Numerous other applications, known as layer-2 or L2 protocols, are being built in addition to Ethereum's functionality. Research analysts Christopher Jensen and David Alderman from Franklin Templeton Digital Assets discuss how Ethereum underlays the Platform economy.

In Ask an Expert, David Lawant from FalconX answers questions about staking and other applications built on Ethereum.

Happy reading.

– S.M.

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Using Ethereum to Understand the Protocol Economy

Most investors are familiar with the business model of the entrenched platform economy, in which a set of powerful tech companies rely on the network effects that they generate to obtain proprietary data, goods or content from users. These tech giants dictate terms favorable to their own businesses yet often limiting for users’ interests. One of the most exciting and perhaps underappreciated aspects of blockchain technology is that it has enabled a new business model – what we call the protocol economy. A blockchain, in its simplest form, is a secure digital ledger that, without the use or need of intermediaries, records new activity to its ledger in exchange for a fee while adhering to its protocol (rules for how the process works). Why does this matter? Blockchains enable digital property rights. Digital scarcity and ownership can now, for the first time, be enforced through software and code rather than organizations and people.

However, not all blockchains function the same way. The Bitcoin network is an application-specific blockchain. It essentially does one thing – records wallet addresses and BTC amounts – but does this very well. It’s secure, transparent and permissionless. Ethereum, on the other hand, is a general-purpose blockchain. Its programming language, along with the introduction of self-executing smart contracts, allows for more complex “if-then” activities. This innovation transforms blockchains from mere distributed ledgers into powerful, global virtual computers. These virtual machines enable developers to create comprehensive applications across various domains securely and autonomously, from marketplaces and financial tools to social networks and even other blockchains.

Ethereum's robust security layer and broader functionality paved the way for new digitally native economies to be built on top of its infrastructure layer. Tokens in such ecosystems are not just currencies but also integral to the network's incentive structure, encouraging coordination and integrity within the decentralized system. Holding Ethereum’s ether token (ETH) signifies more than transactional utility; it represents an ownership stake in Ethereum's network, offering both participatory and economic benefits aligned with the ecosystem's growth. Moreover, the fundamentals of Ethereum’s network can be analyzed in a similar fashion to non-digital companies, which may help inform what ETH is worth (similar to a stock, albeit with some different metrics and nuances).

The protocol economy of Ethereum currently has over 115 million token holders, which has grown at double-digit annual rates over the past four years. Monthly active users grew 25% year-over-year last month and now stands at 6.1 million. If users on Ethereum layer 2s (blockchains built on top of Ethereum to help scale the ecosystem) are included, that user base is over 10 million. Total value locked, the amount of capital stored in Ethereum’s DeFi smart contracts, rose to greater than $50 billion. However, this figure still massively understates the total economic value that the chain secures, which is estimated at $740 billion. And, while Ethereum’s developer count is down year over year, most of that attrition is due to new, part-time developers while the ecosystem’s established developer base continues to rise.

Ethereum’s financial state is likewise robust, with year-to-date total fees and gross profits both up triple digits year-over-year, and revenue for the last 12 months (LTM) revenues stands at $2.7 billion. Furthermore, the network has an ~85% gross margin and is profitable (25% net profit margin) even when accounting for the non-cash token incentives.

So how does one get exposure to this breakthrough technology asset and, just as importantly, the $740 billion value built on top of the chain? Assuming a protocol’s tokenomic design has a value accrual mechanism that allows the value of the network to be captured, then there’s a case to be made for holding the token. When any kind of economic activity happens anywhere in the Ethereum ecosystem, fees (revenues) are generated. Some of those fees fund the network’s security costs (COGS), while the remainder supports token value through strategic buy-and-burn mechanisms (akin to share repurchases). This approach highlights the advantages of protocol economies over traditional platform economies. Rather than buying stock in a company that built a platform that attracted a network, investors and users alike can now own a direct stake in their network’s success.

- Christopher Jensen, director of research, Franklin Templeton Digital Assets

Ask an Expert:

Q. What types of applications are already available on platforms like Ethereum?

A: Ethereum's programming language is designed for high expressiveness, enabling the creation of various applications. While we are still in the nascent stages and innovative entrepreneurs are likely to build groundbreaking applications that we can’t imagine today, the potential impact of crypto on numerous major industries is already evident.

