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How to research tokens in the crypto world?

Read this article in 19 Minutes

This paper provides a thinking frame for the study of Token economics

原文标题：《实用 | Token 经济分析框架（入门）》

Original author: Ren& Amp; Heinrich

The Alpha Rabbit, the Alpha Rabbit research Notes

How to research tokens in the crypto world?

* This article contains about 3500 words and takes 15-20 minutes to read

Let's start with some numbers: As of 2022, there are about 6,000 cryptocurrencies (or more). This is certainly a big opportunity for investors. However, in 2021, investors in Crypto fell victim to fraud and lost $12 billion. Therefore, Token economics is a very important perspective on how to express and see the most essential things.

This article provides a thinking frame for the study of Token economics.

Token economics is a science that studies the design, distribution and supply and demand model of tokens. Token economics is mainly a discipline that studies tokens, including the economic model design of tokens, distribution of tokens among business stakeholders, and the conditions under which tokens start trading. And how trading has evolved over time.

Token economics in a broad sense also includes design, Token engineering, etc., which is beyond the scope of this article.

How to research tokens in the crypto world?

background

Let's be clear: what is the difference between Token and Coin in the crypto world?

Although the terms Token and Coin are often used synonymously, it's important to note that the term Coin usually refers to cryptocurrencies that run on the Layer 1 public chain. The term "token "has different meanings in different scenarios. It sometimes refers to a crypto asset created at the Layer 2 protocol Layer, which means it must follow the rules of the L1 blockchain it uses. For example, ERC20 Token, ERC721 NFT(Token) More broadly, most crypto assets can also be called tokens. Some functions of tokens include voting rights, or as digital ownership of real-world assets, and tokens can sometimes be used as payments within agreements.

The value of the Token mainly depends on the overall performance of the project.

What is Token economics in the crypto world?

The term Token economics mainly refers to the study of the economics of cryptocurrencies and tokens, which allows investors to determine to some extent the quality and value of potential investments. Token economics is very important to the buying and selling decisions of crypto assets.

How to study Token Economics: a Framework for entry

1. Study blockchain Layer (Crypto Layers Explained)

First, we need to carefully study whether the blockchain belongs to Layer 1 or Layer 2, which is the basis.

The first thing to be clear about is whether the Coin or Token is running at Layer 1 or Layer 2.

Layer 1 blockchains operate independently of other blockchains. Examples of Layer 1 tokens are Ethereum's ETH, Avalanche's Avax, and so on.

Layer 2 Solution is a third party protocol built on L1 common chain. Maker Protocol, for example, is built on Ethereum. It is an L2 Protocol, so MKR and Dai are Layer 2 tokens;

Note: The L1 public chain and L2 agreements interact, and if Layer 1 public chain provides a simple, efficient and secure infrastructure, it will attract more L2 projects. Conversely, if the L2 project does well, it will in turn have a positive impact on L1, increasing the value of the cryptocurrency at Layer 1.

2. How to study a chain ecosystem

Because L1 and L2 are intertwined, and there are a variety of projects with different backgrounds, it is important to understand the interdependencies of different encryption tokens as fully and in as much detail as possible.

If you want to explore the next blockchain ecosystem with rich future growth potential. This means having a solid Layer 1 blockchain, which is the foundation for L2 applications to function well.

3. Original Chain vs. Forked Chain

It should also be considered whether the blockchain to be studied is an initial blockchain or a forked blockchain

For example, Ethereum Classic is a fork of Ethereum. Litecoin and Bitcoin Cash are forks of the Bitcoin blockchain.

It is important to study what modifications have been made to the forked chain to understand exactly what is better or worse than the original chain. For example, Bitcoin Cash will never have more users than Bitcoin. However, BSC is a very successful fork of the Go Ethereum protocol, but their consensus mechanism is different.

4. Research on tokens

After studying the basic information of the relevant blockchain, you can then begin a full analysis of tokens.

4.1 & have spent Utility vs Security tokens

The goal and purpose of the Token setting is crucial: for example, the Token holder can use the Token to pay transaction fees, enable the holder to access related services, such as collateral (PoS), or for governance (voting).

A Token with practical value usually has a specific usage situation. For example, some tokens give users access to products or services on the blockchain, while others give users voting rights.

Security-type tokens are somewhat similar to stocks: there are two types of tokens:

- Tokenization of assets: Traditional financial assets are represented by tokens on the chain. For example, shares representing a percentage of ownership of a company can be tokenized. There are also scenarios where ownership of units of gold can be tokenized and represented on the chain.

- Native Token asset: Tokens represent newly generated digital assets in the chain. Tokens are generated by native assets, such as Staking or mining.

Note: In the U.S., companies that want to issue Security tokens are subject to SEC regulation. Blockchain projects that do not comply with these regulations risk being fined or shut down. Therefore, it is important to know whether the Token you want to research or invest in is a target-purpose Token or a Security Token.

In general, according to the Howey test, if a Token cannot be characterized as a SecurityToken, it is a Utility Token;

What is the Howey test?

