Token Economics II: Delving Deeper into Token Supply Dynamics, Why is Bitcoin Considered Simple While Other Cryptocurrencies are Complex?

Bitcoin is simple, with no private placements, team treasuries, vesting periods. Just by looking at the supply chart, you can see the current circulation position, without any other factors that could mess things up. However, evaluating other project tokens makes the process more difficult and cumbersome.

Author Nat Eliason mentioned in "Token Economics I" how to evaluate the basics of token supply and demand, while this article delves further into the supply side: "How token total supply, circulating supply changes, or possible manipulation can affect a project."

Original link: https://cryptonat.substack.com/p/tokenomics-102-supply?s=r

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Even a simple indicator like "market capitalization" can be misleading or manipulated in unexpected ways. Understanding token supply and circulation is an essential factor for investors to achieve high returns. The article will gradually explain all the information for evaluating token supply.

The Supply Data We Should Care About

"Total supply" is not the most important; it's about how much current and future supply is available and at what rate it is being issued.

Starting with the classic Bitcoin, the current circulating supply is 18,973,506 coins, with a maximum limit of 21 million coins.

The remaining 9.6% will only be issued by the year 2140 without any surprises along the way.

Bitcoin is straightforward with no private placements, team treasuries, or vesting periods; one can simply check the supply chart to know the current circulating supply. There are no other factors that could mess things up. However, evaluating other tokens makes the process more challenging. Investors need to understand:

1. How much is the current supply?
2. What is the future supply?
3. When will it all be in circulation?
4. At what speed will it be circulating?

Market Cap vs. Fully Diluted Valuation

• Market Cap = Current circulating supply * Coin price
• Fully Diluted Valuation (FDV) = Total supply * Coin price

For example, if a token is priced at $10, with a current circulating supply of 10 million coins out of a total supply of 100 million:

• Market Cap = $100 million
• FDV = $1 billion

"Market Cap" and "FDV" are crucial in evaluating projects and proving the reasonableness of the coin price. If there is a significant gap between the two, it indicates that a large number of tokens will be unlocked and circulating. Investors need to assess the price rationality using methods 3 and 4 in such cases.

Current Circulating vs. Total Supply

"Total supply" is relatively simple:

• Bitcoin: 21 million coins
• Ethereum: Unlimited supply
• Yearn YFI: 36,666 coins
• Crypto Raiders RAIDER: 100 million coins

RAIDER Tokens

"Current circulating supply" is where things get complicated. Taking RAIDER tokens as an example, the actual circulation is around 16 million coins, but Coingecko only shows 6.7 million coins.

Coingecko and other API services attempt to subtract "inactive" tokens from the "current circulating supply," even if these tokens have been issued. In the case of RAIDER, 9.5 million tokens are staked for 3-12 months, hence Coingecko excludes them from the current circulation:

This illustrates the importance of "current supply." Mathematically, it seems like only 6% of the tokens have been issued. However, looking at it from an FDV perspective, the token would need to increase by 20 times to maintain its price.

Curve

Curve CRV's FDV is about 9 times the market cap, indicating that only around 11% of the current circulation is visible.

However, a deeper investigation reveals that various contracts lock up a significant number of tokens:

The lock-up list shows that the founders seem to hold 572 million tokens, while the community has staked only 440 million. However, further research into the contracts reveals that the 572 million tokens involve many entities, not just the founders, and have a vesting period of over 4 years, requiring time to unlock. The author points out:

The reason for such a detailed analysis is to understand the actual current circulating supply better. Personally, I believe that locked CRV should be included in the current market cap, making Curve's market cap closer to FDV, indicating that the coin price does not need to increase by as much as 9 times to align with FDV. Additionally, the difference between a token's total supply growing 4 times in 4 months versus 4 years is significant, which is why it's essential to delve into the token's issuance schedule.

Token Issuance Schedule

To understand four key points:

1. How much is the current supply?
2. What is the future supply?
3. When will it all be in circulation?
4. At what speed will it be circulating?

JonesDAO

The "token issuance schedule" informs investors about points 3 and 4, which are often not displayed on Coingecko, requiring investors to further examine whitepapers and other materials. The author's previous article introducing JonesDAO compiled its token issuance schedule, highlighting several key points:

• Initial issuance rate is slow, with a linear unlocking period for private sales from 4/30/2022 - 10/30, then accelerating.
• 3% of JONES tokens' total supply is released monthly during the unlocking period.
• The current monthly release is 1.36%, doubling the inflation rate.
• New tokens will be distributed to private investors at low cost, providing enough economic incentive to sell.

Convex

Another method is to issue tokens based on platform performance. Convex is a good example; most CVX tokens are issued based on how many CRV tokens they obtain from their liquidity pool, as shown below.

This means that the issuance inflation rate of CVX will continue to decrease because the CVX:CRV minting ratio will decrease.

Differences in Initial Circulating Supply

Token issuance needs to consider percentage changes. Even if a new token has a linear unlocking schedule over 4 years, starting by injecting "a small amount of unlocked tokens" to provide market liquidity, it could harm early buyers.

Using the project that recently launched the JPEG’d token as an example, they crowdfunded and sold 30% of the tokens with the following breakdown:

• Initial circulating supply is 30% from the Donation event.
• Team and advisors totaling 35%, with a 2-year linear vesting period starting after a 6-month lock-up.
• Unlocking begins after six months, with approximately 2% of the supply entering the market monthly.

The author points out:

When over 30% of the tokens are in circulation, a 2% increase in supply entering the market may seem relatively small. The token supply will double within 15 months, which is enough to keep the project's value on par with the token price. However, if only 10% is in circulation initially, the supply will double in 5 months instead of 15, affecting early buyers significantly, and the price may struggle to keep up with inflation.

Initial Issuance, Liquidity Mining

The author mentions that liquidity mining appears community-oriented, allowing anyone to buy tokens, provide liquidity, and earn more rewards. However, it depends on the execution details, as it could be exploited by the team or insiders to significantly increase their token holdings, an imperceptible method.

An important example is LooksRare, where, as Cobie describes, half of the liquidity rewards can be earned by early investors whose tokens are still in a lock-up period.

Here, investors should expect the team and private institutions to have at least a three to six-month lock-up period, followed by a linear unlocking.

Unlocking

One last thing to note is "when a significant number of tokens will be unlocked."

For example, protocols like Convex have locking mechanisms. At launch, a considerable number of CVX holders locked their tokens in the first week, meaning these tokens will be released after 17 weeks. This mechanism was introduced in September, with the tokens unlocking in January. What can be observed from the chart?

Include tokens with locking mechanisms like veCRV in your watchlist to be aware of when a large number of tokens will be unlocked.

Conclusion

Thoroughly understanding supply and circulation changes when researching project tokens can better inform investment decisions. The author states:

You can obtain a lot of essential information from Coingecko, but delving deeper into project documents can provide insights into subtle details that are not easily noticeable, such as changes in token issuance schedules over time, token distribution, future unlocking events, etc. Supply is just the tip of the iceberg, and subsequent articles will continue to explore demand, game theory, return on investment, and other aspects.