Take decentralized finance (DeFi) as an example; it offers a novel approach to developing and utilizing financial services with minimal dependence on central intermediaries. DeFi platforms can perform extensive services, including trading, lending, borrowing, and even rudimentary asset management functions. Moreover, the evolution of digital property rights has given rise to a vibrant non-fungible token (NFT) ecosystem over recent years. This ecosystem allows tokens representing ownership – from art pieces to concert tickets – to be more fluidly incorporated into our digital existence.

Other significant sectors gaining momentum include decentralized social networks, where users can exert greater influence than conventional models, and gaming, which can significantly expand its design possibilities by incorporating crypto elements. Additionally, artificial intelligence may soon necessitate the secure and verifiable logging of human-generated content within a transparent and immutable ledger, a function uniquely suited to blockchain technology.

Q. What is staking, and how does it work?

A: Staking is an integral process in networks like Ethereum, which rely on proof-of-stake (PoS) to support network operation. It involves participants locking up a certain amount of their cryptocurrency holdings to support the network's operations, including transaction validation and security. This contrasts with networks like Bitcoin, which operate under a proof-of-work (PoW) system and utilize energy-intensive computations to secure the network.

Ethereum switched from proof-of-work to proof-of-stake in September 2022 and, as a result, allowed ETH holders who want to contribute to the network security to derive a native yield in exchange for this extra work. This process is called staking.

The interest rate ETH holders can provide is called the staking rate, and it depends on various factors like the number of validators participating in staking and network transaction fees. Over the past six months, this rate has mostly hovered between 3% and 4%, according to the CESR, a standardized benchmark Ethereum staking rate.

- David Lawant, head of research, FalconX

Keep Reading

JP Morgan analyst said that bitcoin has now overtaken gold in investor portfolio allocation when adjusted for volatility.

Fidelity amended their spot ETH ETF application to include provisions for staking the cryptocurrency.

The London Stock Exchange has announced plans to accept applications for bitcoin and ether crypto exchange-traded notes.

We're rewarding YOU for just enhancing your Binance Square profiles! Get your share of 1,000 FDUSD and stand a chance to win some cool Binance Merch! 🚀
Promotion Period: 2024-03-05 08:00 (UTC) to 2024-03-10 23:59 (UTC) 

💠 Task: 
1. Set up your Binance Square profile (nickname, avatar, username, and bio).
2. Reply to this post with your nickname.

🎁 Promotion A: 
Users who hadn't set up their profiles before 2024-03-05 08:00:00 UTC are eligible for rewards. The first 2,000 users to complete both tasks, based on the reply timestamp, will share 1,000 FDUSD in token voucher rewards. 

🎁 Promotion B: 
Binance will select 10 replies that end in the ranking number "100", based on the reply timestamp (i.e., ranks 100, 1,100, 2,100, 3,100, ...., 9,100). Each selected user will receive a random Binance merchandise.

So, why wait? Make your move, enhance your profile and grab your rewards!
Tips: How to Set up Your Binance Square Profile 👇

Terms&Conditions:
This promotion may not be available in your region.All users must set up their profile before the campaign ends to be eligible for rewards from Promotion A&B. A user can win rewards from both Promotion A & B.Each winner of Promotion A will receive 0.5 FDUSD each. The FDUSD token voucher rewards will be distributed within 15 working days after the promotion ends. Users may check their rewards via Profile > Rewards Hub. The validity period for the token voucher is set at seven days from the day of distribution. Learn how to redeem a voucher.Winners of Promotion B will receive a random Binance merchandise as part of their rewards, and will be notified within 15 working days via Square Assistant push to collect delivery information.If chosen users are from regions not eligible to join the promotion or are identified as ineligible, the reward will go to the next eligible user who meets the conditions.Illegally bulk registered accounts or sub-accounts shall not be eligible to participate or receive any rewards.Binance reserves the right at any time in its sole and absolute discretion to determine and/or amend or vary these terms and conditions without prior notice, including but not limited to canceling, extending, terminating or suspending this campaign, the eligibility terms and criteria, the selection and number of winners, and the timing of any act to be done, and all participants shall be bound by these amendments.Binance reserves the right to disqualify any account acting against the Binance Square Community Guidelines or Terms and Conditions.

