Tokenomics: How to evaluate crypto projects using the token economy

Traditional financial products are analyzed and evaluated using a set of metrics related to the productivity of the underlying business.
Within cryptocurrencies, a number of other interesting factors can be explored. One of the most important pillars of fundamental analysis is the token economy, also called “tokenomics”.

Tokenomics describes the basic characteristics of a cryptocurrency to encourage holding or buying a cryptocurrency. Tokenomics helps to understand the market dynamics of a project ecosystem, to compare them better and to make informed decisions.

The token economy includes a number of metrics such as market capitalization, supply, inflation or deflation, how new tokens are distributed, utility, and many other factors. To put it simply: tokenomics describes the factors that are embedded in the supply and demand development project.

Tokenomics of cryptocurrencies and crypto projects

market value

The current market value of cryptocurrency is calculated by multiplying the current market price by the circulating supply.

Fully diluted market value differs from normal market value as it is calculated using the maximum possible supply multiplied by the current market price. (There is a difference between these two metrics, as most crypto projects do not have all tokens in circulation).

Allocation and distribution of tokens

The initial distribution of tokens during the initial listing or after the ICO plays a big role. Most coins and tokens are generated in one of the following ways: either they are released as part of a “fair launch” (e.g. via airdrops) or there is a so-called “pre-mining” where the tokens are already extracted in advance. extracted.

A fair launch means that a coin is mined, earned, held and regulated by the entire community. Before the token is released, there is no prior access or centrally controlled allocations. Bitcoin is the most prominent example of a “fair launch”.

With pre-mining, on the other hand, tokens are generated and distributed to a select group of addresses (eg developers, team, project supporters, VC investors) before the project is even officially launched. The danger here is that large amounts of tokens from these addresses will be sold on the market after a grace period (earning period) and the price may drop suddenly and drastically.

An image from: https://twitter.com/messaricrypto/status/1394298624906047491

Token delivery

The supply of a cryptocurrency is an important component of the token economy. There are three types of supplies in the crypto space:

  • circulating supply: The current amount of cryptocurrencies currently circulating in the market.
  • Total Offer: The total supply of a cryptocurrency after all coins and tokens have been released and distributed to the market.
  • maximum supply: The maximum amount that can ever be in circulation for a cryptocurrency. With Bitcoin, it would be the well-known 21 million.

Most cryptocurrencies do not have a maximum supply. Instead, new tokens are distributed, increasing the total amount of tokens on the market. If this amount in circulation is not contained by “burning” or other reduction mechanisms, this can lead to a high annual inflation rate. In comparison, Bitcoin has an annual inflation rate of 1.75%. Uniswap, Compound, Avalanche, Algorand and a few other popular cryptos are some with over 20% annual inflation.

token model

Bitcoin is inevitably limited to a maximum of 21 million Bitcoin. In addition to this deflationary token model, there is also the inflationary token model found mostly on proof-of-stake blockchains like Ethereum. An inflation token is continuously produced over time, for example to reward delegators, validators or miners of a network. With such a token, there is no upper limit to the maximum number of tokens that can ever be created. In some cases there are also hybrid models.

Conclusion

Evaluation and analysis of cryptotokenomics is about supply and demand. The dynamics behind it are controlled by the protocol code, but also often consciously controlled and defined in advance. In order to analyze and evaluate a cryptocurrency, it is worth taking a closer look at the initial token distribution at the start of a crypto project. If a large portion of tokens have already been distributed to early investors and other parties in advance, this does not bode well for the token economy in the long term. Besides tokenomics, there are many other exciting criteria that play an important role in the evaluation of cryptocurrencies.

About the author

Philipp Whileer is the founder of kryptovergleich.de, a comparison portal for cryptocurrencies, exchanges, wallets and more. Since 2017, he has worked intensively with cryptocurrencies, blockchain and fintechs.

Disclaimer

All information on our website has been investigated to the best of our knowledge and belief. The journalistic contributions are for general information purposes only. Any action taken by the reader based on the information on our website is entirely at his own risk.

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