Tokenomics is an emerging field that, while a branch of economics itself, deals with the issuing and distribution of digital currencies.
Token metrics are a key part of tokenomics, acting as health indicators for token projects.
When properly understood, they can be used to gauge a project’s chances of success and estimate its future scale.
In this piece, we’ll take a look at what tokenomics is and why it matters.
What is tokenomics?
Tokenomics is the science behind allocating tokens to incentivize users to utilize that token – essential to building a vibrant token community that drives adoption.
Tokenomics looks at:
Purpose: what does the token achieve?
Functionality: how does it achieve it?
Utilization: is it actively being used?
Distribution: how is the token distributed?
Understanding tokenomics can go a long way to helping you assess the merits of a given project.
If crypto projects are able to successfully leverage tokenomics principles to grow a community, the tokens will have a good chance of success.
At a base level tokenomics covers a cryptocurrency’s token metrics, like total supply and how tokens are distributed.
For token projects, there are a number of different metrics that impact crypto asset value. All of them fall under the tokenomics umbrella.
A firm grasp of token metrics is critical to long-term project success.
But tokenomics isn’t just applicable to token issuers – it’s also highly relevant to crypto traders.
Tokenomics metrics provide key indicators of success for a given project – crucial info for any trader.
Token metrics explained
A hard cap is the amount of tokens and dollars required to launch a token project in full.
For token issuers, setting the right hard cap is important because it sends a signal about one’s confidence (or hubris) in a given project.
When setting a hard cap, it’s critical to ensure that the number is backed up by a solid business plan and data, or potential investors will see through it.
The hard cap is the maximum funding that can come from the token sale.
Whereas hard cap represents the amount of tokens required to fully launch a project, the soft cap is used to determine the amount of tokens or dollars required to go live with a minimum viable product (MVP).
If a soft cap is too high, some investors might wait until the soft cap has been hit before investing in a token sale, but if it’s too low, hitting that target may prove difficult.
That’s why accurately setting a soft cap is a key challenge.
Total token supply
This metric represents the total number of tokens that can ever be issued by a token project.
While not an ironclad indicator of project success, total token supply can give a general estimate of a team’s overall confidence in their project, but it’s also highly subjective and dependent on business model.
Some projects may have a high total token supply, while the token supply of others may be more restricted.
This metric in particular is highly dependent on other tokenomics metrics.
While total token supply indicates the total number of tokens that can be issued, circulating supply shows how many tokens have been issued to date and are currently available on the market.
From an investing perspective, it’s generally recommended to consider investing in projects with a large circulating supply only in the early days of a project’s launch.
This is because tokens often start off priced at just cents on the dollar, meaning an increase to just a dollar in value can still be incredibly meaningful.
However, investors should take care to look not just at circulating supply to make such a decision, and instead index it alongside other key token metrics as well.
The token price is the amount in fiat (or BTC, ETH or another currency) required to purchase one token.
Identifying a token price that sets a project up for success is a key consideration for any crypto project, and put simply, this metric can be determined by taking the total allocation of tokens for a given sale, and dividing it by the theoretical hard cap for the project.
The market cap of a cryptocurrency is the price per token multiplied by the number of tokens in circulation (circulating supply, not total supply).
Compatibility can be an indicator of the likelihood of success for some token projects, as it represents the degree to which a given platform is compatible with industry standards.
Fund allocation refers to the amount of funds distributed to the general public as part of a token sale.
In general, less than 80% of tokens being allocated for public use is a healthy indicator of success.
But be cautious of ICOs that have an abnormally low number of tokens available to the public, as those token sales may prove vulnerable to price manipulation.
This isn’t a numerical metric per se, but it’s important to take into account when making an investment decision around a token project.
Token projects that require detailed KYC (know your customer) information from customers prior to accepting their registration for a token sale are almost uniformly more reliable than projects that don’t do the same due diligence.
This metric represents the percentage discount that a token project offers early investors, and it’s commonly regarded as a key indicator of founder confidence in a given project.
Token projects with an abnormally high discount at the beginning of a token sale are more susceptible to price manipulation, while projects with low (or no) discount at the start of their token sale generally fare better at fostering investor confidence.
That said, the discount rate should be taken into account within the context of the entire token sale, as some projects will only sell a small percentage of available tokens at a discount.
This represents the amount of inflation that project owners have built into their project.
Token inflation of any kind is generally a negative for any investor, as it poses a high risk of token value dilution for retail investors in the long term.
Tokenomics, while still an emerging field of study, provides some interesting opportunities for analysts and investors alike to assess every token project’s potential for success.
Token metrics, while not absolute indicators of success in and of themselves, can provide key clues about the potential for a project’s long-term viability that investors should take seriously.
When the hype around a given project goes into overdrive, these metrics should act as every investor’s “true north” and inform their future investment decisions.
Beyond just token metrics though, investors should also take care to analyze the qualitative aspects of any token project before making an investment decision as well.
The product roadmap, partnership opportunities and overall quality of the team are all key attributes of every project, and shouldn’t be glossed over in favor of pure numbers when building an investment thesis.