A comparative study of Tokenomics : $AXS & $SLP
In simple terms, let’s define Tokenomics as the economics and utility theory behind coins in the crypto space. The fusion between the word Token and Economics clearly tries to define what kind of financial utility a token proposes to represent and also clearly defines its other characteristics, such as, Total Supply, Maximum Supply, Circulating Supply and Market Cap.
This kind of data makes It easy to pick absolutely solid viable projects for the long-term. Particularly helpful if you see price dipping and market conditions leaning more towards the bearish side, a project with sound fundamentals and strong Tokenomics will survive the crypto winter without a doubt.
A bull market is where every coin is shining irrespective of the utility it provides (or does not provide). It’s the brutal bear market that will capitulate your portfolio if you pick the wrong projects and/or because your cousin told you to invest in.
If you are just stepping into the crypto game, it’s best to stick to BTC & ETH. Let’s not even think about the top 10 coins by market capitalisation because most of the coins on the list one year will not survive the bear market, and be around for the next cycle.
But if you are still adamant on picking up Altcoins, because the return on BTC or ETH might not be as large for a smaller capital portfolio, then make sure to understand the tokenomics before investing.
- Good tokenomics can make any project shine
- Bad tokenomics can bury any project alive
It’s very much like the saying, “Hard work beats talent, when talent does not work hard”
So there are some key-pointers that you should be evaluating while researching on a projects tokenomics, here’s what I would suggest:
- Token Supply (Distribution, unlock schedule)
- Token Demand:Supply factors (growth drivers, holder incentives, adoption curve)
- Token Dynamics (staking, burns, lockups,minting)
Let’s try to understand using some examples.
Utility of the token:
What is the token being used for?
Let’s take the example of the Smooth Love Potion (SLP) token. So the SLP token is associated with the Axie Infinity (AXS) game and players who invest into the game use the main token AXS and then they are rewarded in SLP after completing tasks.
AXS & SLP are both available to trade on CoinDCX
This leads to a huge inflow of SLP tokens in the open market and there are huge price swings, mainly towards the downside because players are cashing out their profit and not holding the token for future growth. Would you want to invest in a token like that? I guess not.
Check the charts above, SLP is down by 96% from its ATH, but on the other side, AXS is up by 21,086% from its low to ATH, and still up 2,599% from the lows to the recent price correction. This is where Tokenomics kick in.
Will the utility grow with time / adoption?
Again taking the example of AXS & SLP, we can see that AXS grows when the entire Axie Infinity gaming ecosystem thrives. The more investors that take part in gaming with AXS, the more the upward price movement of the token because of the law of supply and demand.
Whereas with SLP, the bigger Axie Infinity grows, the more SLP tokens are released in the form of rewards to the user and that is when we see major downward price action because of profit-booking.
Other examples of Utility:
- $APE coin will be used as currency in the Bored Ape Yacht Club NFTs Metaverse
- $LUNA is burned for every one unit mint of $UST
- How many tokens exist?
- How many tokens are in circulation?
- Distribution models of the tokens
- Token unlock schedules and percentages of Investors, Team, Locked tokens etc
Supply is the most crucial part of a projects plan. If a project has a total supply of 100,000 tokens and the total circulation of supply is also 100,000 tokens, then why would traders hold it? Scarcity or timely unlock is of utmost importance in this scenarios.
A high allocation of tokens to internal teams make the token vulnerable to a major flash dump when the tokens start hitting exchanges. Some projects will involve big names to market the token and provide them with huge number of tokens and this always ends up badly in this space. VCs also dump their tokens from seed funding round and book their profits
An accelerated unlock schedule also increases risk of major wallet holders to dump on launch.
This is where Total Supply, Circulating Supply comes into play. The higher the number of tokens in circulation, the more is the risk of immediate dumpage. Traders need to understand that today Bitcoin is so highly valued in the eyes of investors is because of its limited supply – 21 million coins EVER.
Retail market traders are the most irrational and need stronger, clearer directional bias to not panic sell when there is blood in the streets. This kind of behavioural pattern cannot be predicted in advance.
Learning and understanding Tokenomics can be a game changer in the game of crypto. Traders will realise this more after spending time in the market and understand how important fundamentals of a project are in determining its price action, and in turn avoiding bad projects.
A huge thank you to CoinDCX for giving me this opportunity to write such a detailed report and be a part of the #CoinDCXpathbreaker program, enabling me to share such knowledge with everyone in the crypto space.