El gigante de las criptomonedas, Binance, ha anunciado un emocionante lanzamiento aéreo valorado en la impresionante cifra de 1.000.000 de dólares. Este evento, diseñado para recompensar a los usuarios de la plataforma, ofrece una oportunidad única para intercambiar tokens seleccionados y obtener valiosas recompensas. Ejemplificando su compromiso con la comunidad, Binance busca fomentar la participación y la adopción de criptomonedas entre sus usuarios mediante esta iniciativa generosa.
 
Los usuarios de Binance tendrán la oportunidad de participar en el lanzamiento aéreo al intercambiar tokens específicos dentro de la plataforma. Este proceso simple y accesible ofrece una oportunidad emocionante para obtener recompensas en forma de tokens adicionales o incluso premios en efectivo. Por ejemplo, los usuarios podrían recibir tokens adicionales de proyectos de criptomonedas de alto valor o participar en sorteos para ganar premios en efectivo.
 
Aunque el lanzamiento aéreo promete beneficios tentadores, es importante que los participantes comprendan los riesgos asociados. La volatilidad del mercado de las criptomonedas puede influir en el valor de los tokens recibidos como recompensa, lo que podría afectar el retorno de inversión esperado.
 
Además, es crucial que los usuarios sigan las instrucciones cuidadosamente para garantizar su elegibilidad y maximizar sus posibilidades de obtener recompensas.
 
A pesar de los riesgos potenciales, el lanzamiento aéreo de Binance presenta una oportunidad emocionante para los usuarios de participar en la comunidad criptográfica de una manera significativa. Al fomentar la participación y la adopción de criptomonedas, Binance continúa demostrando su compromiso con el crecimiento y la expansión del ecosistema criptográfico global. Los participantes tienen la oportunidad de beneficiarse de esta iniciativa mientras contribuyen al desarrollo y la diversificación del mercado de criptomonedas.

https://tradingDifferent.com/dashboard

Descargo de responsabilidad: La información presentada no constituye asesoramiento financiero, de inversión, comercial u otro tipo y es únicamente la opinión del escritor, Las imágenes son solo con fines ilustrativos y no deben usarse para la toma de decisiones importantes. Al usar este sitio, acepta que no somos responsables de pérdidas, daños o lesiones derivadas del uso o interpretación de la información o imágenes.

→ Solana Airdrop Season

$JUP given $800M worth of airdrop, and a lot of users receive it.

I've discovered tokenless Solana protocols, that might reward us.

1/ → @Parcl

Parcl is a synthetic asset protocol built on Solana. It allows you to invest in digital square feet/meters of real estate around the world.
It has raised $11.6M from Coinbase Ventures, DragonFly Capital, Solana Ventures, and others.

→ TVL

Parcl takes 13th place by TVL with $50M on the Solana network.

Users actively stake & trade their assets to receive points in return. Because Point Season 2 has started.

→ Step-by-step strategy:

• Go to app.parcl.co/points.
• Connect your wallet.
• Add liquidity.
• Make trades

→ Point System:

Entering "batcher"code earns you a 5% points boost forever.
• 1 point per 1 USD LENDING/24 hours.
• 4 points per 1 USD BORROW/24 hours.

2/ → @Kamino_Finance

Kamino Finance was created to offer users the easiest possible way of providing liquidity and earning yield on-chain.

The UI provides industry-leading analytics, performance information, and position details.

→ TVL

Kamino takes 4th place by TVL with $286M on the Solana network.
Points Season 1 started, and a lot of people participated in it, to receive upcoming airdrop.

→ Step-by-step strategy:

• Go to app.kamino.finance.
• Connect your wallet.
• Go to Borrow & Lend.
• Choose any asset, put in the desired amount
• Borrow it.

3/ → @marginfi

Marginfi is a decentralized lending protocol on Solana that prioritizes risk management to provide a safe and reliable solution for users.

