Good token economics can help a token grow hundreds of times within a year, while bad token economics can cause a token to fall by 90%. Understanding token economics is the most important skill in the crypto industry. If you don’t understand token economics, it’s difficult to be a successful investor. Learning is crucial, don't trade blindly, otherwise you may suffer losses. Crypto KOL cyclop gave an overview of token economics and here is a complete guide to them.
When you first find a potential coin, such as on CMC, you will see the following:
Market capitalization (MC)
total supply
Circulation
Fully diluted value (FDV)
Source: PANews
These are the basic supply indicators:
Circulation: tokens currently in circulation
Total Supply: The total amount of tokens that can exist
MC: Total value of circulating supply (in USD)
FDV: Total value of total supply (in USD)
Understanding these metrics allows you to evaluate a coin’s potential. But to do that, you need to understand more than just the nominal concepts. You also need to understand how they work and how they affect prices.
Start with supply first. There are two paths for tokens:
inflation
deflation
Source: PANews
Inflation Tokens: The supply of a token can be increased, known as a release.
Release is a negative because it usually results in a decrease in value. However, if the release is slow and in small amounts, it will not have a significant impact on value.
Source: PANews
Deflationary Token: A situation where the supply of a token decreases over time. This happens when a project buys back tokens and burns them. In theory, reducing supply should increase value, but that's just theory.
Source: PANews
Let’s now discuss the main factors that determine token issuance and longevity: allocation and distribution.
There are two methods:
Pre-mine (distributed among early investors, teams, advisors, etc.)
Fair distribution (everyone has equal purchasing qualifications)
Most projects use pre-mining.
Source: PANews
Why is this approach important?
Because if TGE is 100% and 50% of the tokens are allocated to investors, then investors can sell tokens at any time, and retail investors may become the takers of exit liquidity. Here's why you need to know:
TGE Allocation
Vesting (token lock)
Cliff (cliff period)
Token distributions typically have the following receipt types:
Private sales (investors, KOLs, etc.)
Public Offering (Retail Investors)
Marketing
Ecosystem (rights, rewards, etc.)
Airdrop
How do they sell tokens?
Source: PANews
The day the token is issued is called TGE.
TGE allocation is the percentage of tokens allocated to all individuals listed above (10-20%)
Cliff is the period after TGE and before the next Vesting
Vesting refers to the gradual release of a certain proportion of tokens every month
Source: PANews
Recent projects have adopted an approach with a smaller TGE percentage (up to 20%), followed by a cliff of several months and vesting of more than 12 months.
This approach is better suited for the long-term success of the project, so it is important to verify all these details before investing.
Another key factor for any coin to be successful these days is demand. This is why projects incentivize retail investors to purchase specific tokens. For example, despite severe inflation, people still buy dollars because they need it to live.
Generally speaking, there are 4 factors that drive demand for a coin:
store of value
Community driven
Practical effect
value accumulation
Source: PANews
Store of value
Cryptocurrencies can serve as a store of value. Many people buy cryptocurrencies just to put money in them, such as Bitcoin, which is often compared to gold.
Source: PANews
Community driven
As this cycle has shown the masses, community can drive demand powerfully. The rise of meme coins is all about community. People will buy things they think they can make money from.
Source: PANews
Practical effect
Demand is stimulated when holding a token provides some utility. For example, in order to stake tokens, you need tokens from a certain network, etc.
Source: PANews
value accumulation
Incentivize stake holders
People also want the token to provide some value. This is a pledge. You can lock up your positions to receive regular rewards. This benefits all parties and is relatively low risk.
Source: PANews
value accumulation
Incentive holders
Another option is to hold. Projects usually provide rewards/airdrops etc. to holders, which is good for everyone. There are many other ways to reduce selling pressure by holding:
Source: PANews
VeToken
VeToken can be obtained by holding tokens
"Ve" stands for voting escrow, which means that by locking your tokens, you gain voting rights.
The longer you hold it, the more voting rights you accumulate.
Source: PANews
Mining
Holding can also improve your mining efficiency
The more holdings, the higher the income ratio will grow.
Also understand that no matter how high the demand is, it is important to know who is holding it. Is it a strong community or a dumper. It's more challenging to figure this out. You need to engage with the project's community and analyze it.
Additionally, despite bad token economics, there is still the potential for a token to rise and vice versa. Always consider this possibility. Here is a list of things to check before investing:
supply and circulating supply
Assignment and distribution
Lock-up period, unlock date
Release percentage
need
After such an analysis, you can basically determine whether the project is worth investing in.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reproduced with permission from: "PANews"
Original author: cyclop, crypto KOL