But still, 99% of people choose to ignore it.
This simple guide will teach you to read tokenomics like a pro ๐งต
Tokenomics is more than just token distribution. It includes the whole economic model of the project.
There are 5 main parts to analyze in every tokenomics:
1.ย Allocation and Distribution
2.ย Supply
3.ย Token Model
4.ย Token Incentives
5.ย Consensus Mechanismย 1/โฃ Allocation and distribution
It contains information about who will receive the tokens and how they will reach the market.
The $UNI tokenomics is considered an exemplary one, most of the tokens went to the community and the entire supply has been distributed over 4 years.
โฃ Most projects distribute tokens either through a fair launch or pre-mine.
Fair launch: tokens are mined and governed by the community.
Pre-mine: tokens are created and distributed before public launch to raise capital. Most of the crypto projects come with pre-mined tokens.ย
2/โฃ Token supply
It refers to the total number of tokens in a project and its future changes.
- Circulating supply refers to the number of tokens that are currently in circulation.
- Total supply refers to the total quantity of existing tokens either in circulation or stuck at different smart contracts and released later
- Maximum supply refers to the total quantity of tokens in a project that will exist once the maximum supply has been reached.
โฃ A huge difference between market cap and total supply results in an issue called "low float high FDV" - a common one lately.
The idea is simple - a high valuation from the start will hurt the project's development because of constant selling pressure from unlocks.
3/โฃ Token Model
This part refers to one main question
- Is the coin inflationary or deflationary?
Let's analyze every part:
โฃ The inflationary model
An inflationary model has no maximum supply limit and continues indefinitely.
Pro: Encourages network participation and growth.
Con: Leads to inflation and devaluation, diluting the existing token value.
โฃ Deflationary model
This model caps token supply and may periodically burn tokens.
Pros: It creates natural demand and avoids inflation.
Cons: It may encourage hoarding, hinder new investors, and reduce token value.
An example of this is @injective $INJ.
4/โฃ Token Incentives
Users should have the motivation not only to join the project but to buy a few tokens early, stay there, and continue to invest their money and time in it.
It could be done through:
- Profit sharing
- Staking poolsย โฃ Profit-sharing
Allow token holders to benefit from holding their tokens by distributing rewards. These can be airdrops, fee reflections, or other discretional token distribution events.
โฃ Staking
Token holders can stake their tokens to earn rewards by acting as validators in the network. Various use cases for the staking mechanism include:
- Holding tokens
- Activity levels
- Platform features
- Participant status
5/โฃ Consensus Mechanism
A Consensus mechanism or protocol allows distributed systems to work together and stay secure. These mechanisms conceal a great deal of the logic utilized behind a blockchain.
There are 2 main consensus mechanisms:
- Proof-of-Work
- Proof-of-Stakeย โฃ Proof-of-Work
In this protocol, blockchain miners race to solve math puzzles and create new blocks. The fastest miner earns a new token.
The block is then shared for transactions or smart contracts. This process uses a lot of energy and miners hold the decision power.
โฃ Proof-of-Stake
In PoS, network integrity is upheld by nodes holding tokens, making it more cost-effective than PoW.
It encourages long-term token holding to gain more power.
That's it for today folks,
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CONTENT SOURCE: RESPECTED Defi_Warhol on X