Hercules | DeFi

Mar 13 • 22 tweets • 9 min read

Understanding Tokenomics is an important skill for getting rich in Crypto investing.

Still most of us don't make time to understand it.

A Massive guide on Tokenomics which even a 5th grader can understand🧵.

1/ What is Tokenomics?

Tokenomics is a combination of 'token' and 'economics' hence the name tokenomics.

It refers to the economic and financial principles that governs a token.

The two main aspects that are baked into Tokenomics are :
♦ Supply

♦ Demand

2/ Supply determines whether a token performs well or not in the long term.

The lower the supply, higher the value of token.

Supply has various factors to it like:
♦Emissions

♦Inflation

♦Deflation

♦Token burns

♦Token allocation and vesting

♦Token supply

♦Market cap

3/ Emissions:

Emission is the speed at which new tokens get created and released.

These tokens are minted and released as directed by the protocol.

In the case of a blockchain minted tokens usually get distributed to miners or validators.

4/ Inflation:

If a token's value or price decreases with increase in its supply then it is called Inflation.

Inflationary tokens doesn't have fixed supply with a constant increase in their supply.

They don't have any mechanisms to reduce the supply.

5/ Inflationary Token Example:

Doge coin is an example of inflationary token since it doesn't have a supply cap.

Doge coin inflates at a rate of 5% per year.

This erodes the value of Doge in the long term.

6/ Deflation:

If a token's value or price increases with a reduction in its supply then is called Deflation.

Deflationary tokens have a fixed supply.

They have have mechanisms such as burning to reduce their supply.

7/ Deflationary token Example:

BNB is an example of deflationary token with a max supply cap of 200Million BNB.

Binance schedules quarterly BNB burns to reduce the supply of BNB.

The burning of BNB will continue on a quarterly basis until 100 Million tokens are burnt.

8/ Token burns:

Blockchains and protocols burn their tokens which are in circulation to reduce the supply.

Such reduction in token's supply will increase the value of token due to increase in demand.

Example : Avax burns all its transaction fees generated in its blockchain.

9/ Token allocation and Vesting:

Tokens can distributed in the following ways:

♦ Presale

♦ IDO

♦ Private sale

♦ Fair launch

Most often Presales, IDOs and Private sales have a vesting schedule.

The tokens get released to the investors according to the vesting schedule.

10/ Fair launch:

Fair launch is a more transparent and decentralized token distribution process.

The market participants have access to tokens at the same price at the same time.

11/ Token Supply:

There are three types of token supply you need to understand:

♦️Max Supply - It is the maximum number of tokens that will ever be minted.

♦️Circulating Supply - It represents the token's circulating in the market currently.

12/
♦️Total Supply - It is the total amount of coins in existence right now (minus any tokens that have been burnt).

13/ MarketCap:

MarketCap is calculated by multiplying circulating supply with the token price.

Lets say, if circulating supply = 1,000,000 and price = 10$:

Then the MarketCap of the token is $10,000,000 Million.

FDV is the total supply of the token multiplied by token price.

14/ Demand:

Demand is the second important aspect of tokenomics after supply.

Demand for a token gets created by the following factors :
♦ ROI

♦ Utility

♦ Memes

15/ ROI:

ROI is the income created by holding a token.

Rewards might also be earned when the tokens are staked.

For example, Sushi swap provides a 10.5% Apr on Staking $SUSHI plus a share in protocol revenue.

16/ Utility

Utility for a token arises when there is a demand to use it in:
♦ Gaming

♦ Protocol

♦ Service

17/
Gaming - You need to purchase the token in order to play the game or for in-app purchase in the game.

Service - You must be holding tokens to use a service provided by a Dapp. Example: Betting services.

Protocol - You need to a buy token in order to use a DeFi protocol.

18/ Memes

Memes tokens are driven by community, belief and cult following.

Though tokenomics of a meme token might seem bad, the belief and conviction of the community can drive the price.

Doge and Shiba Inu are the best examples of Meme tokens.