Beginner's Guide: What is tokenomics?

Why do we study tokenomics?

For all kinds of Web3 projects, a sound tokenomics model is the key to success, so when developing a project, the tokenomics model should be carefully designed to ensure the long-term sustainable development of the project.

For ordinary users, it is crucial to carefully evaluate the project's tokenomics before deciding to participate in the project. Only by fully understanding the project itself can one increase the success rate of their investment.

The DePin leading project Roam, which was previously analyzed, has released the Tokenomics. We can use this project to specifically analyze the strengths and weaknesses of a Token model. @weRoamxyz

(The following mind map is a summary of RoamToken tokenomics)

For the tokenomics model, it can mainly be analyzed through four dimensions: Token supply (supply side), Token utility (demand side), Token distribution (holder situation), Token governance (long-term ecosystem).

1. Token Supply

Assessing the Token supply situation, there are 4 key indicators:

(1) Maximum supply: The maximum number of Tokens as predetermined by the code.

(2) Circulating supply: the quantity of Tokens in circulation; (The circulation of Tokens is mainly influenced by two factors: the unlocking schedule of the development team and investors, and ecosystem incentives)

(3) Current Market Cap: Current Price* Circulating Supply

(4) Fully Diluted Market Cap: The current price * maximum supply (if the price of a new project is hyped up so much that even the fully diluted market cap exceeds the industry benchmark Bitcoin, it means that this price is very difficult to sustain)

Another important dimension that affects the supply of Tokens is the Token burning mechanism: continuously reducing Token supply is deflationary; conversely, continuously expanding Token supply is inflationary.

Let's take another look at Roam,

The total supply is 1 billion (1B) $ROAMToken;

120 million (120M) reserved for the team, distributed over 6 years, indicating the team's long-term commitment to this project;

280 million (280M) allocated to past and future investors, with airdrops deducted from it, this is the actual initial circulation.

The remaining 600 million (600M) is generated through mining, indicating that there can still be continuous participation in this project in the future, avoiding a one-time surge after listing.

The project team also mentioned that they will repurchase Token through business income in the future.

Therefore, overall, Roam is deflationary, which is also a very strong value support.

2. Token utility

Token utility represents the value of the Token, whether there is a practical use case, and whether it can attract more people to join, that is, the demand side of the Token.

Token utility can be divided into three aspects:

(1) Practicality: Gas fees (typified by Ether, used to pay for computational power consumption), real-world payments (typified by Bitcoin, can be used for actual payments)

（2）Value accumulation: pledging (securities-type Token, can obtain partial income of the product), governance (governance-type Token, holders of governance Token have the right to vote on changes to the Token protocol)

(3) Meme and narrative: Meme refers to the culture and concepts that are widely spread due to popularity on the Internet, and Dogecoin is the most typical meme coin, which has no practical value, and is only popular because of spoof memes

Let's take a look at Roam again. Its Token is mainly used for related services within the ecosystem, which can be used to pay for network service fees, exchange for free roaming data, or participate in other functions.

Relatively speaking, there is still strong value support, and it is not a useless air coin.

3. Token distribution

There are two ways to launch and distribute Tokens:

(1) Fair Launch: Fair launch means that before the Token is minted and distributed to the public, no one has first acquired it or conducted a small-scale distribution, with Bitcoin being a typical example;

(2) Launch after pre-mining: Pre-mining refers to minting a portion of the cryptocurrency and distributing it to a specific group (such as the founding team or investment institutions) before making it available to the public. Ethereum conducted pre-mining.

Let's take another look at Roam, which is obviously not a fair launch, but a pre-allocation, which also fits the business logic of VC coins, and investors still want to make money.

We also need to pay attention to the holders of Token: the behavior of large institutions and individual investors is different.

After understanding the types of entities holding Tokens, one can further infer how holders may trade, and their trading behavior will influence the value of the Token.

On the other hand, we need to pay attention to whether the distribution of tokens is even: usually, holding the majority of tokens by some large institutions means that it is riskier.

If patient investors and the founding team hold the majority of the Tokens, the interests of the holders will be more aligned, making long-term success more likely.

The Web3 industry standard is to allocate at least 50% of the Token to the community, which can effectively dilute the ownership that founding teams and investors can retain.

We also need to understand the locking and release schedule of Tokens: to see if there will be a large number of Tokens entering circulation, thereby bringing downward pressure on the value of the Token.

4. Token Governance

How to incentivize participants to ensure long-term sustainability is a core issue of tokenomics.

Many Web3 projects will also add staking mechanisms in the tokenomics model.

Staking Token can increase its Token value in two ways:

First of all, staking incentives mean locking up Tokens to earn passive income, so the minimum value of Tokens is a multiple of future reward value;

Secondly, locking Tokens so that they cannot be exchanged has the auxiliary effect of reducing market supply and increasing Token prices.

Let's take another look at Roam, which, in order to reduce the selling pressure after going online and decrease the actual circulation, also provides staking services, making it a standard feature.

Finally, to sum up:

In this case, the design of Roam's economic model is still very reasonable, and the overall principle of long-termism is sustainable.

Only by controlling the supply, increasing demand, and supplementing with governance mechanisms, can the value of Token be maintained in the long term.

We can find that a good token economic model must have three major elements:

(1) Reasonable staking mechanism: Staking can bind user's interests with project value, and regulate the supply of Token, where Curve's VE staking model has been proven to be relatively superior;

(2) More application scenarios: This is the biggest problem faced by every project, and the expansion of application scenarios should be based on the growth of the business itself;

(3) Steady growth in business revenue: While token incentives can attract new users, the Ponzi scheme will collapse sooner or later, so the key is to see if the business itself can create value;

Tokenomics is very important, but everything depends on the business value itself, otherwise it is just a "air coin" without any value support.

Currently, the tokenomics model is still evolving rapidly, changing very quickly, and everyone can continue to pay attention to whether there are new token models emerging in the market.

But overall, the essence remains unchanged, and the Tokenomics model can be analyzed from the four dimensions of supply, demand, distribution, and governance.