Token reading material
I aggregated a bunch of token related content earlier this year on a range of token related topics. Figured I'd share it with others.
- Token Investment Process Due Diligence
- Token Moats
- ve(3,3) Token Design
- Token Launch & Distribution
- Token Types
- Token Necessity
- Token Fundraising Methods
- Token Glossary
- Reasons to hold tokens
Token Investment Process Due Diligence
ve(3,3) Token Design
Token Launch / Distribution
Token Fundraising Methods
Unfortunately I didn't save the sources for the definitions below. My bad.
- Max Supply
The number of coins/tokens that will ever be created.
For instance, Bitcoin has a max supply for 21 million. Ethereum does not have any max supply.
- Total Supply
The number of coins/tokens that currently exist.
- Circulating Supply
The best approximation of the number of coins that are circulating in the market and in the general public's hands.
A circulating supply below 50% often means that lots of tokens are awaiting release to investors and early adopters, and they may sell for profits putting a downward pressure on short/medium term price action.
In the case of Bitcoin the total supply and the circulating supply are equal. If one took a look at other coins such as ripple it's not even half of it, which means a few people are controlling supply.
Bitcoin has 90% of its max supply in circulation.
- Market Cap
Amount of money currently in the market.
Calculated by multiplying the current market price of a particular coin or token with the Circulating Supply.
The method of using the Circulating Supply is analogous to the method of using public float for determining the market capitalization of companies in traditional investing.
- Fully Diluted Value
FDV is the current price multiplied by the max supply, if all tokens were in circulation, which in itself can be useful to compare to market cap as a guide for future issuance sell-pressure.
- Traded Volume
The total number of units that changed hands in a market during a given time. Can be used as an indicator to gain a better understanding of the market-strength. Higher trade volumes mean higher liquidity and a higher chance to connect a buyer and a seller of an asset.
- Total Value Locked
TVL is the overall value of crypto assets deposited in a DeFi protocol. It’s a metric for gauging interest. It includes all assets deposited in all of the functions that DeFi protocols offer, including Staking, Lending, Liquidity Pools. TVL has been considered useless as a price signal.
- Token Unlock / Lockup / Distribution
Lockup or vesting period refers to the time span in which tokens or coins are not allowed to be transferred or traded.
The sooner they can dump their token, the higher the risk of selling pressure & the price going down.
Look out for:
-If there is a token unlock within the first 3 months.
-If there is a steep increase in 'unlocks'
-Influencers promoting a project pre-pubic sale, with a very short unlock period. Normally means they got in before you + will dump on you
- Bonding Curve
A bonding curve is a mathematical formula used to set a relationship between a token’s price and its supply. Bonding Curves Offerings, or BCOs, allow projects to efficiently, fairly, and reliably distribute tokens to project adopters, who fund and speculate on new business ventures in a transparent way. Bonding Curves offer an innovative solution because they do not require the oversight of a centralized entity to create, oversee, and enforce the market’s pursuit of this equilibrium. Instead of relying on a third-party entity to create the market and mediate the transaction, Bonding Curves rely on a mathematical function packaged within a Smart Contract called an Automatic Market Maker.
The Bonding Curve ensures that each newly minted token (which is sold to a buyer in the market), is more expensive than the previous token. Because the price of each token is defined by the curve / formula itself, every market participant knows exactly how much each token will cost at any given time. As tokens have the lowest price at the lowest part of the curve, there is a price advantage for early adopters.
Early buyers have a considerable upside potential when compared with later entrants to market, as prices are lowest when supply is low as well.
The most fundamental advantage of Bonding Curves over traditional asset pricing mechanisms is that the pricing of assets is transparent, defined, and immutable at all stages. The market is able to reach the equilibrium of consensus through clearly defined rules, without third-party intervention.
Additionally, this fundraising method addresses many of the inefficiencies that have led to fraud and misappropriation within the Initial Coin Offering (ICO) model. Starting offer prices are not set arbitrarily by the project's founders. All tokens are accounted for at all times. The token’s distribution is automatic and configurable.