The protocol is a fully permissionless suite of smart contracts deployed on a blockchain.

→ TVL

Marginfi takes 4th place by TVL with $286M on the Solana network.

Users actively stake their assets to receive points. Point Season 1 is live now!

→ Step-by-step strategy:

• Go to mfi.gg/points.
• Connect your wallet.
• Stake $SOL or any other token.
• Farm points, to later get airdrop for them.

→ Point System:

• 1 point per 1 USD LENDING/24 hours.
• 4 points per 1 USD BORROW/24 hours.

4/ → @DriftProtocol

Drift brings on-chain, cross-margined perpetual futures to Solana. Making futures DEXs the best way to trade.

Raised $3.8M led by Multicoin Capital.

→ TVL

Drift takes 9th place by TVL with $127M on the Solana network.

Users actively stake their assets to receive points. Drift Point Season is live now!

→ Step-by-step strategy:

• Go to app.drift.trade
• Connect your wallet.
• Deposit USDC/USDT/SOL.
• Trade & make volume (be better to make at least $5-10k total volume).

5/ → @ZetaMarkets

Zeta's mission is to become the world's leading decentralized derivatives exchange. It has raised $8,5M from leading funds.

→ TVL

Zeta takes 25th place by TVL with $13,3M on the Solana network.

Users actively stake their assets to receive points. Z-Point Season is live now!

→ Step-by-step strategy:

• Go to dex.zeta.markets/trade/SOL-PERP.
• Connect your wallet.
• Trade $SOL or any other token.
• Farm points, to later get airdrop for them.

→ Point System:

• 1 point per 1 USD Traded.

6/ → @sanctumso

Sanctum is Solana’s on-chain stability protocol. Sanctum unlocks staked SOL to be used throughout DeFi by providing a backstop of SOL liquidity.

Backed by VCs, and launch is expected in Q1 2024.

I hope my article was helpful. If so, please do not hesitate to :

1. Follow me for more alpha content

2. Like & Repost to motivate me to continue
#TrendingTopic

Introduction

As a newcomer to trading or investing, reading charts can be a daunting task. Some rely on their gut feeling and make their investments based on their intuition. While this strategy might temporarily work in a bullish market environment, it most likely won’t in the long run. 

Essentially, trading and investing are games of probabilities and risk management. So, being able to read candlestick charts is vital to almost any investment style. This article will explain what candlestick charts are and how to read them.


What is a candlestick chart?

A candlestick chart is a type of financial chart that graphically represents the price moves of an asset for a given timeframe. As the name suggests, it’s made up of candlesticks, each representing the same amount of time. The candlesticks can represent virtually any period, from seconds to years. 

Candlestick charts date back to about the 17th century. Their creation as a charting tool is often credited to a Japanese rice trader called Homma. His ideas were likely what provided the foundation for what is now used as the modern candlestick chart. Homma’s findings were refined by many, most notably by Charles Dow, one of the fathers of modern technical analysis.

While candlestick charts could be used to analyze any other types of data, they are mostly employed to facilitate the analysis of financial markets. Used correctly, they’re tools that can help traders gauge the probability of outcomes in the price movement. They can be useful as they enable traders and investors to form their own ideas based on their analysis of the market.


How do candlestick charts work?

The following price points are needed to create each candlestick:

Open — The first recorded trading price of the asset within that particular timeframe.

High — The highest recorded trading price of the asset within that particular timeframe.

Low — The lowest recorded trading price of the asset within that particular timeframe.

Close — The last recorded trading price of the asset within that particular timeframe.



Collectively, this data set is often referred to as the OHLC values. The relationship between the open, high, low, and close determines how the candlestick looks.

The distance between the open and close is referred to as the body, while the distance between the body and the high/low is referred to as the wick or shadow. The distance between the high and low of the candle is called the range of the candlestick. 


How to read candlestick charts

Many traders consider candlestick charts easier to read than the more conventional bar and line charts, even though they provide similar information. Candlestick charts can be read at a glance, offering a simple representation of price action. 

In practice, a candlestick shows the battle between bulls and bears for a certain period. Generally, the longer the body is, the more intense the buying or selling pressure was during the measured timeframe. If the wicks on the candle are short, it means that the high (or the low) of the measured timeframe was near the closing price.

