is not introduced as a means of paying transaction fees, the following will happen: ARB is used to pay transaction fees (gas fees), and the operator must then exchange ARB for ETH to be verified on L1 and Further losses in gas fees create a paradox for the growth of ARB.

In the above section, I have introduced the general dynamics of token economics and the various drivers that teams should consider, now let’s take a look at tokens supply. Because this directly affects the token price (which is what degens want). The token supply is structured as follows:

· Maximum supply

· Allocation percentage (sales , investors, team, marketing, treasury, etc.)

· Distribution of allocations: allocated to initial, vesting and bonus issuances.

The maximum supply is important because it determines the maximum limit on whether the team can issue tokens. Unlimited tokens may not have a good price distribution. This does not directly affect the price, but factors that affect the rate of issuance, and whether the token is deflationary or inflationary are factors that affect the price.

For a limited maximum supply, such as CRV (3 billion tokens), the price can increase. Because as the network grows, the demand for tokens increases, creating a high-demand area with limited supply. The problem with this type of maximum supply is that if tokens are not distributed quickly, it will be difficult for new contributors in the future to provide excitation.

On the other hand, having an infinite maximum supply avoids issues regarding future incentive exhaustion, of course, the downside here is that the token may be lost in the long run Prices fall because there is essentially unlimited supply, and unless external models are used to reduce circulation (eg: staking, burning, etc.), there can only be a downward trend in the long term, regardless of its growth.

In terms of allocation, it is usually based on a percentage of the maximum supply, which actually determines the percentage of the maximum supply that each category should be allocated. The main categories are: Team (including founders, developers, marketing, etc., who are actually the individuals responsible for building the project), Investors (people involved in early/seed/private rounds), Treasury (operating costs such as R&D, reserves, etc.), community (airdrops, LP rewards, mining rewards, etc.), public sales (ICO, IDO, IEO, LBP, etc.) and marketing (including consultants, opinion leaders, agents, etc.).

These are some key elements for project consideration, however these elements are essentially unique to each project and can be simplified or simplified depending on their "strategy" Break down the categories further.

It is worth noting that with the rise of DeFi in 2020-21, teams realized that by allowing higher rewards to their communities, or increasing initial holdings through airdrops, Someone’s float could lead to network growth and the prosperity of a sustainable token economy.

Finally, distribute. Initial supply is the initial float released into the open market immediately upon "launch", or as some call it TGE. Allocations allocated to this category are usually a percentage of treasuries, public sales, and the infamous airdrops we see everywhere.

For tokens to be unlocked, these are usually locked for x months/years, usually for investors, treasury, team tokens, they can Determining the duration and when to start the unlock, usually the unlock prevents a massive token sell-off, especially since the participants in this segment are usually investors who bought at a valuation lower than the listing price.

So why does all this matter?

Simply put, token demand and value capture means that market participants should theoretically gain value by holding tokens.

Let's take CRV as an example again. We need to identify and understand the meta-needs for CRV. Let’s break down its value proposition: It’s a governance token. Participants can use their CRV to vote on how many CRV will be issued each week. Why is this important? How does it capture value? Because market participants holding CRV are eligible to receive 50% of project fees. Therefore, the more CRV they hold, the more income they receive. This makes CRV’s ultimate meta-need the ability to maximize users’ profits while encouraging them to hold, a good mechanism to induce positive behavior (users hold) and capture value (get rewards).

Back in the beginning, many tokens struggled to regain their value. This has sparked interest in projects to capture value by generating profits for market participants through holdings.

There are many creative token models in the space today. I think another great example is Cosmos successfully addressing the craze about airdrops.

I've discussed this before, but you may remember that staking ATOM, OSMO, KUJI, INJ, and TIA may qualify you to participate in the Cosmos ecosystem today Most airdrops.

This has resulted in a significant increase in the number of stakers in the Cosmos ecosystem. With the promise of more airdrops in the future, they will not stop staking. This incentive encourages people to hold onto the token rather than sell. Since there is a 21-day unstaking period, unstaking becomes quite cumbersome, so people prefer to hold.

One ​​DeFi Degen described the practices of the Cosmos ecosystem as (3,3) (OHM Ponzi scheme), and to a certain extent he was right.