The Howey Test is a standard for determining whether a particular transaction constitutes an offering of securities. The test stems largely from a 1946 U.S. Supreme Court decision that used a specific standard for determining whether a particular transaction constitutes an offering of securities. If the transaction is deemed to be a security, it is subject to the provisions of the SECURITIES Act of 1933 and the Securities Exchange Act of 1934. At present, many ICOs in the market are likely to be recognized as securities issuance, thus subject to relevant regulation.

Howe test criteria:

1. There is indeed The Investment of Money.

2. Invest in Common Enterprise

3. Investors have Profit Expectation and Expectation of Profit

4. Do not directly participate in the operation, but only rely on the efforts of promoters or third parties. (Effort of Others)

To determine whether a Token is a Security Token or a practical Token, use the score given by the Crypto Rating Council Website. The higher the score, The more likely the Token is to be a Security Token;

4.2 Fungible vs non-fungible Tokens

Fungible Tokens are not unique. For example, an Ether that you own is the same as an ether that I have in my wallet.

Non-fungible Tokens (NFT) are unique and non-replicable, such as individual academic records, works of art, music, etc. For example, each CryptoKitty is unique and represented by an NFT, or every block of land Decentraland can also be represented by an NFT.

The ERC721 Token is not replaceable on the Ethereum blockchain

The ERC20 Token is fungible.

4.3 Token Provider

When analyzing the supply of a Token, consider the following points:

Total supply:The number of tokens created minus the number of tokens "destroyed".

Total Supply: The number of tokens created minus the tokens which have been "burned".

Maximum supply: refers to the total number of tokens that exist forever. For example, the maximum supply of Bitcoin is 21 million, while ETH has no maximum supply.

Maximum supply: refers to the total amount of a token that will ever exist. For example, the maximum supply of Bitcoin is 21 million, whereas Ether has no maximum supply.

Circulation/circulation supplyCirculating supply: is important, because it influences the market capitalization of a Token.

Here is how Marketcap is calculated:

Here is how marketcap is calculated:

Marketcap = number of coins/circulating supply of the token * current price per coin/token

Marketcap = number of tokens/supply of tokens in circulation * current price of each Token

Compare marketcap to diluted marketcap, which can often be found on instrument-based sites like Coinmarketcap.com and Coingecko.com.

Diluted market value represents the theoretical market value of a Token given the maximum supply in circulation.

Diluted marketcap indicates The theoretical marketcap if The maximum supply of a token is in circulation.

To ensure accuracy, the tools that record blockchain data should always be carefully checked to ensure that the data you are getting is up to date.

Market value of Token:The economic value of tokens is better illustrated than the price of individual tokens, note that some projects issue large numbers of tokens at very cheap prices, such as $0.0001 per Token.

(Market 3% of the token; A better indication of the token "s economic value than an individual token" s price.)

They did this to make investors think the Token price could easily go up 1000fold. But the reality is that if the market cap of the Token is already very large, then the Token price may not be able to rise very much.

Even though the prices of most cryptocurrencies are often manipulated by big players, be aware that the higher the market cap, the harder it is to manipulate prices.

4.4 Is the Token you care about pre-minted?

Pre-minted means that tokens are created before they are available. Note that this happens a lot in ICOs. Many Layey 2 tokens, such as ERC20&NBsp; Tokens, both pre-mint so that contributors, early investors and contributors can be rewarded.

So why is it important to know if a Token is pre-mined?

Pre-mint tokens tend to be distributed internally before they can be purchased by the public. If a large number of tokens are held internally at the time of issuance, then Token prices are vulnerable to manipulation.

Token allocation and Distribution: We should always be aware of how tokens are allocated and distributed. First, you can study this information from the project's white paper and on web sites like icodrops.com. But remember to cross-check holders on the blockchain browser because sometimes the information on white papers or other websites may be out of date.

Other issues to look into when studying allocation and distribution of tokens include:

- Who will receive tokens as rewards?

- For ICOs, what is the price of tokens in the Private Sale? This information can be found in a project white paper and on websites such as ICoDrops. If the Token is already listed on an exchange, then you can compare the presale price to the current price. If the pre-sale price is very cheap, then investors who get tokens in the pre-sale can sell their tokens for a profit.

How is the Vesting Schedule of this Token arranged? "Vesting Schedule" means that a certain number of tokens are locked up for a period of time to prevent a sudden surge of Token selling that would cause the price to collapse. If a large number of tokens are locked up, you should study their release schedule, because when more tokens are released, it will affect the Token price and market value. If the project unlocks a large number of tokens at once, there is a high probability that the price will drop sharply.

4.5 Is the Token model an inflationary model or a deflationary model?

Is the token model inflationary or deflationary?

This type of model affects Token supply model: if a cryptocurrency has no limit on maximum supply, it is an inflation-like model. Usually some projects use Token destruction to control price inflation.

It should be kept in mind that just because some tokens will burn and thus reduce supply, this does not mean that the price of the Token will definitely go up. The intrinsic value of a Token comes primarily from what value it provides to the user, not from the supply.