The color and settings may vary with different charting tools, but generally, if the body is green, it means that the asset closed higher than it opened. Red means that the price moved down during the measured timeframe, so the close was lower than the open. 

Some chartists prefer to use black-and-white representations. So instead of using green and red, the charts represent up movements with hollow candles and down moves with black candles.


What candlestick charts don’t tell you

While candlesticks are useful in giving you a general idea of price action, they may not provide all you need for a comprehensive analysis. For instance, candlesticks don’t show in detail what happened in the interval between the open and close, only the distance between the two points (along with the highest and lowest prices).

For example, while the wicks of a candlestick do tell us the high and low of the period, they can't tell us which one happened first. Still, in most charting tools, the timeframe can be changed, allowing traders to zoom into lower timeframes for more details.


Candlestick charts can also contain a lot of market noise, especially when charting lower timeframes. The candles can change very quickly, which can make them challenging to interpret.


Heikin-Ashi candlesticks

So far, we have discussed what is sometimes referred to as the Japanese candlestick chart. But, there are other ways to calculate candlesticks. The Heikin-Ashi Technique is one of them.

Heikin-Ashi stands for “average bar” in Japanese. Such candlestick charts rely on a modified formula that uses average price data. The main goal is to smooth out price action and filter out market noise. As such, Heikin-Ashi candles can make it easier to spot market trends, price patterns, and possible reversals.

Traders often use Heikin-Ashi candles in combination with Japanese candlesticks to avoid false signals and increase the chances of spotting market trends. Green Heikin-Ashi candles with no lower wicks generally indicate a strong uptrend, while red candles with no upper wicks may point to a strong downtrend.

While Heikin-Ashi candlesticks can be a powerful tool, like any other technical analysis technique, they do have their limitations. Since these candles use averaged price data, patterns may take longer to develop. Also, they don’t show price gaps and may obscure other price data.


Closing thoughts

Candlestick charts are one of the most fundamental tools for any trader or investor. They not only provide a visual representation of the price action for a given asset, but also offer the flexibility to analyze data in different timeframes.

An extensive study of candlestick charts and patterns, combined with an analytical mindset and enough practice may eventually provide traders with an edge over the market. Still, most traders and investors agree that it’s also important to consider other methods, such as fundamental analysis.

Ripple's acquisition plan to grab a company with a New York trust charter will expand the business it's allowed to conduct in the U.S., potentially letting it move beyond its well-known role as a payments network.

The deal – Ripple's second recent purchase of a custody business – must still be approved by the New York regulator.

Ripple struck a deal to acquire Standard Custody & Trust Co., the company said Tuesday, in order to secure a New York trust charter in an ongoing expansion of its U.S. regulatory licensing.

Despite Ripple's overseas focus and its high-profile legal clash with the U.S. Securities and Exchange Commission (SEC), which has so far mostly gone against the regulator, the global payments company is still trying to stretch its capabilities in the U.S. The limited purpose trust charter held in New York by the company Ripple is buying will let it offer more in-house services, including to financial firms seeking to tokenize assets. The company is trying to push beyond the payments network it's known for and into other financial products in which their institutional customers can benefit from blockchain technology.

"We want to offer more and more of these infrastructure pieces to these financial institutions," said Ripple President Monica Long in an interview with CoinDesk. "We see this as giving us a lot of flexibility."

She called it a long-term project, and she said Ripple is also still seeking to complete the rest of its U.S. money transmission licensing.

The deal with Standard Custody & Trust, for which Ripple has declined to disclose terms and which is still awaiting approval from the New York Department of Financial Services, adds a crypto custody and settlement business to Ripple's stable. That would let customers maintain custody with Ripple instead of having to go to an outside partner.

Ripple is known in the U.S. for going toe-to-toe with the SEC in federal court over the regulator's accusations that XRP was a security. Though one judge has largely ruled on Ripples' side, the case will continue to be fought in higher courts. Long said the company's hesitation about the U.S. isn't as much about that specific clash as it's about the regulatory uncertainty over digital assets.

