Now you know what Tokenomics is and how to evaluate a crypto’s supply, another thing to consider is allocation or token distribution – what tokens will go where?
This is an essential factor to consider when investigating a project’s tokenomics.
Some of the questions we’ll consider include:
- How did the project launch its token?
- Who gets the tokens at the launch, and how many each?
- How were tokens distributed (fair launch, pre-mine, ICO, IEO etc)?
- How many tokens are allocated to team members?
- How many can the community get hold of?
- How and when will new tokens be released?
Scarcity breeds value- the rate of the release of a token, as well as where and to who it is distributed, affects its value and reputation.
If a few investors, or team members, hold a large amount of the tokens, it adds a high potential risk. They could have excessive swing over governance, or control the price by pumping and dumping to suit them. Even without anything dodgy, they could simply have made a lot of money already, and dump their tokens to cash out, resulting in the price falling.
A good distribution design is when no individual or group holds a significant amount of the token. Instead, it should be distributed among many, with a heavy focus on community allocation.
A fair launch is when the community collectively mines the coin or token e.g. Bitcoin, or Litecoin. There’s no token allocation for fair launch cryptos.
Note that a fair launch is the best, but it’s very rare, as it requires the creators of the crypto to get no allocation (which most aren’t happy to do).
Fun fact, Vitalik wanted Ethereum to be a fair launch, but pressures from other team members prevented this.
Most altcoins have a pre-mine, which is the process of allocating a fixed amount of tokens prior to public launch (to insiders and early investors). In the case of a pre-mine, some or all tokens are minted before opening up the network to the public.
- If there was a pre-mine, how many tokens were allocated to insiders/early investors?
To find out about the pre-mine and how tokens are allocated within a project, check the documents and information you can find through Google searches (although be wary and cross-check sources).
When looking at the documents, there should be a tokenomics section, where you can see how the tokens are distributed and who they’re going to. If this doesn’t exist, that is a potential red flag, and something that should be looked into further.
Note, that it is a risk if an excessive amount of tokens have been allocated to the project’s team and investors.
A private sale is an early-stage fundraising round, where investors can buy into the project at a cheaper rate.
- How many tokens were available to private investors?
- When will tokens be available to private investors?
- What price did early investors pay? How much money have those investors made?
Note when private investors’ tokens are unlocked. This could cause a lot of selling pressure. For example, if a large amount is unlocked at the same time or near to each other, the investors would likely have got in early and at a low price, and will want to take profits.
If you can find it, it’s worth noting the prices that early investors paid, as it gives you a guide on what the protocol was considered to be worth at the time, and tells you how much money those investors have made. If this is a very large amount, they are more likely to sell.
Tokens allocated to angel investors/venture capitalists (from private sales) will often be the first to be sold, as they will have bought in at very low prices, and are likely to want to cash in profits.
As an example, the first investors in DYDX got in at a $10m valuation. The project is now worth $1.8bn (fully diluted value at the time of writing), meaning a very healthy 180x for the investors!
A public sale is when a project makes its token available to the public, this is done in a variety of ways (which we will look to cover in detail in future, more detailed guides).
- How many tokens are available to the public?
- What % of the total supply is available to the public?
- When will those tokens unlock for people who took part in the public sale?
ICO (Initial Coin Offering)
In recent years, ICOs (Initial Coin Offerings) have become less popular due to scams. Since then, alternative token offering methods have emerged (they function broadly in the same way, but without the negative connotations of ICOs). These are IEOs and IDOs.
IEO (Initial Exchange Offering)
An IEO or Initial Exchange Offering is a type of funding method in which a centralised crypto exchange oversees the sale of the tokens.
This means that the project and its whitepaper go through a vetting process, reducing the risk of scams and increasing investor confidence.
IEOs can also help generate publicity for projects and help them make money quickly.
IDO (Initial DEX Offering)
An IDO or Initial DEX Offering is the same as an IEO. However, it is run on a Decentralised Exchange (DEX).
As they are decentralised, IDOs remove the need for third-party influence, protecting against biases and human errors. They are generally considered a fair way to launch a new crypto project.
Often, IDOs have anti-whale and anti-bot measures, to ensure no single investor can purchase a massive amount of tokens, and to prevent other bad actors (although these don’t always work).
Note that while projects are vetted by the DEX, there is less regulation than an IEO on a large, regulated exchange, so be wary and ensure to DYOR before taking part in an IDO!
Tokens may be locked up for a specific period of time, during which they cannot be transacted or traded. The vesting schedule (also referred to as the token lockup period) is the timeline of how the team and investor tokens will be released.
- Is there a token lockup period?
- How long is the lockup period?
- How and when will team and investor tokens be released?
A good vesting schedule helps to increase the confidence of token holders, as it means the market won’t be overwhelmed by a mass release of tokens allocated to the team or private investors.
Usually, vesting schedules take place over many years, often with a ‘cliff’, which refers to a period before they start unlocking, often 1 year (but decided by the team and can be any period). This prevents unlocking too many tokens at once or in a short period of time, which can sink the price of a token and have potentially fatal consequences, as well as giving the protocol time to develop and preventing rug-pulls (as team and investors can’t just sell out instantly).
Solana is an example of a bad vesting schedule. Note the huge release of tokens in early 2021:
Emissions refer to how quickly new crypto tokens are created and released by the protocol. For example, a new Bitcoin block is added to its blockchain every 10 minutes. Miners are rewarded with BTC for every block that is validated. Right now, the reward is 6.25 BTC, at the next Bitcoin halving event in 2024, this will be reduced to 3.125 BTC.
- How quickly are new tokens created and released?
Emissions refer to mining/farming/platform rewards, so if you stake and get tokens back that are not from revenue (i.e. it is added to the circulating supply), those are emissions.
A token’s emissions schedule usually won’t be available on a platform like Coingecko. So to find it, it’s necessary to dive deeper into the project’s documents or Google.
Sometimes projects will allocate a significant amount of token emissions to early Liquidity Provider rewards. This can be a subtle way for early team/insiders to significantly increase their share of tokens, because they own tokens already, so they can provide liquidity and earn rewards.
The LooksRare (NFT marketplace) team faced community backlash when they cashed out 10,500 WETH (est. $30 million) from unattributed LOOKS tokens. (LOOKS is the native token used for paying platform fees and is awarded to users when they sell NFTs on the platform, alongside WETH rewards for staking and trading). After the news became public, the price of LOOKS dropped by nearly 15%.
Another aspect of tokenomics is the wallet holders.
- What wallets hold the token?
- Does one wallet hold a large amount of the supply?
Platforms like Etherscan (they exist on most blockchains, you just need to find the one that is relevant for the project you are looking into, e.g., Solscan, Arbiscan etc.) allow you to see all wallets that hold the token.
This means you can find out which wallets are holding large amounts of the token. This is useful as it allows you to see if one wallet holds a large amount of the supply, and can therefore dictate the price, or dump the token.
Note, often the largest wallets are the protocols treasury, mining wallet, vesting contract or similar. So be sure to check out the wallets before jumping to conclusions.
Also, note that if it is a governance token, these holders, if their positions are large enough, can have considerable sway over the protocol’s governance.
In the next Guide in this series, we’ll look at the difference between inflationary and deflationary tokens.
Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.
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