Like much of the terminology in the wild west of web3, “tokenomics” can mean many things. It can refer specifically to token distributions, supply/demand, vesting schedules, total circulating supply, or mint/burn mechanisms, among others. However, put simply, tokenomics describes what the token is, how much there is, who gets it, ****and when?
How your project addresses these questions is crucial to its success, whether you are making a DAO or a DEX. Read on to find out why!
If you are reading this, you’ve probably had some thoughts about how to tokenize your project. A best practice is to ask yourself what the user will actually do with the token. Some of these functions can be internal to your project and some may be in coordination with other projects (for example, a decentralized exchange (DEX). Also, the availability of your token can change throughout the phases of your project. Consider how you want your token to be:
There are infinite permutations of token use-cases, and these are but a fraction. The main point is that users and investors look at what problem your project is trying to solve and how $YOURTOKEN contributes to this solution.
If you want to take a longer view into your token’s success (and you definitely should!), consider when someone is incentivized to either sell, buy, hold, or spend $YOURTOKEN in the different phases of your project. To understand this more, it helps to look at all aspects of a project’s tokenomics.
If you already have a great token use-case, you then need to decide if $YOURTOKEN will have a fixed supply or a variable supply. But first, some terminology!
<aside> 📚 Initial supply - Number of tokens upon first release.
Circulating supply - Number of tokens available to be bought or sent on the distributed ledger. Also called current token supply.
Total supply - Number of tokens currently existing, including those not in circulation (e.g. vested tokens). Does not include tokens that have been burned.
Maximum supply - Number of tokens that can ever be created. In other words, total supply plus the tokens that have yet to be created.
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<aside> 🧑💼 If you are from a traditional finance (TradFi) background, circulating supply, total supply, and maximum supply have similar characteristics to the float, outstanding shares, and authorized shares, respectively. Later, we will see that “vesting” tokens look analogous to restricted shares.
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Fixed tokens have a hard cap (their maximum supply), beyond which none can be mined, minted, or created. Bitcoin famously has a maximum token supply of 21 million. What is special about this particular number? Not much, it turns out!
<aside> 🪙 Okay, some numbers are more fun to say, and they can give signals about a project’s narrative. For instance, compare the following:
Bankless DAO - 1,000,000,000 (1 billion) Iota - 2,779,530,283,277,761
One is easy to remember and one invites questions. In fact, the iota total supply is optimized for ternary computation and can be expressed as the 33-digit ternary number 111,111,111,111,111,111,111,111,111,111,111. Does Iota’s somewhat technical number help it to be taken seriously? You decide!
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