Learn · Crypto, from first principles
Tokenomics
Supply, distribution and emission — who holds what, at what cost, and when they can sell. It decides more outcomes than the technology does.
Tokenomics is the design of a token's supply and distribution. It is frequently presented as a technical topic. It is a capital structure question, and it is usually the most decisive one.
The two supply figures
Wealth Signal calculation
Why fully diluted value is the number that matters
A token trades at $1 with 100 million in circulation — an apparent market value of $100m. The total supply is 1 billion, with 900 million held by the team, investors and a treasury, unlocking over four years. Fully diluted value is $1bn.
So nine times the current float is scheduled to arrive, held by people who acquired it at a fraction of the price. Unless demand grows at least as fast as supply unlocks, the price falls even if the project succeeds. The headline figure understated the position by an order of magnitude.
A token trades at $1 with 100 million in circulation — an apparent market value of $100m. The total supply is 1 billion, with 900 million held by the team, investors and a treasury, unlocking over four years. Fully diluted value is $1bn.
So nine times the current float is scheduled to arrive, held by people who acquired it at a fraction of the price. Unless demand grows at least as fast as supply unlocks, the price falls even if the project succeeds. The headline figure understated the position by an order of magnitude.
What to look for
- Circulating versus total supply. A very low ratio means most of the supply is still to come.
- The unlock schedule. Published by any serious project. Dates and quantities are knowable in advance, and are frequently ignored until the day they occur.
- Insider allocation. What share went to the team and early investors, and at what price. A large allocation at a tiny cost basis means holders who profit at almost any price.
- Emissions. New tokens issued continuously as rewards are ongoing dilution paid by holders, and they are what most advertised yields actually consist of.
- Any sink. Is anything removed from supply through burning or locking, and is it material against issuance?
What the token actually does
Interpretation
Most tokens have no mechanism connecting the protocol's success to the token's value
A share entitles you to a fraction of profits. A bond entitles you to interest. A governance token typically entitles you to vote and nothing else, so a protocol can become enormously successful while its token captures none of that success. The question to ask is simple and rarely answered clearly: by what mechanism does activity on this protocol accrue to this token? If the answer is that holders may one day vote to direct fees to themselves, that is a hope about a future decision, not a claim.
A share entitles you to a fraction of profits. A bond entitles you to interest. A governance token typically entitles you to vote and nothing else, so a protocol can become enormously successful while its token captures none of that success. The question to ask is simple and rarely answered clearly: by what mechanism does activity on this protocol accrue to this token? If the answer is that holders may one day vote to direct fees to themselves, that is a hope about a future decision, not a claim.
The mechanisms that do exist
- Fee capture — protocol revenue is used to buy back or distribute to holders. The closest analogue to equity, and the least common.
- Staking for security — the token must be locked to operate the network, creating structural demand. See proof of stake.
- Required for use — the token pays for something the network does, as gas does.
- Collateral demand — the token is widely accepted as collateral elsewhere, which is real and reflexive, since it disappears when the price falls.
Distribution as a signal
How a token was first distributed tells you a good deal about who the project was designed to benefit. Broad distribution to users creates many small holders; concentrated allocation to insiders at low prices creates a small number of holders whose interests may not align with later buyers'.
Both are legitimate designs. Only one of them is usually described accurately in the marketing.
Unlock schedules are public and calendars of them are published freely. Checking whether a large unlock is due before buying takes under a minute and is among the highest-value checks available in this market.
Education, not advice. These lessons explain how things work. They do not tell you what
to buy, and Wealth Signal does not publish recommendations. Full disclaimer.