While no two sets of tokenomics are created equally, there are various elements included in any crypto project’s tokenomics that are nearly universal. How a project designs each of these elements will go a long way in deciding what level of investment they can achieve as well as providing a long-term indication of the viability of the project.
The elements of a project’s tokenomics that potential investors must analyze and be aware of include:
The token distribution refers to the areas in which percentages of the token supply are allocated to. For example, a project may allocate a percentage of the token’s supply to seed-round, private-round, and public-round (IDO) investors. They may also allocate a share of the token’s supply to things such as marketing, ecosystem development, staking rewards, exchange liquidity as well as tokens allocated to the team and the project’s advisors.
The token supply is the amount of tokens available for the project. There are three figures for token supply that investors must be aware of: circulating supply, total supply, and maximum supply.
The market capitalization (market cap) of a token is the market price of a token multiplied by the token supply. Market cap can be represented by two figures: circulating market cap and fully diluted market cap. Circulating market cap is determined by multiplying the circulating supply by the token price. If the token has yet to launch on the market, circulating market cap may be referred to as initial market cap which is token public listing price multiplied by circulating supply at launch. Fully diluted market cap, also know as the token’s valuation, is determined by multiplying the token’s total supply by its market price.
The inflation rate of a token or coin is the pace at which the token’s circulating supply will grow over time. Potential investors should be wary of a token with a high inflation rate as its price is likely to drop the more tokens are unlocked. Projects may introduce deflationary (token supply reduction) mechanisms such as token burns in order to combat a high token inflation rate.
Vesting refers to the periodic unlock of tokens for the various token allocations. Tokens purchased in presale token offerings such as seed, private, and public rounds may be subject to vesting. Vesting may occur linearly (constant unlock) or periodically (e.g. monthly unlock) over a period of months or even years depending on the tokenomics distribution schedule. The purpose of vesting is to prevent a sudden rush of tokens onto the market at one time which could cause the token’s price to plummet.
The amount of liquidity added to exchanges provides a strong indication whether a project will be able to support its initial valuation and token price. If a project provides too little liquidity, the token price is bound to drop significantly. Sufficient liquidity will give investors confidence that they can trade the token under ideal conditions and would be more likely to invest.
Tokenomics tables will indicate the amount of funding raised by the team through seed, private, and public rounds. Potential investors should consider this information carefully as the amount of funding received could be a good indicator of the project’s ability to develop its platform over the long run or sustain itself during a prolonged bear market.
These are a few of the things potential investors must be aware of when making token investment decisions.
Now, let us go more in depth on each of the tokenomics elements to make your investment decisions more informed.