Understanding Tokenomics & Token Utility

GM, Anon! We get it, you’re here to make as much money as possible! 

You have dreams that need to be made into realities, be it paying off some kind of debt, retiring yourself and your loved ones, buying that house or car you’ve always dreamed of, and much more. 

Now this is the problem lost on new users to crypto, everyone else is also trying to do that, including the devs behind each new L1, L2 or protocol, and every VC who invests in these projects early.

For a minute, Imagine you’re a VC or some dev with the hottest Solidity chops. You might be here for the tech, but you’re mostly here for the incredible gains. Why do you think almost every major brand or heavyweight financial institution is moving into crypto? Definitely not for the love of cryptography or for the love of trustless transacting. This is a brutal truth that many users need to realize as quickly as possible. 

Yes, crypto can do all the things mentioned above for you, and it has for many, but the sooner you realize the game that’s at play the sooner you can make money and avoid being exit liquidity for a VC who has dreams of acquiring his dream yacht or Island at your expense. 

So now you might ask, how do I avoid being massacred in the crypto markets and being turned into another sad story? Well anon, this is where we come in and give you the brutal truths combined with the tools to survive and hopefully, if you’re studying daily like a good little degen, to flourish!

So without further ado let’s introduce today’s topics: Tokenomics and token utility. 

Why are these important you might ask? Well, this is where you learn to navigate the big moves of a project you’re invested in, in a nutshell, learn to front run the devs and VCs who are going to dump on you, as well as assess the long-term viability of your crypto investments. 

BTW, Don’t forget to join the vibrant telegram community we’re cultivating! Come chat with our researchers who are always on hand to answer questions and other like-minded readers! 

The Fundamentals 

Let’s break the fundamentals of tokenomics down. These should be what you’re looking into when analyzing a project: Token supply, distribution, utility, demand, and security. Other related and important information includes: are the devs doxxed or anon, and who the backers are of the project. 

Token supply encompasses factors such as the maximum and circulating supply, whether the supply model is fixed or inflationary, and the influence of mining or staking rewards. 

• Distribution strategies, such as vesting schedules and token issuances, can impact price movements and market dynamics. 

• it's essential for users to analyze both the maximum and circulating supply of a token. Understanding whether the token operates on a fixed or inflationary supply model can have significant implications for its long-term value. 

• Additionally, assessing the proportion of tokens currently in circulation versus those locked up can provide valuable insights into market dynamics.

When examining token distribution, it's imperative to delve into the strategy employed. 

• This involves scrutinizing details about initial coin offerings (ICOs), security token offerings (STOs), or initial exchange offerings (IEOs) to comprehend how tokens were initially dispersed. 

• Factors like vesting schedules, staking mechanisms, and airdrops can also influence the distribution of tokens and subsequent market behavior.

Evaluation of token utility entails assessing the specific use cases and functionalities within the token's ecosystem. 

• Tokens with clearly defined utility, such as facilitating access rights, enabling governance voting, or providing staking rewards, are more likely to accrue long-term value. 

• Conversely, tokens with redundant or overly complex utility may encounter challenges in gaining traction.

Assessing token demand involves analyzing the driving forces behind it. 

• Look for indications of clear utility, robust technology, strategic partnerships, active community engagement, and liquidity across multiple exchanges. 

• Increasing demand for a token can signal growing interest and the potential for future price appreciation.

Lastly, considering token security is essential. This involves examining the measures in place to safeguard both the token and its associated platform. 

• Regular security audits conducted by reputable firms are vital for identifying vulnerabilities and ensuring the integrity of the token's code and infrastructure. 

• Trust and security are paramount in the crypto space, prompting users to prioritize tokens with transparent security practices.

By focusing on these quantitative metrics, users can gain a deeper understanding of a token's tokenomics and make more informed investment decisions in the dynamic world of cryptocurrencies.

A note on airdrops and narratives

Concerning airdrops, remember, anon, airdrops exist not to make you rich, but the devs and VCs. Airdrops are a quick way to immediately create a liquid market for these entities to dump on retail investors. If your timing is impeccable, you can time this and estimate some kind of top to also sell onto the open market, but it's rare for users to get this right. 

Secondly, keep in mind that very often, due to the power of narratives, the horrible tokenomics of a project might only seriously affect the price at a later date. Insane user adoption and trading can elevate the price of a project to new highs till the trend fades and it all comes crashing down. Just take a look at the graveyard of dog tokens from the last cycle to confirm this.

Resources

First things first, to explore a project's tokenomics, head to their website where you'll typically find detailed information. Pay close attention to the technical details provided on intended token utility and token distribution. 

For distribution and token vesting schedules, navigate to CoinGecko and click on the "Tokenomics" tab for each relevant coin. While this information may be missing for some projects, it should be available for major protocols. Secondly, for vesting schedules and fundraising data, visit Token Unlocks and Coincarp. These platforms provide valuable insights into token vesting periods and fundraising activities.

Now that you have overview of this topic, let’s dive more into token utility and look at some real world examples.

Token Utility and Token Roles

Back in the ICO era, one of the most common questions experts asked about a new project was, “Do you really need a new token?” In other words, does your token have any actual utility, or do you just have a token to raise funds?

The versatility and power of a token can be best understood by examining the various roles it can assume within the ecosystem. A robust token is not limited to a single function; instead, it weaves through multiple aspects of the ecosystem, enhancing its utility and, consequently, its value and longevity.

