Want to learn about token economics? Just read this article

Old iron, if you don’t understand token economics, don’t call yourself an old gun of the currency circle.

But what is token economics and what should you pay attention to?

The following will cover everything you need to know about token economics.

(A free Token Economics Checklist is attached)

What I’m going to talk about today includes:

  • What is Token Economics?
  • Evaluate the protocol through supply, demand and incentives
  • Examples of token economics
  • Free Token Economics Checklist

Next, let’s fight monsters and upgrade together!

What is Token Economics?

Token economics studies the factors that drive the demand for tokens.

Token economics include:

  • math
  • Supply and demand
  • Incentives
  • value accumulation
  • Human Behavior and Game Theory

Token Economics = Token + Economics

Want to learn about token economics? Just read this article

Some of my worst investments in the early days were because I didn’t understand what token economics was about at the time.

  • Tokens are inflationary and do not have enough utility.
  • The concentration of investment in tokens by venture capital firms and whales has led to retail investors taking over.

Therefore, studying token economics will help improve your cryptocurrency investments.

The easiest thing to start learning about token economics is to understand supply and demand.

Example about the boring ape:

There are now 10,000 boring ape NFTs, and their floor price is 111 ETH. What would happen if the supply of bored apes doubled and there were now 20,000 bored apes? Their prices will plummet as more boring apes become available.

So scarcity is a good thing.

Example on the dollar:

The U.S. government increased the U.S. money supply by 40% in 2020, and money flooded the market. At the same time, the supply of housing has remained roughly the same (a large amount of housing cannot be built during the Covid-19 pandemic). That’s why housing prices are out of control in America.

Want to learn about token economics? Just read this article

On the supply side of token economics

Here’s what you should be aware of:

  • What is the current circulation of tokens in the market?
  • What is the total amount of tokens?
  • Who owns the supply of tokens? When can they sell their tokens?
  • How will supply change over time?
  • What policy do they have to change the supply of tokens?

How did the novice go down the road of losing money and no return?

They see a meme coin at $0.000000002 and think that once it hits a dollar, they will achieve a small goal. But when you look at the market cap of the token it is impossible to achieve. The price of the meme coin at $1 means it is larger than all the money supply in the world.

Want to learn about token economics? Just read this article

Irons should be aware of unit bias when investing.
Let’s say someone has $10,000 in their hands.
They would rather buy 10,000 $1 tokens than 0.2 bitcoin.
They don’t consider market capital at all.
This is one reason why the prices of meme coins like Dogecoin and Shiba skyrocketed last year.

Supply Metrics You Should Know

  • Supply: how many tokens exist now
  • Max Supply: The maximum number of tokens that can exist
  • Market Cap: Current Price * Circulating Supply
  • Fully diluted market cap: price * max supply.

Want to learn about token economics? Just read this article

Why are the above metrics important?

These metrics help you understand the future supply and scarcity of the coin.

For example, if the circulating supply is only 40%, I don’t think it’s a good thing, because it means that the supply of tokens will increase by 60% in the future, and the release or generation of more tokens will contribute to the token price bring some selling pressure.

sound money – bitcoin

There will only be 21 million bitcoins in the world, and no one can create more bitcoins:

  • Bitcoin supply is capped
  • Bitcoin demand is increasing
  • Therefore its price should increase

This is why people often compare Bitcoin to gold.

Bitcoin’s halving

In addition to the supply of tokens, make sure you consider the rate of issuance of tokens.

At what rate are new tokens printed?

While miners create new bitcoins, the rate at which new bitcoins are mined has slowed.

At each Bitcoin halving event, Bitcoin’s block reward is cut in half.

Want to learn about token economics? Just read this article

Inflationary Token – Dogecoin

The supply of Dogecoin increases every year, and there is no cap on the supply. This is not good for token economics because it is on the opposite side of scarcity. (Note: The price of Dogecoin rose in the last year despite bad token economics models)

Deflationary Tokens

Some coins become deflationary when the supply decreases over time.

The token’s protocol can buy back tokens and burn them.

A destroyed coin = the coin is gone forever.

In theory, when the supply of a token falls, its corresponding token price should rise.

Burberry burns its handbag

Burberry creates luxury handbags, and exclusivity is part of its appeal. Some of its handbags don’t sell – rather than sell them at a discount, burn their handbags, which keeps the handbags of “one-of-a-kind” value.

This is a real example of the “destroy” mechanism.

Want to learn about token economics? Just read this article

British luxury brand Burberry made $3.6 billion in revenue last year — while it destroyed the equivalent of $368 million in merchandise.
In July 2018, Burberry acknowledged in its annual report that destroying its products was a strategy to preserve the scarcity value of its brand.

