What is tokenomics and how to analyze it?

The tokenomics for a particular crypto token is usually thoroughly discussed in the project White Paper. You can also find it in a separate section on the company's website.

The term “tokenomics” is formed by pairing up two words: “token” and “economy”. It means analyzing the economics of a crypto token – total supply, distribution, market value etc.

The ability to read  tokenomics data allows us to determine how risky and inflationary a token is, whether it will increase in value, and if it has long-term prospects. For crypto projects, well-designed tokenomics is critical to success. 

Tokenomics' key elements

The distribution of tokens:

This section describes how tokens are created and distributed. Usually there are two basic ways most crypto tokens are generated – they’re either pre-mined or released through a launch within the community. There’s no private distributions in decentralized projects.  If the developers choose a pre-mining method for their tokens, some of the coins will be mined and distributed before the public launch, and the rest will be sold during initial coin offering (ICO). Most often, legitimate projects distribute their tokens among potential investors in this way.

The maximum supply of a token:

Token’s max supply is the maximum number of tokens that will be ever created. There is no determined max supply for some tokens.

Some have an unlimited supply of tokens, making them inflationary while others have a fixed number of tokens in circulation, making them deflationary.

Token’s max supply helps to determine if a token's value can rise in the future.  If there’s too many tokens being released at once or too frequently, the value of the token may decrease.

The circulating supply of a token:

This type of supply includes tokens that are circulating in the market between buyers and sellers. Circulating can be increased by active mining of new tokens. The growth of circulating supply leads to the price increase.

The circulating supply of tokens can be used to calculate the market capitalization of an asset. This is done by multiplying the price of a single coin by the total number of tokens in circulation.

Market Cap = Price X Circulating Supply.

The total supply of a token:

The total token supply refers to the number of tokens that are in existence presently, excluding any that have been burned. Total supply = amount of tokens in circulation + amount of tokens locked in staking or liquidity pools.

The market capitalization of a token:

It is a metric that can be used to determine the popularity of a token. Furthermore, capitalization is an excellent indicator of project value. Small-cap cryptocurrencies are considered a highly risky investment, while large-cap tokens provide more guarantees in terms of safety and profitability.

Token allocation:

This element specifies how tokens are allocated in percentage terms among investors, the project team, ICO, funds, liquidity, marketing costs, and airdrops.

The allocation also specifies how long the project will last. If the team has allocated a large amount of funds for marketing campaigns, the project is most likely useless. Thus they must generate buzz through advertising.

Token utility:

Token utility refers to the use cases designed for a token. This is a necessary element of a good project's tokenomics. For example, a token can be used to cover transaction fees or to allow holders to participate in votings that affect the development of the project.

How to analyze tokenomics?

A project's tokenomics can be analyzed in a few steps:

1. Collect all of the information regarding the token from the project's tokenomics, White Paper, and datasheets. CoinMarketCap or CoinGecko will help you to quickly find information about market cap, price, token contract address, circulating and max supplies. Examine the token distribution and utility. Try to answer the following question for yourself: does the asset have real value? If the answers are favorable, you can move on to the next step.

2. Compare tokenomics with other similar projects that have the same utility.  For example, you can compare two governance tokens from different DeFi protocols.

Tokenomics should not be used in place of fundamental analysis, therefore don't rely solely on it. When making investment decisions, take into consideration factors such as the relevance of the product,  the availability of reports and a roadmap,  the CEO's background, and the number of competitors.