What is tokenomics?

Tokenomics is the economic design of a cryptocurrency: how many units exist, how new ones are created, who holds them and what they can be used for.

What does tokenomics cover?

• Supply. Some assets have a hard limit. Bitcoin's is 21 million coins. Others, such as ether and dogecoin, have no fixed cap.
• Issuance. New units enter circulation on a schedule, often as rewards to miners or to people staking their coins. Bitcoin's issuance is cut in half roughly every four years in an event called the halving.
• Allocation. At launch, a project decides how the first tokens are divided among founders, employees, investors, a treasury and the public.
• Vesting. Tokens given to insiders are usually locked and released in stages over months or years. Each release is commonly called a token unlock.
• Burns. Some projects permanently destroy tokens, which reduces supply.
• Utility. This is what the token does: paying network fees, voting in a DAO, serving as collateral or granting access to a service.

How do you read a token's supply table?

Price-tracking sites and project documents list three supply figures.

1. Circulating supply is the number of tokens that can be traded now.
2. Total supply is every token that currently exists, including locked ones.
3. Maximum supply is the most that can ever exist, if the design has a limit.

Market cap is the price multiplied by circulating supply. A second figure, fully diluted valuation, multiplies the price by the maximum or total supply. A large gap between the two means most tokens have not yet reached the market.

The allocation chart shows who holds the rest. The release schedule shows when those holders become free to sell. Many schedules begin with a "cliff", a waiting period after which a large block of tokens becomes available at once, followed by steady monthly releases.

Why does it matter?

Supply is half of any price. When a large batch of previously locked tokens is released, the number available for sale rises, and holders who received them cheaply may sell.

Concentration matters too. If a small group holds most of the supply, it can move the price and, where tokens carry votes, control decisions.

Incentives are the third piece. Many projects pay users in newly created tokens. If demand does not grow as fast as supply, each token is worth less.

What can tokenomics not tell you?

A tidy supply schedule does not create demand. A token can have a hard cap, regular burns and long lock-ups and still fall to nearly nothing if nobody needs it. Critics add that the vocabulary can give a scientific gloss to assets with no income behind them.

Published figures can also be incomplete. Insiders sometimes hold more than charts suggest, spread across many wallets. Tokenomics is one input when people research a crypto project, alongside the team, the code and evidence of real use.