Very often, tokenomics is the difference between a good investment and a bad one.
Here is what you should know about it.
Many people talk about tokenomics, but only some people understand it.
Focusing only on demand or supply won’t help you. To evaluate project tokenomics, you must consider two parts of this equation and understand its dynamics.
Price is the result of supply and demand:
Demand & Supply => Price
It is set by these forces and reflects everything investors collectively believe, hope for, and fear.
Value is not equal to the price.
It is driven by fundamentals (cash flows, growth, and risks). These fundamentals are captured on the demand and supply side.
A supply tells us how many coins or tokens we have.
Supply = Inflation/vesting - buybacks - staking (locking)
For most projects, we have 3 different supplies, which we can find on sites like @CoinGecko
Circulating supply - The number of circulating coins in the market that are tradeable by the public.
It is comparable to looking at shares readily available in the market (not held & locked by insiders and governments).
Total supply - The number of coins that have already been created, minus any coins that have been burned/removed from circulation.
It is comparable to outstanding shares in the stock market.
Max supply - The maximum number of coins coded to exist in the cryptocurrency's lifetime.
It is comparable to the stock market's maximum number of issuable shares.
Circulating supply can be changed by the following:
Inflation and vesting – new tokens are created and are tradable after the vesting period. This is mostly used to compensate for different protocol personas like investors, project teams, or users.
Buybacks – tokens can also be destroyed (similar to stock buybacks). This reduces outstanding project tokens or requires the team to first buy tokens from the market.
Staking or locking – some tokens can be withdrawn from the public market to be locked in the protocol
The dynamic behind this equation is complex - we must analyze all factors for many projects.
The most important metric to analyze is selling pressure. It tells us how the circulating supply will change after X months, where X is our investment horizon.
If we will have a higher circulating supply in the future, the demand side will have to compensate, maintain and finally increase its price.
Demand OR Supply => Price
Demand OR Supply => Price
The demand can be divided into three forces:
Demand = Real Utility (Value) + Financial Utility (Earning on token/coin in Defi) + Valuation Changes (Speculation)
Valuation Changes are impacted by the following:
Momentum (price action) – Most people (and some bots) buy if the price rises.
Investor mood – What is trendy now? Where is money flowing?
Other pricing factors – Accessibility for US citizens, CEX and DEX availability, etc.
This is the most important factor in crypto's short and very often mid-terms.
As this market will be more mature, its impact will diminish. Master it if you are a trader.
You Are Not Investor, You Are a Trader
Most people believe that they are investors because they are buying tokens. If you are only considering the price, mood and momentum you are a trader.
Check the main differences between Investors and Traders.
Financial Utility is the ability to earn on our tokens in #DeFi. 3 key parameters to consider:
Cash flow (APY) – How much will we earn in one year if nothing changes?
Growth of APY – How likely are these changes going to happen?
Risk – How can you lose money here?
Real utility answers the question, “What value is provided by this protocol”?
For many projects, there is no value. Anyway, you can have a different investment strategy in which value doesn’t matter but only short-horizon price appreciation.
To provide real utility, a project needs to have credible resources to deliver it. In most cases, we need the following:
• Teams and advisors
• Investors, capital, and compliant product with regulators
Specific requirements for them depend on our project’s operating model:
• Do we have enough resources (team, money, knowledge) to deliver this project?
• Do we have the required support from other companies and organizations?
• Do we believe that this is possible?
Next, we need to understand how exactly we want to create value:
The market for which we can provide a solution to our problem (someone will have to buy our products or services)
Competitors which cannot provide what we want to offer – we need to be better in some way
Now, we can evaluate the solution.
• Product/Service – how do we want to deliver value?
• Roadmap & Progress – when will this promise be fulfilled?
• Adoption & Community – who will benefit from this?
I hope that this guide will help you better understand:
• demand forces,
• supply forces,
• price dynamics.
Let me know in the comments what you would like to learn more about.