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

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.

There will only ever be 21,000,000 bitcoin, and they’re released at a rate that gets cut in half every four years or so. Roughly 19,000,000 already exist, so there are only 2,000,000 more to be released over the next 120 years.

On the supply side, a token will increase in value if fewer of those tokens exist—we call that deflation. A token will decrease in value if more of them exist—that’s inflation. When you’re evaluating the supply side you don’t have to worry about things like whether the token has any utility, or whether it will generate income for its holders. You’r... See more

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. 

Based on supply alone, should I expect this token to hold or increase its value? Or will that value be inflated away?

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.

What about Ethereum? The circulating supply is around 118,000,000, and there’s no cap on how many Ether can exist. But Ethereum’s net emissions were recently adjusted via a burn mechanism so that it would reach a stable supply, or potentially even be deflationary, resulting in somewhere between 100-120m tokens total. Given that, we shouldn’t expect... See more

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%.

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