The burning process happens in this industry for a whole set of different purposes:
-to decrease coins in the circulation
-to adjust supply and demand
-to make the asset less inflationary
The general idea behind the burning process is to make the coin more demanding and less inflationary.
There is no unique approach that all projects follow to burn their tokens. Some burn on scheduled intervals. Some others burn part of the transaction fees. Surprisingly enough, some projects burn tokens randomly and without notice.
Ethereum burning occurs at the transaction fee level.
Binance Coin has scheduled burnings.
- Monetary Policy
“Monetary Policy” in the crypto assets is related to two things:
-Is the coin inflationary or deflationary?
-What are the plans for the coins (tokens) issuance in the future?
Inflation, deflation, and issuance play a vital role in the current and future price movements.
Part of this data is available online. For example, a project’s CEO may announce that X tokens will be released (or unlocked) into the market in a given time. You can also check websites such as viewbase to get ideas about different projects’ inflation rates (and some other statistics).
However, the primary source of info for checking monetary policy is the Consensus mechanisms of the projects.
- Consensus Mechanism
Methodologies used to achieve agreement, trust, and security across a decentralized computer network. Examples:
-Proof of Stake (PoS): A consensus mechanism in which an individual or “validator” validates transactions or blocks⁷.
-Proof of Work (PoW): A consensus mechanism in which each block is ‘mined’ by a group of individuals or nodes on the network.
-Proof of Authority (PoA): A consensus mechanism used in private blockchains, granting a single private key the authority to generate all of the blocks or validate transactions⁷.
-Proof of Burn (PoB): Miners send coins to an inactive address essentially burning them. The burns are then recorded on the blockchain and the user is rewarded⁸.
-Proof of Capacity (PoC): Plotting your hard drive (storing solutions on a hard drive before the mining begins). A hard drive with the fastest solution wins the block⁸.
-Proof-of-Developer (PoD): Any verification that provides evidence of a real, living software developer who created a cryptocurrency, in order to prevent an anonymous developer from making away with any raised funds⁹.
-Proof-of-Donation: integration of charitable donations into the functionality of a blockchain⁹.
-Proof of Elapsed Time: Consensus algorithm in which nodes must wait for a randomly chosen time period and the first node to complete the time period is rewarded⁸.
-Proof-of-Liquidity: A cryptographically signed assertion by a trusted third-party auditor that an actor holds the declared number of resources⁴.
-Proof-of-Replication: the way that a storage miner proves to the network that they are storing an entirely unique copy of a piece of data⁹.
-Proof-of-Spacetime: someone can now guarantee that they are spending a certain amount of space for storage⁹.
Earning some passive income — on top of your main holdings — while you are contributing as a user in the network.
There are several reasons to distribute these rewards between users:
-to incentivize the miners (in PoW consensus models)
-to secure the network (in PoS or similar consensus models)
-to confront inflation
Holders of the project tokens on the blockchain have voting powers which they can use to voice their opinions about the digital token project.
Important decisions can be made by token holders, such as project features, direction, and token economy changes, among other things. All of these decisions are outlined in the tokenomics section of a project.
- Non-Fungible Tokens
NFTs are unique digital tokens stored on a blockchain. We’ve seen a lot of activity and excitement in this space, but to focus on the bigger picture here, people value virtual goods for six main reasons:
-Identity and belonging
- Equity Tokens
Equity tokens are fungible tokens that represent ownership in an asset or a pool of assets. These tokens are used to incentivize participants to provide a scarce resource to a network. In cryptonetworks, scarce resources include capital, developers, customers, creators, and computing power.
An example of how a protocol uses equity tokens to incentivize stakeholders to provide a scarce resource is Uniswap, a decentralized exchange for swapping tokens on the Ethereum network.
The protocol incentivizes LPs by giving them a proportional share of trading fees for any pool they’re an LP in. In this case, LPs are incentivized through equity tokens (e.g. pool tokens) to offer their scarce resource (e.g. capital) to improve the network.