Can Ethereum be an ultra-sound currency?

  • Merge to Proof of Stake reduces ETH’s inflated supply
  • EIP-1559 takes a little transaction fee and destroys the corresponding value of ETH.

These mechanisms combined (and higher demand) mean that Ethereum could become deflationary.

Want to learn about token economics? Just read this article

allotment and distribution

How were the tokens initially distributed? There are roughly 2 ways:

Pre-mine:

1. Teams allocate tokens to themselves.

2. Distribute to insiders like teams and venture capitalists

Fair launch:

100% fair, everyone has an equal opportunity.

Want to learn about token economics? Just read this article

Why is this so important?

Venture capitalists and insiders can dump their tokens, causing the token price to crash.

Vesting tokens means when they are allowed to sell tokens.

You want to make sure that early backers are incentivized by the protocol for the long term.

Want to learn about token economics? Just read this article

Venture capitalists are not evil

By the way, I don’t mean to give insiders a bad label. They can help the founding team create value by advising, assigning, and connecting.

Not all VCs are created equal, some want to create value for their investments, others want quick paychecks.

Additionally, teams can also sell their tokens:

1. Those huge incentive funds? It comes from selling tokens.

2. They sell the tokens in their hands to raise funds. People forget that some team salaries and expenses are paid in fiat.

The team sells tokens causing downward pressure on the price.

The other half of the equation: demand

Demand: What drives people’s desire to buy, and the price they are willing to pay.

Despite inflation, the dollar is in high demand because of its utility.

The world runs on dollars (for now).

What is driving the demand for tokens?

I divide requirements into 3 broad categories.

  • practicality
  • value accumulation
  • meme and narrative

practicality

Practicality – gas cost

This is the cost of using the network.

  • Want to buy an NFT on Opensea? Then you need ETH to pay the gas fee.
  • Want to enter Fantom to mine? You need FTM.

The more popular the network/DAPP (decentralized application) is, the greater the demand for the token.

Practicality – fun

GameFi has huge potential once games are really fun, just look at how much money Grand Theft Auto and Fortnite make. I’m excited about 3A games like @illuvium, that’s how we get more veterans on board.

By the way, are there any cryptocurrency online tactical arena games coming out now?

Want to learn about token economics? Just read this article

Practicality – Adoption

Cryptocurrencies are slowly increasing their real-world usage, driving demand.

  • The price of bitcoin skyrocketed when Tesla added bitcoin to its balance sheet as a hedge against inflation.
  • Dogecoin’s price surged when asset management firm AMC announced it was accepting Dogecoin.
  • Terra is driving the adoption of $UST

value accumulation

This agreement is awesome, this agreement is printing money, but investors are not getting a piece of it. We see this happening with most of the DeFi 1.0 giants like Uniswap and Compound.

People want value, not just governance tokens.

Value Accumulation – xStaking

Last year we saw the rise of xToken.

Staking tokens will earn you a percentage of platform revenue fees:

  • xSushi @SushiSwap
  • fBeets @beethoven_x
  • sSpell @MIM_Spell

This adds more value to the coin.

Value Accumulation – Governance

We see many protocols in the DeFi 1.0 era issuing tokens that have no utility other than governance. People will get a certain annualized income through mining, and then sell the tokens.

This is why SushiSwap was able to take so many users away from Uniswap when it first launched.

stop mercenaries

In the world of DeFi, people can become mercenaries.

The annualized yield from mining will decrease over time, and you may switch to a mine with more yield.

The protocol still needs liquidity. So how do they incentivize people to hold their tokens instead of chasing high yields?

Incentivize long-term holders

Last year we saw a lot of new innovation in how protocols incentivize long-term holding.

With these new features, the pressure to sell tokens can be reduced.

Let’s take a look at some of them.

The main mechanism of the token now is locking

How did you stop the selling pressure of the coin?

You ask people to lock up their tokens (sometimes for years).

The key is to figure out what motivates people to do so.

(1) Locking is risky

(2) Opportunity cost of liquidity

Hold – veTokens (Curve)

Curve had a big innovation when it launched veTokens.

Ve = Voting Rights Escrow.

  • Lock your tokens = gain voting rights.
  • The longer you lock in, the more voting power you have. (up to 4 years)

So why should people care about voting rights?

Well, stablecoins are the backbone of DeFi. And the protocols are fighting a war for more liquidity and adoption for their stablecoins.

Every week, Curve votes on which pool gets the most rewards.

And some of these protocols will bribe you to vote for them!

