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Tokenomics, Which Criteria to Study?

Tokenomics, Which Criteria to Study?

Hello everyone and welcome to a new Bitget Academy article. Today, in this article, we will focus on the economy of tokens, especially but not limited to DeFi protocols. We will study the different rules concerning the emission of tokens and so many other interesting things, let's go!

Tokenomics Definition

In this article, we will often use the term "tokenomics" so what is tokenomics? Tokenomics is the term used to talk about the economy of a token. Tokenomics is most often defined before the launch of the token in the whitepaper. The tokenomics can be interchangeable or modifiable according to the various protocols. 


Some criteria to define the economy of a token: 

  • the initial distribution of tokens

  • creation or destruction of tokens 

  • utility of the token



Tokenomics is "just" the token economy. The relevance of the protocol is not related to tokenomics (and vice versa). Good tokenomics does not necessarily mean that the price of the token will increase over time. Many of the criteria in this article need to be qualified because the answer is often not simply: yes or no. To illustrate our points with examples, we will sometimes isolate only a part of the token economy of some cryptocurrencies. All products and projects listed in this article are not endorsements and are provided for informational purposes only.

The initial distribution of the token

This criteria gives us a lot of information and can impact the price of the token in the long run. 


There are different types of initial distribution: 

  • fair distribution (fair launch)

  • distribution in the form of a public sale

  • a specific distribution to team members 

  • distribution of tokens over time (vesting)


The initial distribution impacts: 

  • the distribution among users 

  • the buying or selling pressure via the holding of tokens by team members in particular

  • all the token releases 


Tokenomics, Which Criteria to Study? image 0

Source: Alpaca Finance


You can see that 87% of the tokens, or 163.6 million tokens out of 188 million total tokens, will be distributed to the community. So for a protocol like Alpaca, we think this is a real asset since these tokens will be distributed to the users of the protocol to encourage them to use Alpaca. 


Tokenomics, Which Criteria to Study? image 1

Source: Chaindebrief


As for the distribution of tokens by private sale or public sale, we think that an example that can be representative will be the Hubble Protocol. So where Alpaca distributed 87% of the tokens to the community, in the Hubble example, an IDO took place so tokens were sold to the community but only 30% of the total supply was sold via a Token Sale. The rest were sold in seed, private and strategic. So it's professional private investors who have had access to his token sales but it's not the community it's not retail.


The release levels can have a major impact on the price. Here is the example of Axie Infinity, we are no longer on a DeFi protocol but a play-and-earn protocol:


Tokenomics, Which Criteria to Study? image 2

Source: @TokenUnlock 


On November 4, 2021, there was a release of more than 10,000,000 chips, which at the time was more than $1,000,000,000. This release literally drew the top because that's when the price started to drop. 


Monetary policy

Here are the different possible evolutions of the number of tokens in circulation: 

  • Inflationary, i.e. the creation of new tokens in the future

  • Deflationary, i.e. a progressive destruction mechanism of the tokens

  • Fixed, i.e. an initial distribution to which we add a maximum number of tokens that can be issued


The evolution of the number of tokens in circulation is a key metric. 


Tokenomics, Which Criteria to Study? image 3

Source: PancakeSwap


Here is PancakeSwap and its CAKE token. We can notice that there is perpetual inflation, that is to say, that every day there are more and more CAKE tokens in circulation. How high are they? Well, you can see that every day 321,200 new CAKE are issued. 


This same protocol, which is inflationary, will also have deflationary mechanisms: 


Tokenomics, Which Criteria to Study? image 4

Source: PancakeSwap


For example, a portion of the trading fee charged by PancakeSwap will be used to purchase CAKE tokens for burning. Burning them, for those who wonder how it happens in practice, well in reality it is about sending the tokens to be burned to an address on the blockchain that is unrecoverable. On PancakeSwap there is also a lottery and 20% of this lottery will be used to burn tokens.


Utility of the token

The final and perhaps most important point about the token economy is utility. Here are a few examples of the utility of a token: 

  • get a return via staking

  • buy-back burn mechanisms

  • indirect distribution of protocol revenues

  • fee reduction

  • obtaining permissions


Attention, having the information that a return is available is interesting but it is even more important to understand where this return comes from. Indeed, this is the key question because often, if we don't know where this return comes from, it means that we are someone else's return. A little more explanation via a concrete example: most of the returns in DeFi, especially on the smallest "obscure" protocols, can be obtained via inflation. That is the creation of additional tokens. Getting 50% APY on a token is not necessarily a good deal since perhaps the inflation of that token is 100% per year or more. So in reality, in this scenario, you are only getting a fraction of the inflation. 



If you are investing in cryptocurrencies where there are going to be massive token releases in the future, be very careful because inevitably people who are going to pick up large amounts of tokens, especially if the price has skyrocketed before, there is a good chance that these people will want to take profits and thus drive the price down. 


In order to know the evolution of the number of tokens in circulation, we recommend you to go in search of information via social networks such as Twitter, Discord, etc... because normally, all information is easily accessible. For the more mathematically inclined among you, we invite you to calculate the power ratio between the inflationary and deflationary mechanisms of tokenomics. 


The direct or indirect redistribution of income from the protocol gives value to the token just like dividends in the traditional stock world. If a token is very useful then the demand will be high and its potential will probably be as well.


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