<p>One of the most crucial components of any web3 project is <strong>tokenomics</strong>. The key to success, whether you're an investor or a builder, is to grasp <strong>tokenomics</strong>. In many ways, the innovation that cryptocurrency and web3 bring to the table is the capacity to incorporate financial incentives into technological protocols (i.e. tokens). Tokenomics is what makes Ethereum a distributed computing network and Bitcoin a decentralized store of wealth. In this article, <a href="https://www.builder.news/" alt="Builder News" title="Builder News" target="_blank" rel="" class="">Builder.news</a> will show you the two factors that you should pay attention to when researching tokenomics.</p><h2>Supply</h2><h3>Total supply</h3><p dir="ltr"><strong>The total supply of a cryptocurrency</strong> is the total amount of tokens on the blockchain, including those not in circulation.&nbsp;Is there a fixed 21m supply rate, like Bitcoin, or an initial supply with yearly inflation? The total number of coins in your project is unimportant. There is obviously a psychological effect to having more coins, but the amount of coins has no effect on the fundamentals, comparable to how stock splits affect economic outlook but not the fundamentals of a company.</p><p dir="ltr">The higher the rate of inflation, the more dilutive for long-term investors. If a project experiences 10% inflation in the future, all other token holders will experience 10% dilution. On an annual basis, that's a lot of dilution. It denotes two things. First, unless your Return On Investment (ROI) is at least 10% per year, i.e. equal to the inflation rate, your token is losing purchasing power. This can result in reduced utility, governance rights, staking return, or simply a loss of purchasing power in USD or ETH terms. The second principle is that your ROI must be significantly higher to be genuine. Previously, a 10% yield would have sufficed; currently, a 10%+ yield is required for a real return.</p><p dir="ltr">Inflation matters a lot in the long run, but most crypto projects haven't been around long enough to run into inflation-related issues. They perish first by mishandling their initial distribution and supply issuance: failing to grasp how many tokens are currently available and how many will be available in the coming months. Comprehending the initial distribution is required.</p><h3>Public distribution and issuance rate</h3><p dir="ltr"><strong>The public initial distribution and issuance rate</strong> is the number of tokens released to the public and how quickly your tokens are in the hands of the public. As in, not early adopters, but members of your community. Because of the selling pressure, miners have to dump Bitcoin to pay their mining and real-world costs, the speed at which BTC becomes public is generally comparable to the total Bitcoin protocol issuance rate: a halving of the mining rate every four years.</p><p dir="ltr">Other coins, however, have varying public issuance rates. Uniswap began with a 172 million community supply (17% of the entire intended four-year issuance). In years one through four, the community supply was expected to increase by 75%, 28.5%, and 11%, respectively.</p><p class="prosemirror-p-center"><img src="https://cdn.builder.news/news/11ed38988fc2488aa8e6023f659fee92.jpg" alt="UNISWAP release schedule" title="UNISWAP release schedule" width="600" height="388"></p><p class="prosemirror-p-center"><em>Uniswap release schedule. Source: Uniswap</em></p><p dir="ltr"><strong>Initial public distribution and issuance rates</strong> are quite important. During the initial months and years of a project, these are the coins that are actually circulating in the market. The market's circulating supply is represented by this. There are dynamics for an artificial pop if there isn't enough supply initially, but if demand doesn't catch up, the pop can easily crash afterward. Since there is no token contract dictating how the tokens behave, this supply bucket is also the least controllable portion of the tokens. They are up to the discretion of the user.</p><h3>Private distribution and vesting</h3><p dir="ltr"><strong>Insider distribution and vesting</strong> are the most opaque of the three, but they can have the most significant impact. How many tokens have been distributed to investors and developers? When will they be able to put these on the market? When can people stake them or use them to engage in governance? Insider token distribution in many projects exceeds 40% of the total supply. Insiders' stakes can comprise a substantially bigger percentage of the circulating float in the first two years of a project's launching.</p><p class="prosemirror-p-center"><img src="https://cdn.builder.news/news/11ed38988fc24ffda8e6023f659fee92.jpg" alt="LQTY issuance" title="LQTY issuance" width="600" height="380"></p><p class="prosemirror-p-center"><em>LQTY issuance. Source: LQTY</em></p><p dir="ltr">Knowing the insider vesting and distribution timeline can help you understand how many tokens will join the market's circulating supply.</p><p dir="ltr">In the case of the Liquity protocol, for example, 50% of the token supply came from insiders alone in month 13. So, despite the fact that Liquity has no long-term inflation and a hard cap of 100 million tokens, anyone who holds tokens throughout the first year can expect a threefold rise in circulating supply after the first year.</p><h3>Staking mechanism and lock-up periods</h3><p dir="ltr">Staking (or otherwise locking up tokens) is a typical approach for artificially constraining supply. Why not just cut the total supply? By incorporating staking, projects believe they will be able to enjoy the advantages of both worlds: issuing tokens to a large number of stakeholders who will become interested in the project while not oversupplying the market. Token holders are expected to accept yield in exchange for liquidity, according to the projects. The (3,3) meme spread by OlympusDAO was the best illustration of this. (3, 3) says that if everybody keeps their tokens, everybody wins. No supply enters the market, the price rises, and all holders profit.