Did you know your token?

Good morning! Welcome to The Daily Moon. Welcome to The Daily Moon. Welcome to our first 101 of this holiday season. One of the most important things we do is to understand the token we buy. Let’s break it down.

What makes your token work?

Very few people pick a token because they heard about it on Telegram or Discord. They spend hours researching what the token is all about. But what do they research? The token’s economics, also known as tokenomics.

Tokenomics is a portmanteau of token and economics and is a concept that reveals the financial model of a token. It tells you why the token exists, its vision and mission, the mint-burn cycles, and the incentive structure.

A token’s future value is determined by its tokenomics. This includes the annual and lifetime supply of the token, reward capping, and the block addition process. For instance, Bitcoin is based on proof-of-work or PoW mining, where miners use computers to solve mathematical problems and mine crypto.

So if Bitcoin is priced upwards of $16,000 today, it’s because of BTC’s tokenomics, which includes a fixed supply of 21 million.

What are the basics?

1. Mint and burn: How a token is created and destroyed will determine the stability of supply. PoW tokens such as BTC and LTC are created by mining, while PoS tokens such as Ethereum and Solana follow staking. The rewards for each block addition are different between the two categories. Having too many tokens in circulation may crash its price because supply exceeds demand. So, there is a burn mechanism, which sends a fixed number of tokens to a burn address. There is no ideal number; the trick is to have a balance between demand and supply. For instance, an estimated 835,000 ETH is burned every year.

2. Fees and incentives: The fee charged per transaction keeps the blockchain active. The higher the number of transactions on the network, the higher the fee collected. This is redeployed in the network to make it faster. The same goes for incentives. For instance, DeFi protocols give sops to buy and hold tokens. The sops keep the users active and keep the network buzzing.

3. Maximum supply: A predefined supply of a token makes it valuable. BTC has a lifetime supply of 21 million which is one reason why it is the king crypto. Ethereum, on the other hand, has no maximum supply limit. But it has a yearly issuance cap.

Ethereum’s case is slightly different though. The second-biggest crypto started out as a PoW token but changed to proof-of-stake or PoS in September 2022.

After moving to PoS under the Merge, the issuance rate changed. PoS involves staking instead of mining, so miner rewards are eliminated. As a consequence, the ETH issued annually will drop to ~0.5 million.

Beyond the basics, the use cases of a token will also determine its future value. Bitcoin, for instance, is primarily used for online payments and digital transactions. Ethereum can be used for DeFi, NFTs, and smart contracts, apart from payments.

Any red flags to watch out for?

• Tokens with unfair distribution, meaning it is either too private or secretive.

• Unlimited supply without any annual issuance limits.

• Glitchy networks with codes that aren’t available on Github.

• Unsustainable yield promises, upwards of 100% per year.

• Promises that are too good to be true. For instance, crypto token Onecoin claimed to topple BTC without any supporting evidence.

The answers to almost all of your questions will be and ideally should be publicly available. For anything else, genuine token developers have virtual avatars (on social media) to answer your queries. DYOR and read the whitepaper carefully.

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Who are we? This newsletter’s ambition is to educate (and to entertain). The world of money is changing everyday and we want to help you decode what’s happening in the world of crypto, public markets in the US and India.