Effective token economics can propel a token to a hundredfold increase in a year, while poor token economics might cause a 90% decline. Mastering token economics is essential for success in the crypto world. Avoid blind trading; it could lead to significant losses. Crypto influencer Cyclop offers an in-depth overview of token economics, providing you with a complete guide. When you discover a promising token, for example, on CMC, you will encounter the following information:

Market Cap (MC)

Total Supply

Circulating Supply

Fully Diluted Value (FDV)

These are the fundamental supply metrics:

• Circulating Supply: The tokens that are currently available in the market
• Total Supply: The maximum number of tokens that can ever exist
• Market Capitalization (MC): The total market value of the circulating supply (in USD)
• Fully Diluted Value (FDV): The total market value of the total supply (in USD)

Understanding these metrics allows you to assess a token’s potential. But to make an informed evaluation, you need more than a surface-level grasp. You need to understand their mechanisms and their impact on price.

Let’s begin with supply. Tokens can take one of two paths:

• Inflationary
• Deflationary

Inflationary Tokens: These tokens can increase in supply, a process known as release. Release is generally a negative factor because it often results in a decrease in value. However, if the release rate is slow and the amount released is small, it may not significantly impact the token’s value.

Deflationary Tokens: These tokens experience a decrease in supply over time. This happens when the project buys back tokens and burns them. In theory, reducing the supply should increase the token’s value, but this is not always the case in practice.

Now, let’s discuss the key factors that determine token issuance and lifespan: allocation and distribution. There are two primary methods:

• Pre-mining: Tokens are allocated among early investors, the team, advisors, and others.
• Fair launch: Everyone has an equal opportunity to purchase the tokens. Most projects opt for the pre-mining method.

Why is this method important? Because if the Token Generation Event (TGE) releases 100% of the tokens and 50% are allocated to investors, those investors can sell their tokens at any time, potentially leaving retail investors holding the bag. Therefore, it’s crucial to understand:

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

Token allocation typically involves the following recipients:

• Private sale (investors, influencers, etc.)
• Public sale (retail investors)
• Marketing
• Ecosystem (staking, rewards, etc.)
• Airdrops

How are the tokens sold?

The day tokens are issued is known as the Token Generation Event (TGE).

TGE allocation refers to the percentage of tokens distributed to all the aforementioned recipients (typically 10-20%).

The cliff period is the time between the TGE and the beginning of the next vesting period.

Vesting refers to the gradual release of a certain percentage of tokens each month.

Recently, some projects have adopted a method with a small TGE percentage (up to 20%), followed by a few months of cliff and over 12 months of vesting. This approach is better suited for the long-term success of a project, making it crucial 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 purchase specific tokens. For example, despite severe inflation, people still buy dollars because they need them for daily living.

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

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

Store of Value

Cryptocurrencies can serve as a store of value. Many people buy cryptocurrencies just to put money in them, such as Bitcoin, which is often compared to gold.

Community-driven initiatives

As this cycle has shown the masses, communities can drive demand strongly. The rise of Memecoins is all about community. People will buy things they think will make them money.

Utility effect

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

Value Accumulation

Incentivizing Stakeholders People also expect tokens to offer some form of value. This is where staking comes in. You can lock up your tokens to earn regular rewards. This process benefits all parties involved and carries relatively low risk.

Another option is holding. Project teams often provide rewards or airdrops to holders, benefiting everyone involved. There are several ways to reduce selling pressure through holding:

1. VeToken

You can earn VeToken by holding tokens.
“Ve” stands for vote escrow, which means by locking your tokens, you gain voting rights.
The longer you hold your tokens, the more voting rights you accumulate.

Mining

Holding can also enhance your mining efficiency. The more tokens you hold, the higher your earnings ratio will be. Moreover, it’s crucial to understand who is holding the tokens, regardless of demand. Is it a robust community or primarily sellers? Determining this requires deeper engagement and analysis of the project’s community. Additionally, tokens with poor tokenomics can still appreciate in value, and the opposite is also true. Always keep this in mind. Here are the key aspects to check before investing:

• Total supply and circulating supply
• Allocation and distribution
• Lock-up periods/unlock dates
• Release percentages
• Demand

By conducting this analysis, you can determine whether the project is a worthwhile investment.

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2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
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