First, there are two main types of tokens:
Token Governance
Token Governance is also called Security Token. It is a form of electronic stock created in the form of tokens. Owners will receive dividends corresponding to their shares in the project. In addition, if you hold this token, you also have voting rights and can vote on some project activities.
Token Utility
This is a utility token type. It is created to serve new projects with very clear and specific goals and functions. For example, the token issued by the Dock.io project can be used for payment, voting; the BNB token of Binance has the function of reducing transaction fees,...
Tokenomics is a combination of the words Token (cryptocurrency) and Economics (economics). Therefore, Tokenomics can be seen as the economics of cryptocurrencies, how they are constructed and applied to the operating model of the project.
For ease of imagination, people imagine a cryptocurrency business as a normal business that issues shares and is listed on an exchange. Tokens here are like stocks, and Tokenomics is important information about that token: who is it allocated to, how much is allocated, what is the market supply, and how is it priced?
In short, a token is like the “currency” of a cryptocurrency project issued by the project itself, and information related to the “economics” of that token creates an interaction between supply and demand, which combined together is Tokenomics.
Elements that make up a complete Tokenomics
Tokenmetrics
Total Supply
Defined as the total amount of coins/tokens in circulation and locked minus the amount of coins/tokens destroyed. Initially, Total Supply will be a number designed by the project development team to best match the operating model.
Simply put, it is the number of tokens in existence, including the number circulating in the market and the number that has not yet been circulated.
Circulating Supply
Roughly speaking, it is the number of coins/tokens circulating in the market, i.e. being traded back and forth between buyers and sellers.
Maximum Supply
The maximum number of coins/tokens that can exist, including those that have already been mined or will become available in the future.
Market value (project capitalization)
Market capitalization is the market capitalization of a project using the number of coins/tokens in circulation at the time. From the circulating supply, we will have the following formula to calculate the market capitalization:
Market capitalization = circulation x token price.
This is extremely important information for assessing the "level" of a project.
Fully Diluted Valuation (FDV)
FDV is also the capitalization of the project, but calculated by the total number of tokens in circulation, also not unlocked. From the total supply, we will have the following formula to calculate FDV:
FDV = Total/Max Supply x Token Price.
FDV also plays an important role in assessing whether a project has growth potential or is “overvalued” (more than its actual value).
Token Use Cases
Token Use case is to answer a question: What is the token of this project used for?
In other words, it explains the purpose of the token, which is one of the most important elements of token economics and helps you evaluate token holders in the market based on the benefits the token brings to you.
Typically, a use case will be designed to:
Staking
Staking is a feature that allows users to buy tokens to save and receive many rewards from the project. Staking also helps the project reduce the supply outside the market, thereby significantly reducing the selling pressure in the market.
Farming
If you don’t like staking your tokens, then Farming is a good choice. Mining is like putting your tokens into the project’s liquidity pool and getting rewards. A win-win relationship.
Transaction fees (transaction fees in the network)
To conduct transactions, users need to pay fees to the project network. A simple thing, if you want to use the transaction facilities, pay for the services of the project ecosystem, you have to pay fees.
Governance
You can understand it this way, the more tokens you hold of a project, the more rights you have, such as participating in voting to build the project, etc. However, this has many limitations.
Other uses
Get rewards from Launchpad projects. Example: When you hold $BNB, you will get $Hook from the latest Launchpad, the Hook Protocol project.
Token Allocation
Token Allocation is the token allocation ratio among the stakeholder groups (related groups) of a project. Based on Token Allocation, investors will know whether the project is transparent and reasonable in token allocation.
team
This is the token portion of the project development team. This will include members who contribute a certain amount of tokens to the project, such as founders, developers, marketers, advisors… The ideal amount is usually around 15-20% of the total supply.
If this ratio is too low, the project team will have no motivation to develop the project in the long term. Especially if the team's stake is too small, it is easy to cause the project to not have much "say" in front of investors.
If this ratio is too high, the community will have no incentive to hold the project’s tokens because the tokens are controlled by too many entities. This can lead to many problems, such as concentration of power and the possibility of overpricing.
Foundation Reserves/Treasury
The reserve is a reserve that the project has in reserve for future product or feature development. It is an unspecified number of tokens, usually accounting for 20-40% of the total supply.
Sometimes, these reserves will be used to organize an Airdrop/Retroactive program for the project later if the initial Airdrop is not enough.
Liquidity Mining (aka Farming)
Liquidity Pool is an Allocation that has appeared more frequently in recent times, especially after the strong development of DeFi projects from September 2020 to now. Liquidity mining is a token that is minted as a reward for users who provide liquidity to DeFi protocols.
Seed/Private/Public Sale
This is the seed round, which can be roughly understood as a round of venture capitalists who accept investment when the project has not yet completed the product or even has nothing.
This also means that investors in this round will be able to buy at the lowest price in the remaining rounds.
Airdrop/Retroactive
As soon as a new project comes online, usually if you want to promote this project to a lot of people, they will have to deduct a very small portion of the total supply to pay Airdrop/Retroactive rewards to users.
Other Allocation
Marketing, etc.
Token Release Schedule
Token Release is a plan to distribute tokens to the project circulation market.
Similar to Token Allocation, Token Release greatly affects the price of tokens and the community’s motivation to hold tokens.
There are currently two types of token distribution in the market:
Each project will have a different token payment schedule. The token distribution schedule is extremely important. It is one of the factors that strongly affects the token supply and thus the price.
If the delivery time is long, about 3-5 years, it means that the project wants to be on the market for many years.
If the issuance time is short, only about 1-2 years, and it is released to the market, it proves that the project just wants to "take a bite" and is short-sighted.
If the distribution project takes too long, the project builders may not have enough motivation to stick with the project, unless the project brings great benefits to the team.
Therefore, the design of the Token Release Schedule is very important because it is the "lifeblood" of the development project.
Allocation on demand
Solve the problem of inflation happening too quickly compared to the original plan. Some projects choose to release tokens based on specific criteria rather than a set time. This is a very cool mechanism because if applied correctly, it will help stabilize the price of the token.
For example, MakerDAO does not have a specific token replenishment time.
The amount of MKR actually on the platform will be appropriately distributed ⇒ If there is lending activity, new MKR tokens will be released.
Token Sale
Token sales are a form of raising funds by selling shares similar to traditional market companies. However, in the crypto market, shares will be replaced by tokens.
Seed sales
The Seed Sale is the first token sale of the project. Most projects have not completed their product or are not even close to being finished during this sale. There are many projects that are open to selling tokens as a form of fundraising for deployment.
Most of the funds invested in Seed Sale are venture capital funds. They bear high risks, but they will also get returns if the project is successful.
Private Sale
If the Seed sale is mainly venture capital funds, then the Private sale will have many larger and more well-known investment funds participating. Usually at this stage, the projects have launched their products and partially demonstrated their results after raising funds in the Seed sale round.
Public Sale
A public sale is a public sale of tokens to the community. The project can issue tokens in the form of an ICO, as was done in 2017, or through a third party in the form of an IEO or IDO.
Fairy Launch Distribution
Fair Launch is a fair and transparent initial distribution of coins/tokens in blockchain projects. This is considered an effective way to promote decentralization and participation in the crypto community.
Using Fair Launch:
The project's coin/token has been owned and managed by the community from the beginning.
Opportunities are available to everyone from development teams, retail investors to large investment funds.
No longer is it necessary to allocate early access to tokens to development teams or large investment funds.
A good example of a Fair Launch is PeopleDAO, where they distribute 100% of their tokens to the community.
