Unlike traditional equity projects where the core of judging value lies in looking at fundamentals，Tokens are central to any web3 project. Tokens are the new form of equity, operating as the pillar of the ecosystem. Tokenomics with a good incentive structure are more likely to succeed in the long run, since they've done a good job of incentivizing people to buy and hold their tokens. Just as central banks utilize monetary policies related to their respective fiat currencies, proper design, management and execution of tokenomics allows teams to create an effective economic environment that facilitates the growth of the ecosystem and token prices. To be able to participate seamlessly in the web3 movement, it is crucial to be able to read and analyze those metrics. In this article I will briefly summarize the framework for analyzing tokenomics.

Our primary focus in standard economics is on supply and demand. The same concerns exist in tokenomics. The analysis of tokenomics can also start from these two dimensions.

Supply

On the supply side, number of tokens isn't necessarily the most important aspect of supply. It's about how tokens are distributed right now, where they will be in the future, and how fast they will get there. Based on this, we need to look at the following metrics：

Max Supply

A token with a fixed supply, or one that is approaching it, implies that it has the factor of scarcity, which is essential for the token to be considered seriously as a long-term store of value. There will be less value proposition for tokens that do not have a fixed supply and will inflate at a significant rate each year.

If an asset is scarce and there is a high demand for it, it can increase its price.No max supply can lead to an abundance of the coin in the market and a decrease in the price (not necessarily).Once locked-up coins are released to the market, they can affect the price.

Market Cap vs. FDV ratio

Generally, the market cap is equal to the number of tokens in circulation multiplied by their price. The FDV is calculated by multiplying the current price by the maximum supply. These figures show how the market values a project today, and how its value must increase going forward to justify its price today. Overall, be cautious if you see a big difference between the market cap and FDV.

Emissions Schedules & Rates

It's important to realize that tokens are released at different rates and amounts during each time period. One topic you want to consider for the emissions schedule is what the percentage changes look like. Even if there’s a gradual 4-year emissions schedule, if it starts from a very small percent of the tokens unlocked, that could be harmful to early buyers. 

Distribution

A token distribution can generally be divided into two types.

(I) Pre Mined: where some of the tokens are given away to investors and insiders before the launch

2)Fair Launch: where everybody has equal access to tokens from the outset

You need to pay attention to the fairness of token distribution, such as whether the protocol allocates most of the tokens to the community, whether there are a small number of investors holding tokens that are about to be unlocked in large numbers, an excellent distribution mechanism will present a reasonable benefit party allocation

Demand

On the demand side, there are a couple other considerations:

Return on investment

By holding a token, you will be able to earn income or cash flow.

Is there any return generated by simply holding the token without considering any price appreciation? Is it possible for yield farming to generate additional returns? Does the protocol distribute earnings/fees to token holders? You have to check the websites of each project to get the exact information for earning money on top of your money.

Meme/Narrative

Even though it is tempting to be purely analytical, don't underestimate how far a token can go with faith, clever memes, a wonderful narrative. Memes and narratives have also proven to be powerful drivers of demand. As a result of narratives, widespread speculation such as Dogecoin's rise and fall in April and May of 2021 was fueled. A narrative, however, is capable of sustaining web3 tokens in a broader sense. A token's narrative is different from measuring its distribution or utility, but it can be evaluated by looking at and evaluating things like Twitter  Discord activity, voting participation, etc.

Utility

To understand what drives a token's demand, it is crucial to understand the utility of the token and how its utility may evolve in the future. Generally, tokens have the following several functions:

n  A token acts as a store of value that can also be used as a form of currency. For instance, you could use Ethereum to buy NFTs or Bitcoin to buy a Tesla or Dogecoin to buy tickets to AMC.

n  Tokens can also used in play-to-earn games. For example, individuals can play games and earn rewards using AXS tokens and other GameFi tokens from Axie Infinity.

n  Beyond this, tokens are often used as a voting component in DAO governance proposals, and voting is often weighted based on the number of tokens a person owns.

n  Finally, some tokens can be used  as collateral to borrow against, using one of the major lending platforms.

Conclusion

This article discusses two high-impact factors in the tokenomics. On the supply side, we need to focus on max supply, market cap vs FDV, emissions and distribution.

On the demand side, we need to pay attention to ROI, memes and utility.  A good understanding of the supply and demand of the token of a project and how it will change over time will allow you to decide if now is a good time to invest. In addition to the metrics I mentioned ahead, there are more details that need to be explored in the project and adjusted according to the situation in time.