Partnered With:

From the perspective of token economics, it is necessary to understand the 'knowledge of trading coins' before the bull market arrives.

Read this article in 17 Minutes

To understand whether a coin is rising or falling, we must understand the supply and demand.

Original Title: "Tokenomics 101 - valuable knowledge before the 2024-2025 bullrun"

Original Author: Route 2 FI

Translation: Luccy, BlockBeats

Editor's Note:

In this article, cryptocurrency researcher Route 2 FI explores the basic concepts of token economics and some reference standards. Starting from the perspective of supply and demand, it delves into the issuance, distribution, and market performance of tokens. By comparing the different scenarios of tokens such as Bitcoin and Ethereum, as well as considering governance, returns, and expectations, it comprehensively explains the mechanisms and driving factors behind tokens. BlockBeats has translated the original article as follows:

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

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

If you are considering purchasing cryptocurrency assets, understanding token economics is one of the most useful first steps you can take to make informed decisions. This communication will introduce some basic knowledge to help you learn how to analyze projects on your own.

In order to understand whether a coin is rising or falling, we must understand supply and demand. To better understand this, 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 exist in total?

Answer: 21 million BTC.

· How often are new tokens released to the market?

Answer: As time goes on, the increase in token supply is referred to as "emission", and the speed of emission is crucial. You can find information about this in the token's whitepaper.

Every 10 minutes, BTC miners verify a block of BTC transactions. The current reward for verifying one block of BTC is 6.25BTC. Therefore, approximately 900BTC are released into the market every day.

On average, the creation speed of each block will be "halved" once every four years (called "halving"), until in 2140, the reward for mining one block will be only 0.000000001BTC.

In other words, by the beginning of 2030, it is expected that nearly 97% of BTC will be mined. The remaining 3% will be produced over the next century until 2140.

The inflation rate of BTC is currently 1.6% and will gradually approach zero.

This means that if there are fewer tokens in existence, the token price should rise, and vice versa, if there are more tokens, the price should fall.

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

Important Metrics

· Circulating supply: The number of tokens in existence today.

· Total supply: tokens on-chain minus those destroyed.· Maximum supply: the maximum number of tokens that can exist.· Market Cap: Token price today x Circulating supply· Total Diluted Market Cap: Token price today x Maximum supply

Another important consideration in terms of supply is token distribution. This is not a big issue in terms of BTC, but needs to be taken into account when evaluating new tokens to consider purchasing.

Additionally:

· Are there any major holders who own a large portion of the tokens?

· How does the unlocking plan work?

· Has the protocol distributed most of the tokens among early investors in the seed round?

My point of view is: do not invest in garbage coins like KASTA created by The Moon Carl just because you have not studied token economics and end up losing money. In my opinion, @UnlocksCalendar and @VestLab are good resources for checking unlocking plans.

· Destroyability (Destroyable + Non-Destroyable): BNB and SBTs respectively.

Sometimes, a team intentionally decides that a token is allocated conflicting value propositions or functions. In this case, the token can be divided into two or more types. The famous case of AXS is a prime example, transitioning from a single token model to a multi-token model.

Initially, AXS had three value propositions: value transfer, governance, and holding. The conflict here arises from the fact that if participants decide to transfer the value of AXS within the game, it means giving up their rights to governance and holding, which creates problems for the game economy. To solve this problem, they released a "new" token called SLP, which became the preferred value transfer tool within the game. You may also remember the same dual system in GMT and GST of STEPN.

However, implementing a dual-token system may make token economics design too complex, and sometimes considering external tokens as auxiliary tokens may be important to ensure smoother interactions. A typical example is ARB, mainly used for governance.

In order to ensure smoother interactions, ARB uses ETH as a means of paying transaction fees, because transactions that occur on L2 are bundled together and sent to the L1 state. If an external token (ETH) is not introduced as a means of paying transaction fees, the following will occur: ARB is used to pay transaction fees (gas fees), and operators must then exchange ARB for ETH to verify on L1 and incur further gas fees, creating a contradiction for the growth of ARB.

In the above section, I have introduced the general dynamics of token economics and various driving factors that teams should consider. Now let's take a look at token supply, as it directly affects token price (which is what degens want). The structure of token supply is as follows:

· Maximum supply

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

· Distribution allocation: allocated to initial, ownership, and reward issuance.

The maximum supply is very important because it determines the maximum limit of tokens that the team can issue. Tokens without restrictions may not have a good price distribution. This does not directly affect the price, but it affects the factors that determine the issuance rate and whether the token is inflationary or deflationary, which are factors that affect the price.

For a limited maximum supply, such as CRV (3 billion tokens), the price can rise. As the network grows and demand for tokens increases, a high-demand area with limited supply is formed. The problem with this type of maximum supply is that if token distribution is not rapid, it will be difficult to provide incentives for future new contributors.

On the other hand, having unlimited maximum supply can avoid the problem of future incentive exhaustion. However, the downside here is that in the long run, there may be a decrease in token prices because there is essentially an infinite supply. Unless external models are used to reduce circulation (such as staking, burning, etc.), there can only be a downward trend in the long term, regardless of its growth.

When it comes to allocation, it is usually based on the percentage of maximum supply, which actually determines the maximum supply percentage that should be allocated to each category. The main categories include: team (including founders, developers, marketers, etc., who are actually responsible for building the project), investors (those who participate in early/seed/private rounds), treasury (operating costs such as research and development, reserves, etc.), community (airdrops, LP rewards, mining rewards, etc.), public sales (ICO, IDO, IEO, LBP, etc.), and marketing (including advisors, opinion leaders, agents, etc.).

These are some key factors to consider in the project, however, these factors are basically unique to each project and can be simplified or further classified according to their "strategy".

It is worth noting that during the rise of DeFi in 2020-21, the team realized that allowing higher rewards to their community or increasing the float of initial holders through airdrops could lead to network growth and the prosperity of a sustainable token economy.

Finally, distribution. The initial supply is immediately released to the open market at the start, also known as TGE. The allocation to this category is usually a percentage of the treasury, public sales, and infamous airdrops that we can see everywhere.

For tokens that are yet to be unlocked, they are usually locked for x months/years. This is typically applicable to investors, treasury, and team tokens, and they can decide on the duration and when to start unlocking. The unlocking is usually done to prevent massive token dumping, especially since participants in this part of the industry usually purchase tokens at a valuation lower than the listing price.

So, why is all of this important?

In short, token demand and value capture mean that theoretically market participants should obtain value by holding tokens.

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

Going back to the beginning, many tokens have struggled to recover their value. This has sparked interest in projects capturing value through holding for market participants to generate profits.

Nowadays, there are many creative token models in the cryptocurrency industry. I believe another good example is Cosmos, which successfully addressed the hype around airdrops.

I have discussed this before, but you may remember that staking ATOM, OSMO, KUJI, INJ, and TIA may qualify you for most of the airdrops in the Cosmos ecosystem today.

This has led to a significant increase in the number of stakers in the Cosmos ecosystem. With promises of more airdrops in the future, they will not stop staking. This incentive encourages people to hold tokens instead of selling them. Due to the 21-day unbonding period, unbonding becomes quite cumbersome, so people are more willing to hold.

An DeFi Degen describes the approach of the Cosmos ecosystem as (3,3) (OHM Ponzi scheme), and to some extent he is right.