Here are some of the roles that a token can take.

#1 Medium of Exchange

At its core, a token can function as a medium of exchange within its native ecosystem, facilitating transactions and interactions among users. This role is foundational, enabling the basic buying and selling of goods, services, or assets, much like traditional currencies but within a decentralized framework. Usually, every token should have some element that makes it a powerful medium of exchange.

Example: BTC, ETH, USDT, USDC.

#2 Utility Instrument

Tokens often grant access to specific functionalities or services within their ecosystem. This utility aspect is crucial, as it ties the token directly to the value proposition of the platform. Whether it's accessing a decentralized application (dApp), executing smart contracts, or enjoying premium features, the utility role ensures that the token is an indispensable part of the ecosystem, driving demand and encouraging engagement.

Example: ETH, SOL

#3 Governance Enabler

Governance tokens empower their holders with decision-making authority over key aspects of the project's development, from protocol changes to feature implementations. The idea here is to use tokens to democratize the governance process, allowing token holders to shape the project's trajectory and ensuring that it evolves in alignment with the community's needs and preferences.

Example: UNI, CRV

#4 Store of Value

Similar to traditional assets, tokens can act as a store of value, enabling individuals to preserve wealth in a digital form. While the volatility of cryptocurrencies can affect their reliability as a value store, certain tokens, especially those with strong fundamentals and real-world utility, can maintain and potentially increase in value over time. Plus, stablecoins, by definition, provide a stable store of value for your wealth.

Example: BTC, USDT, USDC

#5 Representation of Assets

Tokens can represent real-world assets (RWA), such as real estate, art, or commodities, making these assets more liquid and divisible. This tokenization opens up new investment opportunities, allowing for fractional ownership and easier transferability, which can democratize access to investments that were previously out of reach for the average person. 

One of the hottest sectors in decentralized finance (DeFi) is RWA.

With over $6 billion locked in, you can expect this sector to grow even more.

Example: PAXG, ONDO.

#6 Staking

In proof-of-stake (PoS) and similar consensus mechanisms, tokens can be staked to participate in network validation processes. Staking not only secures the network but also rewards participants with additional tokens, creating a passive income stream while incentivizing network participation and health.

Example: ETH, SOL

#7 Incentive Mechanism

Tokens can incentivize desired behaviors within the ecosystem, such as participation in network security, content creation, or community engagement. These incentives align the interests of the participants with the overall health and growth of the platform, creating a virtuous cycle of engagement and development.

Example: GRAIL, CRV, CVX

A token that effectively encompasses these roles can establish a strong foundation for both the immediate utility and long-term viability of its blockchain ecosystem. By intertwining these functionalities, the token becomes an integral part of the ecosystem's economy, governance, and growth, ensuring its relevance and value are sustained over time.

A multifunctional token benefits holders and contributes to a more robust, resilient, and dynamic blockchain ecosystem.

Tokenomics Analysis

Let’s analyze the tokenomics of a project to understand what makes it strong or weak. Here is a quick checklist we will be going through to get an initial impression:

Analyzing Camelot (GRAIL)

Camelot's GRAIL token introduces a nuanced and sophisticated tokenomics structure designed to balance incentives, encourage long-term holding, and support sustainable ecosystem growth. 

With a maximum supply of 100,000 GRAIL tokens, Camelot ensures scarcity and potential value appreciation. The ecosystem's design, focusing on convertibility between GRAIL and xGRAIL, as well as the innovative use of vesting mechanisms and rewards system, presents a compelling case for both short-term traders and long-term investors.

Conversion and Vesting Mechanism

xGRAIL is a non-transferable escrowed governance token, corresponding to staked GRAIL

• GRAIL to xGRAIL Conversion: Instantaneous at a 1:1 ratio, promoting flexibility in token utility.

• xGRAIL to GRAIL Conversion: Subject to a vesting period selected by the user, with a conversion ratio varying from 1:0.5 to 1:1 based on the vesting duration. This mechanism encourages long-term holding and stabilizes token circulation.

Rewards Mechanism

• Dividends Plugin Allocation: 50% of xGRAIL being redeemed is earmarked for dividends, fostering active participation in the ecosystem.

• Vesting Rewards: During the vesting period, 50% of redeemed xGRAIL generates rewards, offering an additional incentive for long-term engagement.

Tokenomics Observations

Now that we have a general idea, let’s measure the tokenomics based on the checklist we made earlier.

• Long-term Commitment Incentives: The vesting mechanism with its varying conversion ratios, encourages users to commit to the ecosystem for longer periods, aligning user interests with Camelot's long-term vision.

• Active Ecosystem Participation: The dividends system and the ability to cancel redemption foster active engagement within the Camelot ecosystem, enhancing overall ecosystem health.

• Sustainable Growth: The gradual release of GRAIL and xGRAIL over three years is designed to mitigate market volatility and ensure a steady growth trajectory.

• Utility: The GRAIL token takes up multiple roles - utility, staking, rewards, and governance.

Camelot's GRAIL tokenomics embodies a well-thought-out strategy that balances immediate utility with long-term value preservation. The nuanced mechanisms of conversion, vesting, and dividends not only incentivize participation but also promote a stable and sustainable growth path for the ecosystem. 

That wraps up today's insights! We hope you enjoyed today’s issue! Till next time anon.