Thread by @amrali0fx

#Week_1: #Tokenomics Day 4: An introduction to token economics by @likebeckett
Tokenomics, a combination of the words token and economics, refers to the economic properties that a token possesses. It includes qualities such as supply, issuance schedule, burn functions, and more

2- As bitcoin, its value proposition is highly correlated to its tokenomics, supply capped at 21M with a predictable supply schedule that decreases over time reducing inflation, Its monetary policy is solid and remained unchanged since the start, result in attractive tokenomics

3- Supply, will impact how scarce it is. By default, when a token is given a low supply it is automatically deemed as scarce and vice versa. However, While scarcity is one factor of the supply, the other is supply and demand.

First, you have the circulating supply of the token,

4- it measures what available for people to trade, use or hold,
Circulating supply and the price of the coin are what determine its market cap, This is why two coins, one with a small price and one with a large price, can have similar market caps.

5- you can see that $link is over $40 while $USDC is only $1 but because USDC has a much larger circulating supply, over 14 Billion compared to only 400 M for link, they have very similar market caps, at $17 Billion and $14 Billion respectively. (when the article was written)

6- So it is understandable that events that increase or decrease this could have a positive or negative effect on the price of a token.

For example, if there is an option to stake a token for yields as a validator for a Proof of stake blockchain -

7- then those tokens are “locked up” and removed from the circulating supply. Since price is determined by supply and demand, if demand stays the same but supply decreases then the price will naturally increase.

This same principle can also be applied to the max and total supply

8- when a coin like Btc is capped while other with no Cap, however tokens that have no max supply can still be seen as valuable, Ethereum is a great example of this because its lack of a max supply, it continues to rise because of high demand,

9- This comes from not only investors wanting to buy ETH as an investment, but also the high demand from individuals using applications that require ETH to operate so Demand exceeds Supply.

-Token burning, it is a method to permanently remove tokens from the circulating supply,

10- teams do it aiming to push up the price of their token, The idea behind token burning is simple, reduce the supply so the price can increase. Two methods include regularly scheduled burns and fee burns, The first can work to push the price up by introducing a supply shock,

11- an example: The 19th BNB Burn took place on April 2022, 1,8m BNB burnt, worth some $772m, this can be seen as a short-term approach because there is no long-term sustainability to it.

While the fee burn one removes tokens from the supply by burning part of transactions fees

12- This can be amore sustainable approach as it reduces the number of tokens based on the usage of the network. It can reduce the inflation rate, it could even make the token deflationary, EIP 1559 for Eth as an example: As of may 22: 2.2m ETH has been burned surpassing $6 bn.

13- Monetary policy: like the dollar, cryptocurrencies also have monetary policies that dictate certain aspects of the token like its supply schedule, inflation, and more,

This can be used as a mechanism to increase, decrease or stabilize the price.

14- Think of token supply schedule as the inflation rate
Bitcoin is an example of a crypto that has a fixed supply schedule, and by extension a fixed monetary policy, that is designed to remain unchanged. with decreasing the number of bitcoins being created every 4 years by half=

15- =it continually reduces its inflation rate.
Ethereum is an example of a token where its monetary policy is variable(open to being changed),
the block rewards have decreased over time (started with 5 Eth per block, changed multiple times now 2, =decreasing its inflation rate

16- The variable nature of its monetary policy it what allows Ethereum to test and understand how to better improve ETH and the overall network.

So While a fixed monetary policy can have its benefits, there are advantages to having a variable monetary policy

17- Token distribution: When deciding how to launch a token, there are 2 options; a fair launch, and pre-mine.
A fair launch where the opportunity to acquire it is fair for everyone. A pre-mine is where the supply is initially distributed to founders, investors, treasury and so

18- Btc is an example of fair launch because anybody that wanted to gain Bitcoin had to go through the same steps to do so =Mining.
However, A pre-mine isn’t inherently bad, For example, when developing a token and the ecosystem around it, there are expenses that need to be paid.

19- the development team will need access to funds to finance future development (**a take here, i have asked myself before, why the team doesn't take all the allocation or most of it and take the future revenue to themselves, simply cause they need Fund to develop)

20- There are many different ways to distribute tokens to the general public, they change and evolve, each one has different benefits and limitations according to the project's type,

-First example: In 2014, Ethereum held its ICO to raise $16 Million at a price of $0.31 per $ETH

21- 2nd one: @Uniswap is a Dex that launched a token to provide rewards to their users and for governance.
60% of UNI is allocated to the public and 40% to the team and private investors with 4-year vesting. Upon launch of $UNI Sep 2020 =

22- 15% of the UNI was available for claiming by anyone using the platform, trading, or providing liquidity, 4.9% of the UNI was given to liquidity providers, 10% of UNI was split evenly among all the historical user addresses, 251k. 43% of UNI is held in the governance treasury=

23- where it will be released into the community over time through programs like grants, community initiatives, liquidity mining for the long term.
This can be powerful for a platform that implements this because if done correctly it can lead to sustained long-term growth.

24- My takes: 1: knowing the different burn mechanism and what they would affect, long term or short term
2: Uncapped Variable supply isn't necessarily a bad thing, it gives you room to test and grow,
3: Studying token distribution models and what's suitable for each project.

25- Thanks for @likebeckett and his public contributions like this article.
the full article's link if anyone wants to read it: alexbeckett.medium.com/an-introductio…

just an update here, bnb has 2 burn mechanisms, and as of dec 2021, they updated the mechanism by which the quarter auto burn is made, but the article was written on jun 2021

Uncapped supply with variable monetary policy i meant :D