A 🧵 about tokenomics (the economics and game theory behind tokens) 👇
It's easy to pick winners in a bull market.
Really difficult to find winning altcoins in a bear market.
Your best bet is often to stick to , and some solid large cap coins.
But if you want to pick altcoins, make sure to understand the tokenomics.
Good tokenomics can make a shit project do well (for a while) 💩
Bad tokenomics can kill the best of projects. ☠️
When evaluating tokenomics, here's what I like to look at 👇
2. Supply (Distribution, unlock schedule, etc)
3. Demand Drivers (growth drivers, holder incentives, adoption)
4. Other token dynamics (staking, burns, lockups, taxes)
Let's try to understand using some examples.
1. Utility of the token:
• What is the token used for (other than speculation)?
• Will the utility grow with time / adoption?
• Is it a compelling enough use case to buy / hold the token?
• How many tokens exist?
• How many in circulation?
• How are the tokens distributed?
• What is the unlock schedule of remaining supply?
• How much inflation / deflation annually?
Supply is a very important piece of the tokenomics puzzle.
A high allocation of tokens to internal team make the token vulnerable to a few actors.
An accelerated unlock schedule increases risk of whale dumps.
(Example: VCs may dump tokens as they unlock)
Some tokens like have both an inflation component (issuance) and a deflation component (burning) that determines total increase in supply of per day.
Example: currently, ~13,000 new are minted & ~3,000 are burned per day.
i.e - Net issuance is ~10,000 per day.
Deflationary tokens or tokens that have a burn mechanism that grows with usage (like , ) are a big plus.
As an example, total supply has gone from 996M to 763M in the last 6 months.
3. Demand Drivers
• What will cause an increase in token demand (other than speculation)?
• Do people have an incentive to buy / hold / stake / lock the token?
• Does the platform have a competitive edge to allow it to grow adoption fast?
Demand Driver Examples:
• A hyped project launch can be a (temporary) demand driver for launchpad tokens, which may reward users who held for longer.
• holders are battling for governance of an imp. piece of DeFi Infrastructure
• is locked to boost reward APR
While I prefer fundamentals-based demand drivers, demand drivers based on marketing / hype / narratives can't be ignored either.
• / / saw a boost in ecosystem projects, TVL and price from incentive funds luring devs to their ecosystems.
Governance can sometimes be a demand driver but usually not.
Does the community have any real incentive to vote?
In the case of , the incentive is that voters receive bribes.
But in most cases, governance incentives are not much of a demand driver.
4. Token Dynamics (lockups, staking, taxes, burning, etc)
• and are locked for voting power / bribes.
• FaaS coins charge a tax on buys and / or sells that funds the treasury
• is burned to mint
is an interesting case study in tokenomics. Let's take a look:
• Staked earns every hour.
• is used to boost reward APR.
• Unstaking ANY amount of means forfeiting accumulated
This means there is a strong incentive for holders to keep all staked.
So if the boosting incentive of is high, then it would be a good incentive to reduce sell pressure for .
is an economic experiment happening in real time.
Ultimately, a big factor in the success (or failure) of a project comes down to the tokenomics, and the game theory.
But it's important to remember that it takes more than tokenomics to make a project successful and for price to go up.
Example: had pretty good tokenomics, but when the devs quit abruptly with a poorly communicated departure, it destroyed trust (and then price).
Bear markets have different game theory.
Market participants are more irrational and need stronger, clearer incentives not to panic sell when there's blood in the streets.
If the model relies on participants understanding the game theory, it doesn't work nearly as well.
The behavior of market participants can't be accurately predicted.
But learning about tokenomics can help you stay away from bad projects.
And occasionally, catch the good ones early.