Hold – Farm Boosting

We see AMMs (Automated Market Makers) adopting this model of Farm Boosting @traderjoe_xyz, @beethoven_x, @spirit_swap

Locked tokens have the right to vote for the pool.

Protocols are now at war and now they need to gain governance to benefit themselves.

Want to learn about token economics? Just read this article

Hold – unlock and you lose it

Platypus Finance introduces one of Ve’s most interesting mechanics:

Staking $TPP can get $vePTP, which makes your stablecoin more profitable. And once you unstake $vePTP, you lose all vePTP in your hand. In this way, people will not easily sell the tokens in their hands.

Holding – Rebasing

@olympusdao introduced the concept of rebasing, which other protocols desecrated.

Rebasing is a form of gamification. It looks like you’re getting 50,000% APR. And in reality, it’s paid in tokens, and your percentage of the market cap remains the same.

Hold – Rewards/Sweepstakes

@DeFiKingdoms allows users to stake, which is revenue sharing.

They also have:

  • Staking xJewel/xCrystal puts you in a sweepstakes for airdrops. This includes valuable Gen 0 heroes (which are worth a fortune).
  • The more tokens you stake, the more raffle tickets you get.

Hold – Unlock/Lock Rate

@Defikingdoms is a game in this mode.

How do they prevent people from selling the game’s tokens?

They automatically lock up a portion of the tokens.

Crystalvale just launched. You can get 4000% of the annualized income, but if you want to collect the vegetables and get the income now, then 95% of the income will be locked for one year.

Will everything go to zero after that year?

I do not think so,

  • Once unlocked, it is not unlocked once.
  • They are using this time to add utility to games like PVE and PVP.
  • They hope that a year from now, the game will be even better.

Want to learn about token economics? Just read this article

Meme and Narrative

Human desires are strange. I watched a YouTube video of someone buying a golden steak from Salt Bae for $2k.

Despite the terrible token economics, a coin can skyrocket. Sometimes memes, narrative and marketing can be very powerful.

The Curious Case of Dogecoin

Last year, Dogecoin experienced a wild rise. Elon, the richest man in the world, has a strange obsession with Dogecoin.

With his appearance on Saturday Night Live, Dogecoin’s price peaked, and people were buying Dogecoin in the hope that Elon would continue to drive the price of Dogecoin higher.

People buy what they think will make money

Sometimes, being a normal person can pay off. There are protocols that have great token economics, but whose prices keep going to zero. It’s probably because of the narrative — people are chasing the next theme that’s about to explode.

The opposite of token economics – PancakeSwap

The price of PancakeSwap peaked a year ago and has been trending downward.

1. This is an inflationary token. (supply)

2. The token has no utility. (need)

Pancake issues cake, and users immediately sell it.

Want to learn about token economics? Just read this article

The Big Adjustment in Token Economics

I’m fascinated by forks when the protocol overhauls its token economics.

Trader Joe launched with a basic token economics structure. They made a major overhaul to their model in Q1. Before, by staking Joe, you get a% of the protocol revenue.

Below is the adjusted new content.

Now pledge Joe:

  • rJOE – a chance to enter the launch pad
  • sJOE – % of platform revenue earned, paid in stablecoins
  • veJOE – Yield Enhancement + Governance. (Unstake and you lose it like PTP)

They are increasing demand through different incentives.

Could this turn TJ’s fortunes around?

Want to learn about token economics? Just read this article

other ideas

  • I wrote a topic on “economics”. This is a huge topic and there are a lot of things I haven’t been able to cover.
  • I’m sick of DeFi token economics – it’s somewhat rigid in its current form.
  • GameFi token economics has a different imagination.

Token Economics Checklist

I created a checklist of token economics for you (I know you need it).

You should have a checklist to evaluate every aspect of the agreement. This helps keep you making objective decisions.

Want to learn about token economics? Just read this article

TheDeFiEdge Token Economics Checklist

supply

  • What is the current supply and maximum supply of the token?
  • What is the token’s market cap and fully diluted market cap?
  • What is the initial distribution of tokens? Is it fair run or pre-mined?
  • How much token share do teams, insiders, whales, and retail investors have?
  • What is the inflation and issuance of tokens?

need

  • What is the usage scenario of the token?
  • What is the actual value of the token?
  • How is the situation in the community?

long-term incentive

  • How does the protocol reward long-term holders?
  • How did the protocol reduce token selling pressure?

Summarize

  • Master the fundamentals of token economics as it will get more complicated.
  • Look at token economics through the lens of supply, demand, and long-term incentives.
  • While token economics is important, it’s not the whole story. Sometimes, narrative and hype can outweigh token economics.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/want-to-learn-about-token-economics-just-read-this-article/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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