What is tokenomics?

Think of a game that hands out digital coins to its players. How many are in circulation? Who gets them first? Can new ones be created all the time? And what can you do with them? These are the questions that tokenomics, i.e. a token’s economics, answers.

In practice, we look at the amount in circulation, whether there’s a maximum supply cap and how the tokens are distributed among the team, early investors and users. We also look at whether new tokens are created as rewards or whether some are permanently destroyed through burning.

A hypothetical project may have created one million tokens, but only a small portion of them may be circulating. The rest may be locked and released gradually under a vesting schedule. A release doesn’t necessarily mean new tokens are created: it often means that already existing tokens become available to transfer or sell.

Why it matters

A token’s price alone doesn’t tell us whether its valuation is high or low. We need to know how many tokens are in circulation and how many can be added to circulation. A large unlock can increase the available supply, without that automatically leading to selling or a specific price move.

Utility is just as crucial. Is the token needed for fees, access to services or participation in votes? Where do the rewards come from? We think tokenomics should be examined together with how the project works, not as an allocation chart that promises profits.

What to watch out for

High rewards may be funded by continuously issuing new tokens. As a result, a holder may end up with more units, while their share of the total supply doesn’t grow accordingly. Also, heavy concentration in the team or among a few holders creates risks of outsized influence over votes and the market.

Check who can change the rules: issuance, unlocks or rewards. A limited supply and burns don’t guarantee demand, and a well-designed economic model doesn’t eliminate technical risks or the chance that the project fails.