The term "tokenomics" has become a crypto shorthand for describing the economic model of tokens in both a micro and macro sense. For investors, understanding the tokenomics of a project is a crucial consideration when debating whether to get into a project. For builders, tokenomics can be your project's single most critical element.
Creating a project with good tokenomics can mutually benefit the token holder and the project and ensures the project's long-term success in the broader crypto ecosystem. Whether you're building or investing, it's essential to consider tokenomics to ensure the project is best set up for the future.
This blog will guide you to identify key attributes of tokenomic models, so you can create a checklist and determine whether a project is set up for success or failure.
To start, Tokenomics can be broadly divided into the mechanics surrounding its supply and demand.
The first key to evaluating a project's tokenomics is understanding the token's supply.
One of the most frequented metrics in tokenomics to refer to is what is known as market capitalization. Market capitalization, or market cap, refers to the total value of tokens in circulation — the circulating supply.
When assessing tokenomic supply, there are a few other basic metrics to evaluate.
Fully diluted valuation (FDV) refers to the market cap of a token when the total supply of tokens exists at the time. The difference is subtle, but FDV is essentially a market cap — plus the number of tokens that have been created but have not yet entered the market.
Max supply is the total amount of tokens that could be in circulation, including those that have yet to be created.
FDV and Max supply can be calculated throughout a project's lifespan. However, these metrics can be traced back to the token's life phases: the launch and the emissions phases.
These phases impact the future price and supply of tokens so they're both important to consider when evaluating a potential ecosystem. They’re also crucial to builders looking to implement tokenomics into their projects.
As the name suggests, the launch phase is the first phase a project will encounter when it decides to issue a token. You only get one opportunity to launch a token. Builders should pay close attention to creating a tokenomic model supported by the launch.
Initial distribution is the amount of tokens you plan to distribute from your total supply at the project launch. This includes tokens you are looking to allocate toward key individuals, private investors, the project itself, and future public token holders.
Allocation refers to the number of tokens you set aside for specific vital individuals and events. Distributions for individuals, like private round investors, founders, and developers, usually come with a token lock period, where holders cannot trade their tokens for a certain period of time.
Allocated supply to these individuals can be unsustainably high if you’re not careful. Controlling the rate could make or break your project.
For example, Sprinter’s token allocation model is as follows:
- 30% Airdropped to the community.
- 30% for the DAO treasury.
- 10% designated for platform rewards.
- 30% to our team, investors, and partners.
Sprinters $RUN token allocation
In addition to the allocations above, it's essential to factor in allocation for ecosystem promotion, marketing, and other related expenses.
Finally, builders should set aside an allocation of their initial distribution for early adopters and future public token holders. This is typically achieved through a public token sale or an airdrop, where the builders can gain immediate access to capital through a direct sale. After the launch phase, tokens will be purchased on secondary markets.
The second phase of tokenomics supply is the emissions phase. Emissions refer to the amount and rate of distribution of your tokens over time. Regardless of your token's consensus mechanism, there are two main models to look at when determining your supply emission: inflationary and deflationary.
Under the inflationary token model, more tokens are continuously introduced to your ecosystem over time and at a fixed rate. Under a deflationary model, a maximum amount of tokens is set from the outset and then distributed accordingly.
Inflationary and deflationary supply emission models both have pros and cons. We'll look at both individually to give you an idea of what would work best for your project.
The inflationary model of tokenomics allows for the continued creation of new tokens and the increase of the token supply. The total supply of tokens is uncapped, and the supply will increase regardless of the demand. Although it's not a digital asset, one of the best examples of an inflationary asset is USD.
Since USD and other similar fiat currencies have been studied extensively throughout time, inflationary tokens gain an advantage. They pull from a wealth of past mistakes and successes in monetary policy to suggest long-term viability, if managed correctly.
However, that is sometimes a big “if.” We've seen inflationary assets fail in the past, and are currently watching the effects of rampant inflation in USD and other currencies around the globe.
The deflationary model of tokenomics is the emission of tokens with a fixed total supply. Deflationary models typically introduce a cliff at which the total amount of tokens emitted over time decreases.The deflationary model refers to the rate of tokens being distributed over time. Contrast this to the inflationary model, which indefinitely offers a continuous increase in supply at a fixed rate.
The gold standard for a deflationary tokenomics model is bitcoin (BTC). BTC's total supply is capped at 21M BTC and is set to be released over the next 120 years. While new tokens are still being distributed to miners, increasing the circulating supply of BTC, the rate of token inflation gets cut in half every four years, making it deflationary overall.
While inflationary and deflationary models of token emissions are some of the most common, they are not currently the only models. Depending on your token goals, you can also implement other emission models like the asset-backed model (ex. USDC, USDT), a two-token model (ex. LUNA/UST, MKR/DAI), or others.
A project’s demand-side tokenomics can be simply defined by the question: why would you hold this token? It is broadly broken down into its ROI and Utility.
Web3, in the present tense, is hyper-financialized. A project’s token holders often simultaneously act as users, investors, and governors. Thus, it's best that all participants understand a particular token’s potential for return on investment.
The return on investment on a token isn't always (and shouldn't be) as simple as its particular fiat value growing from, say, $1 to $10. ROI can also be calculated based on how much cash you receive by holding it. A simple example of this is staking.
Holders of Sprinter’s $RUN token can stake their tokens to provide liquidity to the network in exchange for yield. This yield can be looked at as a form of cash flow but must be taken on carefully — after all, it’s still a bet on the yielded token’s future value.
If a token does not have some form of intrinsic ROI or cash flow, its value is incredibly difficult to justify in the long term.
Tokens are dynamic pieces of data that can unlock a world of possibilities for users. These possibilities are commonly referred to as a token’s utility. Tokens can broadly be divided into two utility buckets: holding and spending.
Some tokens are designed to be spent within an ecosystem. These tokens are traditionally bought or earned in batches and should not be held as a long-term investment. The exception is if the token serves a dual purpose of unlocking governance or cash flow.
$RUN is a spending token with additional governance and cash flow utility, via staking.
The $RUN token serves as a payment token amongst network members. Users who transact on the Sprinter platform with $RUN receive a premium on their rates.
Clients will receive a discount on services when selecting to pay member vendors with $RUN.
Members also have the ability to contribute work like engineering, marketing, sales, and community development to the Sprinter network to earn additional RUN tokens.
While “HODL!” is a well-known rallying cry in crypto circles, a token must have some strong intrinsic value for an investor to hold it long-term. Aside from sheer speculation, cash flow and governance can be forms of utility that aid in providing that justification.
Holding a project’s governance tokens allows you directly shape its decisions. In decentralized autonomous organizations like SprinterDAO, this is a big plus. $RUN holders receive cash flow via staking and have the collective governance to shape the network's direction and growth while guiding the Sprinter platform's overall roadmap.
Before taking part in any token emitting project, it is paramount for you to analyze its tokenomics. We hope that this article provides you with a framework to do as such. Sprinter’s $RUN token was created with this comprehensive framework in mind.