</p><p dir="ltr">Unfortunately, it's more challenging, because convincing someone to stake requires you to cover their opportunity cost, which might be substantial. This is why many projects end up paying absurdly high APYs to stakeholders, causing supply to skyrocket. This is also what happened to OlympusDAO and the (3, 3) meme. OHM, OlympusDAO's token, eventually fell into the (-3, -3) category as the yield and promises of OlympusDAO failed to persuade holders to continue holding.</p><h2>Demand</h2><h3>Utility</h3><p dir="ltr"><strong>Utility tokens</strong> are typically used to represent access to a service or as a means of exchange inside an ecosystem. BNB is an example of a utility token because it is primarily used to pay for trading costs on the Binance exchange. It can, however, be used to pay for products and services.</p><p dir="ltr">Your token utility TAM (Total addressable market) is determined by what people can do with your token, how much it costs them (in token terms), and how many users you have who will take that action. In terms of how much economic value your token utility will generate. This is your project's GDP. A high GDP results in a higher token price.</p><h3>ROI</h3><p dir="ltr">The second demand source for a token is the expected return on investment (ROI) from owning the token. This is similar to the TradFi markets, where one keeps an asset because they expect a precise ROI that matches their risk/reward tolerance. Return can be derived via cash flows delivered in the form of a dividend, obtaining financing of the token, or the usage of the token for DeFi use cases such as leverage.</p><p dir="ltr">Cash flow incentives are typically created through staking (such as staking ETH as a validator) or holding tokens that accrue rewards of some kind (like holding stETH which gives you ETH staking rewards). While many in crypto assess their earnings in dollars, others measure them in ETH or BTC, making long-term cash flow returns difficult (because most tokens decrease 90-95% over a 1-4 year time horizon and never recover in ETH and BTC terms). Consider UNI, one of the greatest projects in the DeFi industry in terms of dollar and ETH pricing. While UNI is up in dollar terms, it has never achieved its highs of 0.02 ETH in ETH terms.</p><p class="prosemirror-p-center"><img src="https://cdn.builder.news/news/11ed38988fc25506a8e6023f659fee92.jpg" alt="Uniswap priced in ETH terms" title="Uniswap priced in ETH terms" width="600" height="354"></p><p class="prosemirror-p-center"><em>Uniswap priced in ETH terms. Source: Uniswap</em></p><h3>Governance</h3><p dir="ltr">Many systems, in some way, link governance to token ownership. <strong>Governance</strong> can take many forms, including one token — one vote, staked token voting, time-gated governance, and continuous governance. Different models of governance encourage various types of token holding. Governance does not appeal to all token holders equally – smaller holders frequently find it ineffective, and even large holders are unable to persuade early members and holders. and it is very dependent on the token's specific governance dynamics. Governance, like staking, can work to decrease circulating supply on the market. It is just as simple to incentivize the use of tokens as collateral for fast loans.</p><p dir="ltr">The veToken model represents a significant advancement in the governance requirement in the field of digital assets. Originating from Curve(veCRV), the veToken paradigm has been replicated by numerous DeFi protocols and has gone through many changes, including xToken and stToken. The essence of the veToken idea is locking up its native token and empowering voting rights, generating some techniques to maximize benefit. Curve's native token CRV, for example, has three main functions: voting, staking, and yield boosting, all of which require CRV locked in the form of veCRV, which has become the system's foundation.</p><p><strong>Conclusion</strong></p><p dir="ltr">These several factors combine to form the supply-demand curve for tokens that you need to watch in the tokenomic. The nature of demand influences supply-demand curves in addition to the price. The more the inelasticity of demand, the greater the impact of reduced supply on pricing. Each supply and demand element influences the other: the more usefulness a token provides, the more built-in demand it has. If supply is restrained by mechanisms like staking, a slow distribution schedule, or governance, each unit of new demand can have a significant impact on the curve.</p><p class="prosemirror-p-center"><img src="https://cdn.builder.news/news/11ed38988fc25abea8e6023f659fee92.jpg" alt="Supply and demand" title="Supply and demand" width="480" height="471"></p><p class="prosemirror-p-center"><em>Supply and demand. Source: Wikipedia</em></p><p dir="ltr">Understanding what factors influence a token's supply and demand characteristics is the foundation for assessing the chances of a web3 project. Once it is evident that a token is being used for the proper reasons and has the potential to capture real-world value, it is time to understand what factors influence the token's supply and demand. If you keep reading to this point, we believe you are now able to evaluate a project yourself.</p><div class="pr-block-special"><strong>Disclaimer:</strong><br>This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.</div><p><br></p>

One of the most crucial components of any web3 project is tokenomics. Here's the guide to evaluate one with main components being supply and demand.

An ultimate guide to evaluate Tokenomics: Demand & Supply