Earlier, the editor has introduced to you what token economics is, and token economics explores the token economic operation model. Token Economics describes the factors that affect token usage and value, including but not limited to token creation and distribution, supply and demand, incentives, and token burn schedules. So, what does token economics look for? What are its key factors? Below, let’s take a look.
What does token economics look at?
1. Token supply
The supply can be known from white papers or authoritative websites. These websites, such as CoinMarketCap and Coingecko, will indicate the supply, total supply and its circulation. The maximum supply refers to the upper limit of the supply, the total supply is the issued quantity minus the total number of damages, and the circulating supply is the total number currently in circulation in the market. Taking BTC as an example, the maximum supply is 21 million pieces, and the current circulation is about 19 million pieces, 91% of which has been mined. The mining quantity is halved every 4 years, and it is estimated that the mining of the last one will be completed in 2140. Therefore, from the perspective of supply, it can be seen that the design of limited release makes BTC rare.
2. The market value of tokens
The market value of a token is to test the industry size of this token. Market value = current price x how many tokens are in circulation. From the market value, we can see how much money has flowed into this token. The size of the market value can infer the level of investor confidence in this token, but it is worth noting the difference between the market value and the fully diluted (FDV), because the current market value may not contain some assets belonging to the team, investment institutions, or passed in the future. Tokens are gradually released by mining, so the fully diluted market value (FDV) is closely related to the future trend of the currency price.
●Market value = current price x how many tokens are in circulation
●Fully diluted market value (FDV) = current price x total supply
In the case of continuous growth in demand, the larger the market value of the token, the smaller the circulating supply, which means that the value of the token will be higher in the future, which is why BTC is the only choice for value storage.
3. Token distribution ratio
The distribution of tokens means that some projects will allocate part of the issued proportion to venture capital institutions, developers, promoters, etc. When these large holders dump the tokens they hold at one time, the price of the currency will fall, so It is very important to query the distribution ratio of tokens and the opening period of tokens. It can be seen when the digital currency may be in danger of being cut.
4. Distribution of Tokens
The distribution of tokens refers to the proportion of giant whales holding a large number of coins in the market. You can see the distribution of tokens from CoinMarketCap. Taking Dogecoin as an example, the top 10 holders accounted for 48.49%. The top 100 holders accounted for 69.08%, from which you can guess who is creating the meme of Dogecoin and who is calling, but this also takes into account that some holders are exchanges.
5. Inflation rate
Some tokens will achieve the goal of rectification by issuing additional tokens or burning tokens. For example, some DeFi projects with high annual rewards will issue additional tokens to meet the needs of users. The EIP1559 case of Ethereum is to burn service fees to reduce tokens. The supply of tokens, these countermeasures of additional issuance or burning will directly affect the inflation rate of tokens. Additional issuance will lead to positive inflation, and destruction will lead to negative inflation. However, if a large number of additional tokens are issued, whether the currency price will be diluted is very bad. It depends on how big the demand for the token is.
demand side
1. Efficacy of Tokens
On the demand side, first of all, you have to consider the function of the token and what kind of services it can provide. For example, Ethereum is used as a token for paying transaction fees on the Ethereum chain and purchasing NFT. Or Maker (MKR) is a governance token where holders can influence decisions related to the project. The more endowment, the more demand can increase.
2. Incentive measures
There are many kinds of incentives, such as fundraising, event rewards, pledge rewards, liquidity mining, airdrops, etc. The purpose is to increase the demand for tokens. For example, PoS proof of rights is an incentive measure, through pledge tokens to Assist the blockchain in transaction verification and get pledge rewards. Customers will buy tokens for pledge rewards, thereby creating demand.
3. The ability of tokens to capture value
It means that a project party can capture a lot of value when providing innovative products. For example, in 2020, Uniswap released the AMM market maker service, but did not announce the token. Sushiswap is a token holder that can vote for rectification and pledge to get rewards , Therefore, Uniswap did not capture value in AMM market maker commodities, and Sushiswap formed the ability to capture value due to the sale of Sushi coins.
Another example is the difference between Polkdot and Cosmos. Both Polkdot and Cosmos are cross-chain fusion blockchains. Cosmos technology can cross-chain without going through the Cosmos blockchain, while Polkdot needs to go through the Polkdot block. Chains can be cross-chained, and DOT coins must be used to pay the handling fee during the cross-chain process, so Polkdot has the ability to capture value.
4. Faith
It refers to the level of confidence of token holders in the project. Faith plays a key factor in increasing demand. For example, Dogecoin has no effect and is endlessly sold. It just depends on the villagers’ belief that Musk can lead Dogecoin to the moon, but Faith alone can squeeze into the top 20 tokens by market capitalization. Therefore, to see whether a token is valuable, in addition to looking at the white paper, it also depends on the network volume and community strength.
Key Factors in Token Economics
1. Token supply
Supply and demand are important factors in determining the price of any product or service. The same is true for digital currencies. There are several key metrics that take into account the token supply.
The first indicator is called the maximum supply. It means that there is a large number of tokens in the life cycle of this type of digital currency. For example, BTC, Litecoin and BNB are all issued with a fixed and large supply.
Some tokens do not have a large supply. The Ethereum supply of the Ethereum network is increasing every year. In addition, stablecoins like USDT, USDC, and BUSD do not have a large supply because these tokens are issued against a reserve of collateralized tokens. Theoretically, it will continue to grow indefinitely.
The second is the circulation supply, which refers to the number of tokens in circulation. Tokens can be minted and burned, or otherwise locked. This also affects the token price.
2. Token function
Token functionality refers to the use cases customized for the token. For example, paying transaction fees and enjoying discounts on service fees, as well as being a utility token for daily spending on the ecosystem. You can even get additional benefits through staking within the ecosystem.
Tokens also have many other use cases. Governance tokens empower holders to vote on changes to the token agreement. Stablecoins are designed to be used as money. Security tokens, on the other hand, can represent assets. For example, a company could sell tokenized shares during an Initial Coin Offering (ICO), granting holders ownership rights and dividends.
Various factors can help determine the potential use case of a token, which is especially important for grasping how token economics will develop.
3. Token Destruction
Many digital currency projects regularly burn tokens, which means permanently withdrawing tokens from circulation. When the supply of tokens decreases, it is called deflation. Conversely, when the supply of tokens continues to expand, it is considered inflation.
4. Incentive mechanism
The incentive mechanism of tokens is particularly important. How tokens encourage participants to ensure long-term continuity is the key to token economics. The way BTC designs its block subsidy and transaction fees are perfect examples. Many DeFi projects continue to achieve rapid growth through innovative incentive mechanisms.
At this point, I believe everyone has a certain understanding of what token economics depends on and its key factors. Generally speaking, there are many aspects to consider when looking at the price of a token, including the general environment, news, etc., but the value of a token depends on whether its token economy is perfect. Therefore, before entering the pit with a lot of banknotes, everyone must have a comprehensive understanding and not blindly follow the trend.
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