Tokenomics 101: The Basics of Evaluating Cryptocurrencies - DeFriday #19

And the question to keep in the back of your mind isn’t necessarily “will this appreciate against the dollar?” but “Will this appreciate against (BTC, ETH, SOL, whatever you prefer)”. Most crypto assets are highly correlated and move together, and if you’re holding anything besides the big foundational coins, it should be based on some belief that ... See more

By reading the docs or whitepaper, you should get a good sense of how the supply is going to be managed, and what forces will drive demand for the token or cryptocurrency.

So while it’s tempting to be purely analytical, don’t discount how far a token can get with faith, clever memes, and a cult-like following. 

Belief in future value is often one of the most powerful drivers of demand. Bitcoin has no cash flow, no staking rewards, nothing. It just has the belief that it could be a long term store of value to rival gold. Or more ambitious beliefs like definancialization and hyper-bitcoinization. But it’s all beliefs at the end of the day.

Another form of ROI comes from “rebasing,” similar to a stock split where by holding a token and staking it, you continue to get more of that token as the protocol inflates its supply. This is how Olympus works and is why their heavy inflation rate is not necessarily a bad thing since you can retain the share of the protocol that you own. 

Some tokens allow you to tap into the earnings of the protocol they represent. If you hold SUSHI, you can stake it to earn a share of the Sushi protocol revenues, currently for about a 10.5% APR.

For example, if you hold Ether you can stake it to help secure the network once Proof of Stake launches. In return for Staking your ETH, you get paid in more ETH, at a rate of about 5%.

ROI in this case is not how much you think the token price will go up. It’s how much income or cash flow the token is able to generate for you simply by holding it.

The last thing you want to consider with supply is allocation. Do a few investors hold a ton of the tokens which are going to be unlocked soon? Did the protocol give most of its tokens to the community? How fair does the distribution seem? If a bunch of investors have 25% of the supply and those tokens will unlock in a month, you might hesitate bef... See more