When researching a project, one of the most important metrics I pay attention to is tokenomics. Here are 4 tokenomics factors that will help separate a promising project from an unviable one.
1. Token utility
Understanding the utility of tokens helps predict future supply and demand dynamics.
+ Increasing demand: discounts on commissions, management rights, etc.
+ Increasing supply: incentives, rewards, etc.
Staking: although staking can stimulate both supply and demand, staking with real returns (e.g., $GMX) creates a return on actual profits, increasing demand and decreasing supply.
Red flags:
– No clear mechanics for increasing demand.
– Excessive inflation due to steaking/farming.
– Excessive or useless usecases for tokens.
2. TOKEN ALLOCATION AND CLIFFS/VESTINGS
The token allocation diagrams provide insight into the allocation strategy.
Key principles:
+ The lock-in period for private sales should not exceed the vesting period for the team.
+ The vesting period for public sales tokens should be shorter than for private sales tokens.
+ Tokens from eirdrop should either have a vesting period or make up a small portion of the circulating supply.
+ Ecosystem/foundation tokens should have a vesting period, especially if they make up a significant portion of the supply.
Red flags:
– High centralization of token distribution.
– No vesting for large token pools.
3. INFLATION RATE
Inflation affects purchasing power. While most tokens are subject to inflation, the key is to ensure that it matches the growth of the project.
Analysis: If inflation is projected to be 600%, project growth should ideally match or exceed that rate. Some projects provide annual inflation rates, which can be a good indicator of transparency.
4. EVALUATION.
How do I know if the price of a token is fair? Valuation provides a point of reference.
Formula: Valuation = price * total supply
By comparing a project’s valuation to similar projects in the market, you can estimate its relative value.
Red flags:
– Overcharging without a live product and a clear UTP (unique selling proposition).
