🔰Today in continuation of previous parts , In this post, I'm gonna share five Metrics of tokenomics aspects that are essential in understanding how much a crypto project can be valuable for an investing purpose ..
So lets get started;
♻️#1 — Supply and MarketCap
Think about dollar fiat currency. You may wonder how many dollars — in total — are in circulation now? How many more can be printed in the future? Are there any dollars printed but not in circulation? The same concerns exist in cryptocurrencies. and about
🔸Circulating Supply: the amount of coins (tokens) circulating in the market and owned by people.
🔸Max Supply: the maximum possible number of coins (tokens) that can ever exist.
🔸Total Supply: the total amount of coins (tokens) issued until now and not necessarily in circulation. This includes the burned coins or the locked-up coins ready to be unlocked in the future.
The following image shows the supply numbers for three famous crypto projects — Bitcoin, Ethereum, and Cardano.
🔹Market Cap: Market capitalization refers to the market value of a company's equity or a cryptocurency in this case. It is a simple but important measure that is calculated by multiplying a crypto circulating supply by its price per unit. For example, DOGECOIN priced at $0.1386 per unit and with 132.67B DOGE(sirculating supply) outstanding would have a market capitalization of $18,386,887,172 .
🔹Fully Diluted Market Cap: means crypto at today's token price if the total supply of cryptocurrency were in circulation. To determine the fully diluted market cap, multiply the token's current value by the total supply of cryptocurrency
Now you may ask why checking and analyzing these numbers are important?
These numbers are perfect indicators for analyzing supply and demand. Here are some examples:
I mentioned this idea before as a fundamental factor of economy and now you can scale for tokenomics because it also has a very close correlation with “Supply” metrics. Thus, to better understand supply and demand, please check it out !
♻️#2 — Burning
Have you ever destroyed your fiat money? Remember the money went to the washing machine, and it never came out of it? You got drunk and burned some dollars on a VIP table in a disco. You emptied your pocket into the recycle bin, and the poor money ended up in the trash. It happens to all of us. And for the record, this is something our beloved governments are also doing — time to time.
You can expect the same type of destiny for cryptocurrencies. Here, we are talking about token (coin) burning.
The crypto world does not have any washing machines, VIP tables of discos, trash bins, or governments. Yet, the burning process happens in this industry for a whole set of different purposes.
🔹to decrease coins in the circulation
🔹to adjust supply and demand
🔹to make the asset less inflationary
The general idea behind the burning process is to make the coin more demanding and less inflationary.
There is no unique approach that all projects follow to burn their tokens. Some burn on scheduled intervals. Some other burn part of the transaction fees. Surprisingly enough, some projects burn tokens randomly and without notice. It is also worth mentioning that some experts also count lost coins (forgotten passwords, coins sent to wrong addresses, dead owners, etc.) as burnt.
♻️#3 — Monetary Policy
Traditionally speaking, the concept of a monetary policy doesn’t come from crypto. Instead, it refers to a central bank’s macroeconomic measures to regulate a nation’s money supply and ensure sustainable economic growth.
But what does monetary policy have to do with tokenomics? As part of a project’s tokenomics, monetary policy deals with inflation and deflation of its token supply.
A healthy monetary policy implies that a project has a token issuance mechanism that incentivizes network participants to continue to behave in the best possible way. Additionally, it attracts new users to join the network and helps the token gain a higher valuation.
These are some of the questions you can ask about a project monetary policy to draw conclusions about its future inflation or deflation:
🔻• How fast are the tokens released in circulation?
🔻• Does the release rate change over time?
🔻• Are there deflationary pressures, such as token-burning?
🔻• Are there significant changes in technology that can affect the project’s token supply? For example, Ethereum plans to move from proof-of-work (PoW) to proof-of-stake (PoS).
In the same way that central banks strive to keep inflation at an optimal level, crypto projects focus on a token supply that best suits their strategy. There is no ‘one size fits all’ monetary policy, as the goals of crypto projects differ significantly.
For example, some projects may opt for a deflationary token model as it can help grow the value of each token (the less tokens there are, the more valuable each token becomes). In other cases, an inflationary model may be more suitable as it can incentivize holders to stake their tokens, which will also keep the network secure and decentralized.
Some projects offer incredibly high APYs of hundreds or even thousands of percent to incentivize people to remain within their ecosystems and bring forward unique use cases.
The primary source of info for checking monetary policy is the Consensus mechanisms of the projects. This is something related to the source code and the infrastructure of the project under review.
In simple words, a consensus mechanism refers to any number of methodologies used to achieve agreement, trust, and security across a decentralized computer network⁶. Here are some examples:
⚪-Proof of Work (PoW): A consensus mechanism in which each block is ‘mined’ by a group of individuals or nodes on the network⁷.
⚪-Proof of Stake (PoS): A consensus mechanism in which an individual or “validator” validates transactions or blocks⁷.
⚪-Proof of Authority (PoA/ ⚪- Proof of Burn (PoB)/⚪ -Proof of Capacity (PoC) /⚪ -Proof-of-Developer (PoD) /⚪- Proof-of-Donation /⚪- Proof of Elapsed Time /⚪-Proof-of-Liquidity /⚪-Proof-of-Replication /⚪-Proof-of-Spacetime
Yes, I know! It is a lot to grasp. And every single project uses its version of the consensus mechanism. Yet, reviewing this data can give you valuable info about how coins are extracted, the inflation and deflation rates of the coins, and the rates the new coins will be introduced into the market.
♻️#4 — Token Distribution
This is where things are getting more interesting. We all know or have heard about the stories of riches getting richer. We understand how the 80–20 rule works in traditional finance. 20% of the whole population owns 80% of the wealth or so. We all know how unfair can wealth distribution be — especially in less developed countries.
We do not want to see those things in the crypto world. We want to invest in assets that we believe have a fair distribution of their tokens. We hate whales, or big players own the majority of the tokens. We scream and demand equality. Right?
“Token Distribution” is absolutely an essential factor you need to check when investigating about tokenomics of a project. More specifically, you have to find out:
How initially were tokens distributed (pre-mining, ICOs, etc.)?
What percentage of the tokens are owned by owners, funders, developers, or partners of the projects?
What is the maximum percentage public investors like you and me can own?
Are there any locked-up tokens reserved for future distribution? If yes, what are the plans for making that happen?
Are there some big wallets holding the majority of the tokens? And at what percentages?
Is it possible that at some point, a big wallet sells its tokens and manipulates the market?
These are just some of the questions you have to ask when you evaluate the token distribution. Answers to these questions (and similar ones) give you insightful ideas about either you have to invest in a specific project or not?
♻️#5 — Earnings💲
In blockchain-based models, sharing benefits or profits with stakeholders of the projects is a possibility. This means earning some passive income — on top of your main holdings — while you are contributing as a user in the network.
There are several reasons to distribute these rewards between users:
to incentivize the miners (in PoW consensus models)
to secure the network (in PoS or similar consensus models)
to confront inflation
For example, these are three famous ways for earning rewards:
☑️Mining: is the process of gaining cryptocurrencies by solving complex mathematical problems using the processing powers of miners' computers.
☑️Staking: is the process of gaining cryptocurrencies by setting aside a certain amount of your tokens. By staking, you become a validator of the transactions in the network and as an incentive, you get some rewards back.
☑️Running Masternodes: is the process of running a cryptocurrency full node or computer wallet in charge of maintaining a real-time record of the blockchain activities. Masternodes are complicated to run and on top of that, they have an important role in the blockchains. Therefore, as an incentive, they receive rewards or interests.
Sources:medium
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate
