Tokenomics is a word that pops up a lot in the crypto space and even for experienced crypto people it is still somewhat confusing to what it actually means, I’m here to explain it.
So, tokenomics is an extract of the word economics, which is defined as ‘’the branch of knowledge concerned with the production, consumption, and transfer of wealth.’’ Basically, it is the crypto version of transacting, buying, selling and transferring a means of value (the token).
None of that really matters but hopefully it gives you a little insight into where it comes from.
Typically, in crypto when this term is used, it is used to discuss a certain project’s token allocation — how much is in circulation, how much goes to the team, developers, partners, investors, community, etc. From this information people can form a good idea of how the project is structured and if their launch price is fair. It is a frequently used tool to analyse a project before buying.
A key thing to note is the distinction between crypto ‘coins’ and crypto ‘tokens’:
- Coins are native to their own blockchain, they are also what’s paid in transaction fees and what miners or validators are paid with when new blocks are created. Examples are $ETH and $SOL.
- Whereas, tokens exist on another (or multiple) blockchain(s). These tokens have their own utility specific to their project and are not used to pay things like fees. Examples being $VEMP and $SAND.
- One of the biggest differences between the two is their regulatory positions, coins are treated like currencies which makes them subject to different laws than that of tokens which have controversy over what they should be classed as. For now, they do not formally have an asset class which is a discussion for another day.
Aside from all of that, let’s get into tokenomics.
The key things to look at whenever examining a project is:
- Their circulating and max supply. This will contribute to the determination of the token price. The circulating supply will often be much lower than the max supply because projects will have mechanisms in place like lock-up periods or mining periods where tokens are released into the supply over a course of years. For example, the estimated time where all bitcoins will be in circulation is the year 2140, not long to go. A vesting schedule is virtually the same dynamic, tokens get unlocked over a certain amount of time and then they can be sold into the market for retail buyers. This does cause some supply and demand consequences but that’ll be discussed later.
- Market cap — the total amount of circulating tokens * the price per token. Higher token prices do not mean it’s more expensive, coins like $SHIB and $DOT have extremely similar project value but have drastically varying prices.
- Token allocation — When a token is launched, unless it is a ‘fair launch’ structure, tokens are minted prior to the public sale and are used to distribute equity to the team, pay developers and are given to investors after raising capital. Usually, the majority of the supply is allocated to the team and investors while the rest is open for sale on the public launch (ICO).
After a vesting period is over the coins are released into circulation, applying simple supply and demand logic to this means that the price would decline because of an increase in supply. However, this would only be the case if the unlock is quite aggressive, this is not the typical case as most unlocks happen slowly over the years — not changing prices significantly.
Similarly, supply and demand logic can be applied to the entire token supply. If a token is inflationary, more tokens will be minted overtime, increasing the supply, devaluing the price per token. On the flip side, a deflationary asset has a decreasing supply, raising demand and increasing the price per token (theoretically).
Hint: $VEMP is deflationary.
This is a good thing to look out for when analysing projects for longer term holds.