"But the U.S. is a major market, and we believe it's possible for the U.S. to emerge as a leader in driving innovation," she said.

This latest Ripple acquisition follows a deal last year in which Ripple bought another cryptocurrency custody firm, Metaco.

Read More: Ripple-Owned Crypto Custody Firm Metaco's CEO and Head of Product Depart

TL;DR

Tokenomics is a term that captures a token’s economics. It describes the factors that impact a token’s use and value, including but not limited to the token’s creation and distribution, supply and demand, incentive mechanisms, and token burn schedules. For crypto projects, well-designed tokenomics is critical to success. Assessing a project’s tokenomics before deciding to participate is essential for investors and stakeholders.

Introduction 

A portmanteau of “token” and “economics,” tokenomics is a key component of doing fundamental research on a crypto project. Aside from looking at the white paper, founding team, roadmap, and community growth, tokenomics is central to evaluating the future prospects of a blockchain project. Crypto projects should carefully design their tokenomics to ensure sustainable long-term development.

Tokenomics at a glance 

Blockchain projects design tokenomics rules around their tokens to encourage or discourage various user actions. This is similar to how a central bank prints money and implements monetary policies to encourage or discourage spending, lending, saving, and the movement of money, Note that the word “token” here refers to both coins and tokens. You can learn the difference between the two here. Unlike fiat currencies, the rules of tokenomics are implemented through code and are transparent, predictable, and difficult to change.

Let’s look at bitcoin as an example. The total supply of bitcoin is pre-programmed to be 21 million coins. The way bitcoins are created and entered into circulation is by mining. Miners are given some bitcoins as a reward when a block is mined every 10 minutes or so. 

The reward, also called block subsidy, is halved every 210,000 blocks. By this schedule, a halving takes place every four years. Since January 3, 2009, when the first block, or the genesis block, was created on the Bitcoin network, the block subsidy has been halved three times from 50 BTC to 25 BTC, 12.5 BTC, and 6.25 BTC currently.

Based on these rules, it’s easy to calculate that around 328,500 bitcoins will be mined in 2022 by dividing the total number of minutes of the year by 10 (because a block is mined every 10 minutes) and then multiplying by 6.25 (because each block gives out 6.25 BTC as rewards). Therefore, the number of bitcoins mined each year can be predicted, and the last bitcoin is expected to be mined around the year 2140.

Bitcoin’s tokenomics also include the design of transaction fees, which miners receive when a new block is validated. This fee is designed to increase as transaction size and network congestion rise. It helps prevent spam transactions and incentivizes miners to keep validating transactions even as block subsidies keep diminishing. 

In short, the tokenomics of Bitcoin is simple and ingenious. Everything is transparent and predictable. The incentives surrounding Bitcoin keep participants compensated to keep the network robust and contribute to its value as a cryptocurrency. 

Key elements of Tokenomics

As a catch-all term for a wide range of factors influencing a cryptocurrency’s value, “tokenomics” refers first and foremost to the structure of a cryptocurrency’s economy as designed by its creators. Here are some of the most important factors to consider when looking at a cryptocurrency’s tokenomics. 

Token supply

Supply and demand are the primary factors impacting the price of any good or service. The same goes for crypto. There are several critical metrics measuring a token’s supply. 

The first is called maximum supply. It means that there is a maximum number of tokens coded to exist in the lifetime of this cryptocurrency. Bitcoin has a maximum supply of 21 million coins. Litecoin has a hard cap of 84 million coins, and BNB has a maximum supply of 200 million.

Some tokens don’t have a maximum supply. The Ethereum network’s supply of ether increases every year. Stablecoins like USDT, USD Coin (USDC), and Binance USD (BUSD) have no maximum supply as these coins are issued based on the reserves backing the coins. They theoretically can keep growing without limits. Dogecoin and Polkadot are two more cryptos with uncapped supply.

The second is circulating supply, which refers to the number of tokens in circulation. Tokens can be minted and burned, or be locked up in other ways. This has an effect on the price of the token as well.

Looking at the token supply gives you a good picture of how many tokens there will be ultimately.

