In the past few years, the term “tokenomics” has become a common way to talk about how to value crypto assets. This term refers to an asset’s economic properties, how it works, and any psychological or behavioral factors that could change its value in the future.
Well-thought-out tokenomics make it much more likely that a project will succeed. This is because the team has put a lot of thought into how they will encourage people to buy and hold their tokens.
If a project’s tokenomics are bad, people will sell their tokens as soon as they see trouble coming.
If you are thinking about whether or not to buy a crypto asset, one of the best first steps you can take is to learn about tokenomics. This will help you make the right choice.
Tokenomics is all about supply and demand
As in traditional economics, supply and demand are the most important factors. We need to know how they fit into the field of tokenomics. This will give you a good idea of how much people want a token or coin.
Emission, inflation, and distribution of the supply
Let’s start with a sentence because it’s a little simpler. The most important thing to find out is:
“Just based on supply, can I expect this token’s value to stay the same or go up? Or is it too expensive?
If there are less tokens, their prices will go up. This is called deflation. If there are a lot of tokens on the market, their price will go down. This is called inflation. When you look at a proposal, you don’t have to think about things like how useful the token is or whether its owners will make money from it. You’re really just looking at the offer and how it will change over time.
Here, you need to ask yourself the following:
How many of these tokens have already been made? How many will be given out all together? How quickly will there be new ones?
The total number of bitcoins will be 21,000,000 in the end, and this number has not changed. Every four years, the number of coins made drops by half. This is called “halving.” At the same time, there have already been 19,000,000 coins mined. So only 2,000,000 bitcoins will be added to the market in the next 120 years.
This means that 90.5% of the supply is already in circulation, and in 100 years there will only be 9.5% more bitcoins. This means that inflationary pressures won’t be strong enough to make the coin less valuable.
What’s up with Ethereum?
You can have as many coins as you want. But when Ethereum switched from PoW to PoS, the coin lost value. On the other hand, this might make ETH grow faster.
Dogecoin also doesn’t have a limit on how many can be made. Its inflation rate is 5% per year. So, we can say that inflationary tokenomics will hurt Doge’s value more than Bitcoin or Ethereum.
In the proposal, it is also important to think about how the money will be shared. The following facts are important to keep in mind:
How soon will the tokens be given out if a lot of investors have a lot of them?
Have most of the protocol’s tokens been given to the community?
How fair do you think the split is? If a group of investors has 25% of the coins and they will be released in a month, you should think twice before buying.
As an example, let’s look at a couple of DeFi tokens. One of the first DeFi protocols, Yearn, always has 36,666 YFI. Since no new money is being made and there is no inflation, you shouldn’t expect the value of 1 YFI to go down because of inflationary pressures.
The Olympus protocol, on the other hand, gives out a huge number of new OHM tokens every day, which leads to a crazy amount of inflation. So, in theory, it’s not a good idea to hold OHM. But you need to take into account more than just the proposal.
These were the main things people thought about the plan. Let’s talk about demand now, which is where things start to get interesting.
ROI, Memes, and Game Theory: What People Want
You can go out into the yard, break some rocks, and then say, “These are the only rocks I will ever break and sell.” I always have 10 stones with me. And zero inflation. Does this mean the stones are worth millions of dollars?
No, because nobody is interested in my broken stones.
At this level, there is no difference between my stones and bitcoins. Having a fixed amount does not make something valuable by itself. People have to think that the asset is worth something and will be worth something in the future.
Think about return on investment (ROI), memes, and Game Theory if you want to know if a token will be in demand in the future. ROI is the easiest, so let’s start there.
ROI (return on investment) (return on investment)
In this case, ROI is not how much you think an asset’s price will go up. This is how much income or cash flow you can get from holding a token.
If you have Ether, for example, you can put it at risk in a Proof of Stake contract. In exchange, you will get about 5% of the amount locked as a reward.
Some tokens let you make money not from the tokens themselves but from the protocol they stand for. If you have SUSHI, you can bet them to get a share of what the Sushi protocol makes.
“Rebasing” is another way to calculate ROI. In the end, we block the token in the protocol and get a piece of the protocol. So, even if the market price of the token drops below what it cost to buy in the first place, an increase in the staking balance can make your digital assets worth more. For example, Olympus works with this plan. Since you can keep the share of the protocol you own, their high inflation rate is not always a bad sign.
ROI is a very important thing to think about. After all, a token is harder to believe if it doesn’t have a natural return on investment or cash flow. You need to make sure that other people think your business will be profitable and that there are enough of them to support growth.
Or, you have to believe what the memes say
People may also want a token just because they think other people want it or will want it in the future.
You can call it faith, belief, or memes, but no matter what you call it, the thing that makes people think that the value of something will go up in the future will always be an important factor.
And how should we judge it? Memes are the only thing in tokenomics that can’t be measured. You have to be a part of the community and feel it here.
What is the mood on their Discord like? How often do they check Twitter? People’s identities include this token or protocol? How long have people been involved in the community?
A strong force behind demand is often the belief that something will be worth more in the future. Bitcoin has no cash flow, no rewards for staking, and no other value. People just think that Bitcoin will become a long-term store of value like gold. Or beliefs about hyperbitcoinization that are even more grandiose. But, in the end, these are all just ideas.
So, along with pure analysis, don’t ignore your feelings and your faith. Believe me, a token can go far if it has faith, smart memes, and a cult following.
There is a third part to this that combines parts of memes and ROI. Let’s call it the Theory of Games.
The study of games is called “game theory.”
Game Theory asks you to think about what other parts of tokenomics make people want a token more. This is one of the most complicated parts of tokenomics, and it will be the main focus of the next version of this post.
But there is a popular idea about how token games work. Its main point is to block. The protocol gives you a reason to put your tokens in a contract.
Results
This should give you a good place to start if you want to evaluate a new project. If you read the documentation or white paper, you should have a good idea of how many tokens are available and what will drive the demand for them.
You don’t have to keep asking yourself, “Will the token go up against the dollar?” Better to ask, “Will it be worth more than Bitcoin, Ethereum, or Sol?” (or whatever you put in there).
Crypto assets are very similar and move in the same way. So, if you hold anything other than large base coins, you should do so because you think its tokenomics and utility will be worth more than the base currencies it is built on.
In the next part of this series on tokenomics, you’ll learn more about the different ways that protocols use Game Theory to increase demand.
