Thread by @amrali0fx

#Week_1: #Tokenomics, Day 2: Tokenomics 102: Digging Deeper on Supply -by @nateliason

Understanding a token’s supply, and how that supply is going to change over time, is one of the biggest factors in your ability to get a good return on investing in a project, 🧵

2- Unless you know where and how to look, it’s easy to get the wrong impression about the supply of a project.

Even metrics like Market Cap can be misleading or manipulated in unexpected ways.

The important aspect of supply isn’t necessarily the total number of tokens, -

3- Remember the questions ?
-Where is the supply right now
-Where will it be in the future
-When will it be there
-How will it get there

Let’s start with the simple classic, Bitcoin. The current circulating supply of Bitcoin is 18,973,506 and there will only ever be 21,000,000

4- That last 9.6% of Bitcoin’s supply won’t be fully released until around 2140, there won’t be any surprises along the way. It’s fixed.
Bitcoin is easy too because there aren’t any investor unlocks, no team treasury, no cliffs, vesting, anything else that could mess this up.

5- Most cryptocurrencies are not this simple though.

*Market Cap & Fully Diluted Valuation*
The market cap is the circulating supply of tokens multiplied by the token price. The FDV is the current price multiplied by the max supply, if all tokens were in circulation.

6- So if a token worth $10, a circulating supply of 10m and a max supply of 100m, then the MCap would be $100m and the FDV would be $1Bn.
They give an idea of how the market is valuing a project today, and how that project needs to grow in the future to justify its current price.

7- If you see a big difference between the market cap and FDV, that means there are a lot of tokens locked up waiting to come on the market, search how and when those will come out, Basically the ratio between Mcap and fdv the higher the ratio is, the more overvalued the project

8- 2 examples: If the Mcap is 10% of the FDV and the tokens are all released in the next year, the project needs to grow 10x, or 1000%, in a year just to maintain current price.

But if the Mcap is 25% of the FDV and the tokens are released over 4 years -

9- that’s only a 4x in growth over 4 years or about 40% growth year over year.

*Circulating Supply & Max Supply*
Circulating Supply is where things get trickier. For Bitcoin it’s easy, just subtract how many haven’t been released from the max supply and you have your number.

10- Other L1s like Ethereum and Solana either self-report it or there are APIs available that monitor it.

But it can get complicated with project tokens. Here’s a simple example. For Crypto Raiders, 16m released of 100m total supply. But if you look on Coingecko -

11- it says circulating supply is only 6.7m Where are the rest? Coingecko and other APIs will try to subtract out“inactive” tokens from the circulating supply, although they were released into the market previously. the case is, people have locked 9.5m tokens in staking contract

12- This shows how important is to dig into the circulating supply. Initially it looks like only 6% of tokens have been released, which would mean the project has to grow 20x to maintain its current price. But in reality, 16% of tokens have been unlocked, so it’s more like 6.25x.

13- The circulating vs max supply is only part of the story. it will be different if the token supply is growing 4x in 4 months vs 4 years. Which is why we also need to look at the emissions schedule.
The emissions schedule is usually in a project’s docs, it won’t be on Coingecko

14- *How Starting Liquidity Affects Emissions Rate*
One sub-topic to consider is what the percentage changes look like. Even if there’s a gradual 4-year emissions schedule, if it starts from a very small percent of the tokens unlocked, that could be harmful to early buyers.

15- Think of the next 2 examples:
-The 1st had initial circulating supply of 20%
-the 2nd had initial circulating supply of 2% (as most of the current shitty projects),
If 2% of the supply hitting the market monthly, it will represent 10% increase in the supply in the 1st case-

16- And 100% (double the supply) in the 2nd case, imagine the impact on the price in both situations, The early buyers would be much more impacted by the unlocks, and the token price would have a harder time keeping up with the new inflation.

17- Another important factor is the "Unlocks" is to watch when large amounts of tokens might come unlocked, When Convex first launched locking, a huge number of CVX holders locked their tokens in the first week. Which meant 17 weeks later, all of tokens were coming unlocked.

18- The mechanism was introduced at the beginning of September and those tokens started unlocking at the beginning of January. Notice the chart, so it’s good to be aware of when there might be a large unlock of the circulating supply.

18- Recap You can get a decent amount of the info from dashboards like Coingecko, but digging into the details in a project’s docs can help sorting out details like how the emissions schedule is changing over time, who the tokens are going to, and what unlocks are happening.

19- My takes:
1* pay attention to platform performance based emissions like onomy protocol or CVX
2* low initial circulating supply is a bad thing and unhealthy for a project on the long run
3* the relation between Mcap and FDV and how to look and correlate them together

Again thanks for @nateliason and his articles which are informative, the full article link : every.to/almanack/token…