Token Utility

Token utility refers to the use cases designed for a token. For example, BNB’s utility includes powering the BNB Chain, paying transaction fees and enjoying trading fee discounts on the BNB Chain, and serving as community utility token on the BNB Chain ecosystem. Users can also stake BNB with various products within the ecosystem to earn additional income.

There are many other use cases for tokens. Governance tokens allow the holder to vote on changes to a token’s protocol. Stablecoins are designed to be used as a currency. Security tokens, on the other hand, represent financial assets. For instance, a company could issue tokenized shares during an Initial Coin Offering (ICO), granting the holder ownership rights and dividends.

These factors can help you determine the potential use cases for a token, which is essential in understanding how the token’s economy will likely evolve.

Analyzing token distribution 

Aside from supply and demand, it’s essential to look at how tokens are distributed. Large institutions and individual investors behave differently. Knowing what types of entities hold a token will give you insight into how they are likely to trade their tokens, which will in turn impact the token’s value. 

There are generally two ways to launch and distribute tokens: a fair launch and a pre-mining launch. A fair launch is when there is no early access or private allocations before a token is minted and distributed to the public. BTC and Dogecoin are examples of this category. 

On the other hand, pre-mining allows a portion of the crypto to be minted and distributed to a select group before being offered to the public. Ethereum and BNB are two examples of this type of token distribution. 

Generally, you want to pay attention to how evenly a token is distributed. A few large organizations holding an outsized portion of a token are typically considered riskier. A token held largely by patient investors and founding teams means stakeholders' interests are better aligned for long-term success. 

You should also look at a token’s lock-up and release schedule to see if a large number of tokens will be placed into circulation, which puts downward pressure on the token’s value. 

Examining token burns

Many crypto projects regularly burn tokens, which means pulling tokens out of circulation permanently. 

For example, BNB adopts coin-burning to remove coins from circulation and reduce the total supply of its token. With 200 million BNB pre-mined, BNB’s total supply is 165,116,760 as of June 2022. BNB will burn more coins until 50% of the total supply is destroyed, which means BNB’s total supply will be reduced to 100 million BNB. Similarly, Ethereum started to burn ETH in 2021 to reduce its total supply. 

When the supply of a token is reduced, it’s considered deflationary. The opposite, when a token’s supply keeps expanding, is deemed inflationary. 

Incentive mechanisms

A token’s incentive mechanism is crucial. How a token incentivizes participants to ensure long-term sustainability is at the center of tokenomics. How Bitcoin designs its block subsidy and transaction fees is a perfect illustration of an elegant model.

The Proof of Stake mechanism is another validation method that is gaining prevalence. This design lets participants lock their tokens in order to validate transactions. Generally, the more tokens are locked up, the higher the chance to be chosen as validators and receive rewards for validating transactions. It also means that if validators try to harm the network, the value of their own assets will be placed at risk. These features incentivize participants to act honestly and keep the protocol robust. 

Many DeFi projects have used innovative incentive mechanisms to achieve rapid growth. Compound, a crypto lending and borrowing platform, lets investors deposit cryptos in the Compound protocol, collect interests on them, and receive COMP tokens as additional reward. Moreover, COMP tokens serve as a governance token for the Compound protocol. These design choices align the interests of all participants with that of Compound’s long-term prospects.

What’s next for tokenomics

Since the genesis block of the Bitcoin network was created in 2009, tokenomics has evolved significantly. Developers have explored many different tokenomics models. There have been successes and failures. Bitcoin’s tokenomics model still remains enduring, having stood up to the test of time. Others with poor tokenomics designs have faltered.

Non-fungible tokens (NFTs) provide a different tokenomics model based on digital scarcity. The tokenization of traditional assets such as real estate and artworks could generate new innovations of tokenomics in the future.

Closing thoughts

Tokenomics is a fundamental concept to understand if you want to get into crypto. It’s a term capturing the major factors affecting the value of a token. It’s important to note that no single factor provides a magical key. Your assessment should be based on as many factors as possible and analyzed as a whole. Tokenomics can be combined with other fundamental analysis tools to make an informed judgment on a project’s future prospects and its token’s price.

Ultimately, the economics of a token will have a major impact on how it is used, how easy it will be to build up a network, and whether there will be much interest in the use case of the token.