- Utility Tokens
A utility token is a crypto token that serves some use case within a specific ecosystem. These tokens allow users to perform some action on a certain network.
Utility tokens are not mineable cryptocurrencies. They are usually pre-mined, being created all at once and distributed in a manner chosen by the team behind the project.
While utility tokens are not currently classified as securities, there has been some speculation that one day, they could be.
In general, utility tokens provide access to a specific service or product with a blockchain ecosystem. In other words, you might need a certain utility token to be able to perform actions on an altcoin’s network.
While cryptocurrencies are a form of digital money, utility tokens might be better described as pieces of software. They can be used to transfer value, but that’s generally not their main purpose.
-Usage Tokens / Medium of Exchange Tokens
A token that is required to use a service.
These are the tokens that function like a currency in their respective dApps.
These tokens have monetary value; however, they don’t come with any sort of rights or privilege within the particular network.
In short, think of a token as money. Usage tokens are sometimes also referred to as “medium-of-exchange” tokens.
A token that gives users the right to contribute work to a DAO and earn in exchange for their work.
In this model, the user (or service provider) stakes the native token of the network to earn the right to perform work for the network. The cool thing about the work token model is that as demand for the service grows, more revenue will flow to service providers. Given a fixed supply of tokens, service providers will rationally pay more per token for the right to earn part of a growing cash flow stream.
-Access to Community Tokens
Like FWB. Equity tokens incentivize participation in a protocol, and utility tokens unlock functionality in a protocol while easing coordination among participants.
-Governance Tokens. Governance tokens represent percentage ownership over voting rights. It’s difficult for most community members to keep up with the latest developments for specific protocols, so most protocols allow token holders to delegate their votes to trusted representatives.
- Security Tokens
Security tokens give rights of ownership to a company. Think of them sort of like digital, decentralized shares of stock. Security tokens are also classified as securities by financial regulators like the Securities and Exchange Commission (SEC), making them subject to all the same rules as stocks, bonds, ETFs, and other securities.
The SEC uses something called the Howey Test to determine whether or not an investment is a security. The criteria of this test are:
-A monetary investment
-People invest because they expect to make money
-The investment is a “common enterprise,” meaning investors will only make money based on what the issuers of the investment do
-Profits are dependent on the work of a third party If the investment in question checks the above boxes, the SEC considers it a security
- Layer 1 Networks
Layer-1 focuses on creating a consensus ledger. Use a native token to access the network's resources. Anytime you hear topics like "scaling network performance" (aka rollups, side-chain, multi-signature), "reducing transaction fees", or "increasing programmability", the emphasis is on Layer-2 solutions.
Bitcoin, Ethereum, Solana, Binance Chain.
- Layer 2 Networks
Extends layer 1 functionality by enabling fast, cheap, high-throughput transactions over the underlying ledger.
Lightning Network, Polygon, Arbitrum.
Reasons to hold a token
Again, sorry I didn't save the original sources.
- It grants governance actions, like voting.
- It grants exclusive access to a community, network, or service.
- It enables a user to contribute to value-adding actions to the network or market.
- It provides discounts or rewards to incentivize usage.
- It’s a principal payment unit.
- It grants the user value based on sharing/contributing (passive work).
- Provides opportunity to earn return by yield farming.
- Earnings/fees generated from the protocol are distributed back to holders. Ex. Ethereum (ETH) for example will offer a roughly 5% annual percentage rate of interest (APR) for staking to help secure its network when Proof-of-Stake (PoS) finally launches
- Holding is required to run a smart contract or fund an oracle.
- Holding is required as a security deposit to secure some aspect of the blockchains operation.
- It’s a derivative to pay for usage.
- Rebasing with inflation (similar to a stock split, whereby holding and staking the token enables the holder to receive more, thereby offsetting any impact of inflation – eg % ownership remains constant).
- Rarity & Speculation (Memes and Religion): blind faith that it’s valuable and will become more valuable over time. Bitcoin, Dogecoin, NFTs…
Here are some more crypto resources I've gathered over the years.