Overview of Token Economics: What Indicators Should Be Considered Before Investing?

Author: cyclop, Crypto KOL

Compiled by: Felix, PANews

Good tokenomics can help a token achieve a hundredfold increase within a year, while poor tokenomics may lead to a 90% drop. Understanding tokenomics is the most important skill in the crypto space. If you don't understand tokenomics, it will be difficult to achieve successful investments. Learning is crucial; don't trade blindly, or you may suffer losses. Crypto KOL cyclop provides an overview of tokenomics, and here is a complete guide on the subject.

When you first find a potential token, for example on CMC, you will see the following:

• Market Cap (MC)
• Total Supply
• Circulating Supply
• Fully Diluted Valuation (FDV)

These are the basic supply indicators:

• Circulating Supply: The tokens currently in circulation
• Total Supply: The total amount of tokens that can exist
• MC: The total value of the circulating supply (in USD)
• FDV: The total value of the total supply (in USD)

Understanding these indicators allows you to assess the potential of a token. But to do this, you need to understand not just the nominal concepts. You also need to know how they work and how they affect prices.

Let's start with supply. Tokens can follow two paths:

• Inflation
• Deflation

Inflationary Tokens: The supply of tokens can increase, known as release.

Releases are a negative factor because they usually lead to a decrease in value. However, if the release rate is slow and the amount is small, it may not have a significant impact on value.

Deflationary Tokens: A situation where the supply of tokens decreases over time. This occurs when projects buy back tokens and burn them. Theoretically, reducing supply should increase value, but this is only theoretical.

Now let's discuss the main factors that determine token issuance and lifespan: allocation and distribution.

There are two methods:

• Pre-mining (allocation among early investors, teams, advisors, etc.)
• Fair distribution (everyone has equal purchasing eligibility)

Most projects adopt the pre-mining method.

Why is this important?

Because if the TGE is 100%, and 50% of the tokens are allocated to investors, then investors can sell their tokens at any time, and retail investors may become the exit liquidity. This is why you need to understand:

• TGE allocation
• Vesting (token lock-up)
• Cliff

Token allocations typically have the following recipient types:

• Private sales (investors, KOLs, etc.)
• Public sales (retail investors)
• Marketing
• Ecosystem (staking, rewards, etc.)
• Airdrops

How do they sell tokens?

The day of token issuance is called TGE.

• TGE allocation is the percentage of tokens allocated to all the individuals mentioned above (10-20%)
• Cliff is the period after TGE and before the next Vesting
• Vesting refers to the gradual release of a certain percentage of tokens each month

Recently, some projects have adopted a method with a smaller TGE percentage (up to 20%), followed by several months of cliff and over 12 months of vesting.

This method is more suitable for the long-term success of the project, so it is important to verify all these details before investing.

Another key factor for any token's success today is demand. This is why project teams incentivize retail investors to buy specific tokens. For example, despite severe inflation, people still buy dollars because they need it to live.

In general, there are four factors that can drive demand for tokens:

• Store of value
• Community-driven
• Utility effect
• Value accumulation

Store of Value

Cryptocurrencies can serve as a means of storing value. Many people buy cryptocurrencies just to store money, like Bitcoin, which is often compared to gold.

Community-Driven

As this cycle has shown to the public, communities can strongly drive demand. The rise of memecoins is entirely due to community support. People buy what they believe can make them money.

Utility Effect

Demand is stimulated when holding a token provides some utility. For example, to stake tokens, you need tokens from a certain network, etc.

Value Accumulation

• Incentivizing Stakeholders

People also want tokens to provide some value. This is staking. You can lock up tokens to receive rewards periodically. This benefits all parties and has relatively low risk.

Value Accumulation

• Incentivizing Holders

Another option is to hold. Project teams often provide rewards/airdrops to holders, which benefits everyone. There are many ways to reduce selling pressure through holding:

VeToken

• You can obtain VeToken by holding tokens
• "Ve" stands for voting escrow, meaning that by locking your tokens, you gain voting rights
• The longer you hold, the greater the accumulated voting power

Mining

• Holding can also increase your mining efficiency
• The more you hold, the higher the yield ratio grows

Additionally, it's important to understand that no matter how high the demand is, it is crucial to know who is holding. Is it a strong community or flippers? Figuring this out is more challenging. You need to engage with the project's community and analyze it.

Moreover, even if the tokenomics are poor, there is still a possibility for the token to rise, and vice versa. Always consider this possibility. Below are the items to check before investing:

• Total supply and circulating supply
• Allocation and distribution
• Lock-up period/unlock date
• Percentage of release
• Demand

With such an analysis, you can basically determine whether this project is worth investing in.