Tokenomics refers to the economic design and distribution of a cryptocurrency coin or token. They include the total supply of the tokens, how they are distributed, and how they are going to be used. The tokenomics should tell you how many of the tokens are going to:
- Supply
- Marketing
- Staking and farming
- Potential ICO or presale
- Treasury
- Development
- Team
Good tokenomics can help to ensure that a token has a sustainable value proposition and a bright future. Bad tokenomics can lead to inflation, devaluation, and a lack of investor interest.
Now let’s look at how you can spot good and bad tokenomics.
Good Tokenomics
One way that good tokenomics can benefit a token is by having a limited total supply. By having a supply cap, it can help prevent inflation, which will keep the token more scarce and therefore in theory should lead to it being more valuable. The most common example is to compare Bitcoin to gold, which is a finite resource that you can’t just make more of. Because of golds finite nature and scarcity, it has kept its value for thousands of years.
Good tokenomics have a fair distribution of tokens and they make sure that no one group or individual has too much control over the token price from or close to launch. The reason why this is so important is because if too many of the tokens are allocated to a single group or person, they can manipulate the price easily and control the market unfairly.
Developers should also define a concrete use case for their token which gives it a purpose and gives buyers and holders of the token confidence that it has worth.
Bad Tokenomics
One common pitfall to avoid is the promise of exaggerated returns. Projects that give astounding APRs and APYs should raise eyebrows.
Transparency is the bedrock of trust in any project. Vague explanation or inaccessible tokenomics details are a sign of a lack of transparency. A trustrworthy project will be open about their token distribution, supply mechanisms, and inform you about any presales that may or may not have occured. The absence of such information should prompt due diligence and skepticism.
An abnormally inflated token supply (Like 10000 billion tokens) can dilute the value of the token, raising concerns about long-term sustainability. An insanely high supply will often mask the price volalitity, since you can’t read the numbers properly as they are too high.
Token burning, the strategic reduction of token supply, can enhance scarcity and value. However, if this mechanism lacks a concrete reason for exisstin, skepticism is warranted. If a burning mechanism is announced at launch, it should raise the question as to why they didn’t just make a lower supply to begin with.
A high distribution of tokens to the team and developers is also a red flag, especially if they mask it as different areas. An example is having for example 10% supply to “Marketing” and 10% supply to “Partnerships”. In reality, it’s 20% for the same thing and the same people, it just looks like its going to different places.
Tokens lacking real-world applications within the project’s ecosystem may signify a lack of substance. What is the reason that this token was created?
Before buying any token, it is paramount that you understand the tokenomics and how the team has planned for the token to be sustainable and profitable. If you spot even one red flag listed above, you should avoid buying that token.
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