(5th June) "Supercharge your savings up to 10% APY" - founded by Roblox, Alchemy & Anduril alum
++ Tokenomics 101
Welcome to the 24th edition of the Geeks Of The Valley (GOTV) Newsletter, where we share exciting ideas/insights on tech, ventures & trends + feature interesting early-stage company every week. If you enjoy and want to keep abreast with insights and interesting early-stage startups before they go big, subscribe to this newsletter ✌️.
Geeks of the week
Startup name: Argo (raising as of 13th May).
Team: Ex-Amazon, Anduril, Roblox, Alchemy and IMC Trading.
Startup name: Tiki (currently raising).
Team: Ex-Rocket Internet operator, country/regional exec of OYO and oBike.
Tractions (as of April’22):
10 million DAU
70% retention rate
Into the 🐰🕳️
Tokenomics 101
In the conventional economy, economists leverage the official money supply - namely M1, M2, M3, and M4, to track the issuance of a currency. In a nutshell, M1 is the quantification of the most liquid monies while M4 is the least. These measurement helps to enable visibility of different aspects of any currency supply.
Why does it matter? Simply because the political expedient in the past to simply create more currency due to wars or running the country. Today, the same comparison can be made to bank bailouts and pandemic responses which called-for government intervention to create an enormous supply of new currency.
This is where tokenomics (“token” and “economics”) emerged as a viable option for implementing monetary policy on blockchain networks. Tokenomics, which refers to the structure of a project’s economics and value system is a very important concept in emerging industries such as GameFi and SocialFi.
Projects with well-designed tokenomics are considerably more likely to thrive in the long run because they've done a good job in motivating people to buy and hold their tokens, whereas projects with poor tokenomics are likely to fail because people would easily sell the tokens when things go wrong. Hence, understanding the underlying tokenomics structure of a project can de-risk your investment.
Back to basic - Supply & Demand
As in conventional economic theory, what we will be most interested in will be supply and demand. It is crucial for investors to understand the supply and demand factors as it will give clarity on the following :
A look at the profitability of one crypto asset over time.
It provides insight into the crypto market's short-term performance.
On the supply side, the important question we want to ask is “Should I expect this token's value to hold or increase solely based on supply? Or will that value be blown up?”. A cryptocurrency's supply mechanism has always been clear; each cryptocurrency reveals its token minting and burning plans. Some, like Bitcoin, have a predetermined maximum supply of 21 millions.
Others, like Ethereum with over 119 millions circulating supply, have no cap on how many Ether can exist. However, the adjusted net emissions following the Ethereum Improvement Proposals (EIPs) enable the supply to be more stable resulting in the cost of using the Ethereum network being more predictable, while also improving the incentive structure for miners securing the network.
Another important aspect to know is the allocation. Did the protocol distribute the majority of its tokens to the community? If yes, how equitable does the distribution appear to be? For example, NEAR - a decentralized application platform built on top of the public, sharded, Proof-of-Stake blockchain has over 1 billion NEAR tokens created at Genesis on April 22, 2020. Out of those amounts, 6% of it was given back to its small backers.
From the demand perspective, understanding how game theory works will help in evaluating whether the token could have demand-side value in the future. Game theory is used to model and evaluate strategic situations, as well as to forecast how players will behave in a game. Game theory ideas are essential for successful blockchain projects as they can predict how agents will react to events and what behaviors they will exhibit. Hence, help them in avoiding any potential future issues.
Game theory actually works better when applied to the blockchain, than it does in the real world because of several factors; fixed rules and transparency across the chain which enable the information available to all the players.
Deciding on your own
By no means is this to be the only factor you should take into consideration. But, this should provide you with a solid starting point for evaluating any new project you stumble upon. You should be able to obtain a fair idea of how the supply will be managed and what forces will drive demand for the token or cryptocurrency by reading the documentation or whitepaper.