• Poorly-designed incentives within the project.
  • Incompetence and/or malice on part of the project’s developers — scams, hacks, etc.
  • Users not fully understanding the system.
  • A recap of the supply and demand model.
  • Analysis of project tokenomics using the supply and demand model.
  • A glossary of common terms in tokenomics.

What is Supply and Demand?

You are likely already familiar with the supply and demand economic model, in which functions mapping price to quantity supplied/demanded intersect at an equilibrium/market price. For typical goods and services, the supply function monotonically increases, and the demand function monotonically decreases.

  • Bitcoin banned in China (2021–09–24): due to increased barriers to entry for transacting with Bitcoins in China, as well as more subtle fears of regulatory action in the near future, the demand shifts downward, causing equilibrium price to fall.
  • Bitcoin planned to become legal tender in El Salvador (2021–06–08): due to excitement over a potential real-world demonstration of Bitcoin used as a currency, as well as a wider audience of Bitcoin network users, the demand shifts upward, causing equilibrium price to rise.
  • Rising case counts for the omicron variant of COVID19 (2021–12–29): due to fears of economic contraction, people moved away from risky assets toward safer assets. Bitcoin is considered a risky asset, so the demand shifts downward, causing the equilibrium price to fall.

Evaluating Supply and Demand

Predicting some of these changes is difficult-to-impossible. However, when evaluating any kind of token for investment, certain things that are always worth considering on the supply side:

  • Token distribution: How are tokens distributed to the people who want them? Did certain classes of investors get preferential treatment? Are they airdropped? Are they launching on centralized exchanges? Are they launching on decentralized exchanges? Which ones? Is it available as spot, options, or futures?
  • Liquidity capture (see glossary): What kind of vesting schedules are involved in distribution, if any? Are there staking programs and liquidity provider incentives to help capture free liquidity? Where are the liquidity onramps/offramps? What will the volume look like on these onramps/offramps?
  • Supply over time: How many tokens will exist now and in the future? Will tokens continue to be created over time? Are tokens consumed for any common activities, and if so, at what rate? What actions/events cause tokens to be minted, burned, rebased, locked, or unlocked?
  • Reserves: Is the project’s organization planning to reserve a treasury to fund project operations? Does the organization have an ecosystem fund, marketing budget, or grant program backed by their own tokens? How much of the token supply is under direct control of the organization, and how much by the community? How much influence will the organization be able to exert using these funds?
  • Mindshare: Who’s talking about the project? Who is the target audience of the project? Is that target audience actually interested in the project? For example, a decentralized market maker project would heavily rely on people with lots of money being interested in providing liquidity.
  • Utility and complements: To whom is the project useful? Do those people using the project cause the project to become more successful? Does the utility form a positive feedback loop with the project itself or other projects in the same ecosystem?
  • How to obtain the tokens: Just like on the supply side, how do you move liquidity into and out of the project? Are they doing airdrops? Are they listed on centralized exchanges, are they running liquidity pools on decentralized exchanges?
  • Reputation: What reputation does the project’s organization have? What about their founding team, their lead developers, and their investors? What about the reputation of the community around the project? Reputation is still an important factor even when project team members are pseudonymous.


Being a fast-moving space, some terms don’t have a consistent definition. Here are some tokenomics-adjacent terms as we define them.

  • Term: Utility — how useful a token is; reasons to continue holding a token rather than just selling it.
  • Term: Market Capitalization — the product of the token price and the total number of tokens currently supplied.
  • Term: Fully Diluted Value (aka FDV) — the product of the token price and the total number of tokens that can ever be supplied.
  • Term: Liquidity — as an adjective, refers to how easily a market allows users to buy and sell a particular asset; as a noun, refers to assets that are easily bought and sold.
  • Term: Liquidity Generation Event — an event in which tokens are distributed, often due to vesting, airdrops, or giveaways.
  • Term: Liquidity Capture Event — an event intended to cause token holders to make their tokens unavailable on the open market, usually to prevent the market price drop associated with a liquidity generation event.



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