In a Twitter (now X) post, a user named Stacy Muur described some of the most vital things to consider when reading crypto tokenomics. Below, we will explain these five vital things and other deciding factors in tokenomics.
What Are Crypto Tokenomics?
- In simple terms, crypto tokenomics is simply the catch-all term for a wide range of factors influencing a cryptocurrency’s value. So, it is a combination of “token” and “economics,” to form the word “tokenomics.”
- Tokenomics isn’t only about reading the white paper of a crypto project. Although it is part of it, there are other critical factors to evaluate outside of the whitepaper. So, some of them are below.
Check for Token Utility in the Tokenomics
- One of the most important things to check out in crypto tokenomics is the utility of the crypto project. After all, it is no good to invest in a crypto project that offers no use case. So, good knowledge of this aspect helps project future supply and demand dynamics.
- The first thing to look out for in token utilities is the demand boosters. So, some examples of these demand boosters are Fee discounts and governance rights. The second thing to consider is supply increases such as incentives and rewards. So, another aspect to look out for in utilities is staking. This is because staking can drive both supply and demand.
- There are also red flags when checking out a token utility, and there are:
- Unrealistic and fictional use cases.
- No precise demand-boosting mechanics.
- Extreme inflation due to staking/farming.
Check Out for the Token Distribution
- When checking out the tokenomics of a crypto project, the token distribution is one of the most important things to look out for. So, this is because the distribution of a token can determine if a rugpull can easily happen to a crypto project. Here are some of the things to look out for in a token distribution:
- The lock-up period for private sales should not exceed the team’s vesting period. So, this is to prevent the project developers or team from selling off their holdings before normal investors.
- The airdropped tokens should be a more minor part of the circulating supply. So, some crypto projects make their entrance through airdrops. Even at that, it should be a smaller part of the circulating supply.
- Another thing to consider is that project team members should have a very small share of token distribution. So, this is to prevent bad scenarios like rug pulling from the project’s team members.
- There are also red flags to look out for in the token distribution of a crypto project, and they are:
- Project team members should never have a large share of the token distribution. So, this is to prevent rug pulling.
- Another red flag is the lack of vesting for large token pools.
Example of Token Distribution in Crypto Tokenomics
- An excellent example of a token distribution is the Uniswap token. So, they managed to keep to most of the rules regarding token distribution.
- In the case of UNI, 60% went to the community (people who swapped tokens before airdrop). So, another 21.51% went to the team. The team of a crypto project can consist of many people. So, these are paying employees, marketing, funding servers, etc.
- 17.8% of the token distribution went to investors. So, these are the VCs and angel investors behind the funding of Uniswap prior to launch. Lastly, 0.69% went to advisors. So, these are blockchain experts supporting the Uniswap team.
Check Out the Inflation Rate
- The inflation rate is another thing to consider when checking crypto tokenomics. So, inflation is an intricate part of many cryptocurrencies, including Bitcoin.
- While reviewing the tokenomics of any crypto project, ensure that the inflation rate aligns with project growth. So, even if the crypto project has a 400% inflation, the growth percentage should be greater. Something like 700% growth will be great to counter the inflation rate.
Check Out the Token Burns in the Crypto Tokenomics
- Especially in the new era of launching crypto tokens, it’s always important to check out the schedule of the token burns. So, token burn is the process of removing tokens permanently from the crypto ecosystem.
- One of the best things about token burns is that they help create a balanced token supply and ensure its increased value. Token burns work by the project team sending some amounts of cryptocurrencies to invalid wallet addresses. So, removing these tokens from circulation helps make the token scarce and increases the price.
The Consensus Mechanism of the Cryptocurrency
- One of the things many crypto enthusiasts overlook when checking out a crypto project is the consensus mechanism. Forget the big grammar; this simply means whenever the cryptocurrency operates on a proof-of-work or proof-of-stake blockchain. So, a proof-of-work blockchain means you can mine the crypto tokens. On the other hand, a proof-of-stake blockchain means you can stake the crypto tokens.
Tokenomics is the short form of “token economics.” So, this is simply referring to the value and important functions of a specific cryptocurrency. This is one of the things that can show an investor if a crypto project has any chance of succeeding in the near future. So, the article above shows some of the crucial things to check out in tokenomics. Some of them are the token supply, distribution and allocation, token burns, the token utility, and the inflation rate.
The information provided in this article is for informational purposes only and should not be considered financial advice. The article does not offer sufficient information to make investment decisions, nor does it constitute an offer, recommendation, or solicitation to buy or sell any financial instrument. The content is opinion of the author and does not reflect any view or suggestion or any kind of advise from CryptoNewsBytes.com. The author declares he does not hold any of the above mentioned tokens or received any incentive from the company.