But still, 99% of people choose to ignore it.
This simple guide will teach you to read tokenomics like a pro 🧵
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. Allocation and Distribution
2. Supply
3. Token Model
4. Token Incentives
5. Consensus Mechanism 1/➣ 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.
➣ 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.
2/➣ 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.
➣ 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/➣ Token Model
This part refers to one main question
- Is the coin inflationary or deflationary?
Let's analyze every part:
➣ 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.
➣ 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/➣ 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 pools ➣ 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.
➣ 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/➣ 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-Stake ➣ 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.
➣ 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,
Thanks for reading! For more insightful crypto content,
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CONTENT SOURCE: RESPECTED Defi_Warhol on X
