Before deciding to participate in a project, carefully evaluating its tokenomics is a crucial step.

Why should we study tokenomics?

For all types of Web3 projects, a well-designed tokenomics model is the key to success. Therefore, when developing a project, the token’s economic model should be carefully designed to ensure the long-term sustainability of the project.

For regular users, thoroughly evaluating a project’s tokenomics before deciding to participate is extremely important. Only by fully understanding the project itself can you increase the chances of success in your investment.

The leading DePin project, Roam, has released its tokenomics, which we can use to specifically analyze how to evaluate the strengths and weaknesses of a token model. @weRoamxyz

(The following mind map summarizes Roam’s tokenomics.)

For the token economics model, there are four main dimensions to analyze: token supply (supply side), token utility (demand side), token distribution (ownership situation), and token governance (long-term ecosystem).

1. Token Supply

To assess token supply, there are four core indicators:

(1) Max supply: the maximum token quantity set by the preset code.

(2) Circulating supply: the number of tokens currently in circulation. (Circulating tokens are mainly influenced by two factors: the unlocking schedule for the development team and investors, and ecosystem incentives.)

(3) Current market capitalization: the current price * circulating supply.

(4) Fully diluted market capitalization: the current price * max supply. (If the price of a new project is hyped up and the fully diluted market capitalization exceeds the industry benchmark, Bitcoin, it indicates that this price is hard to maintain.)

Another important dimension influencing token supply is the token burn mechanism: continuously reducing token supply, which is deflationary; conversely, continuously expanding token supply is inflationary.

Now, let’s look at Roam.

The total supply is 1 billion (1B) $ROAM tokens.

120 million (120M) are reserved for the team and will be released over 6 years, indicating the team’s long-term commitment to the project.

280 million (280M) are allocated to past and future investors, with airdrops deducted from this, which is the actual initial circulating supply.

The remaining 600 million (600M) will be generated through mining, showing that participation in the project can continue after listing, avoiding a pump-and-dump situation.

The project team also mentioned that they will buy back tokens using business revenue.

Therefore, overall, Roam is deflationary, which also provides a strong value support.

2. Token Utility

Token utility represents the value of a token, its real-world use cases, and its ability to attract more participants, i.e., the demand side of the token.

Token utility can be divided into three aspects:

(1) Practicality: Gas fees (a typical example is Ether, which is used to pay for computational power), real-world payments (a typical example is Bitcoin, which can be used for actual payments).

(2) Value accumulation: Staking (security tokens, which allow holders to earn part of the product’s profits), governance (governance tokens, where holders have the right to vote on protocol changes).

(3) Meme and narrative: Meme refers to the culture or ideas that spread widely on the internet due to popularity. Dogecoin is a typical example of a meme coin, which has no practical utility and became popular merely because of its humorous meme.

Now, let’s look at Roam.

Its token utility is mainly used for services within the ecosystem, such as paying for network service fees, exchanging free roaming data, or participating in other functions.

Relative to this, Roam has strong value support and is not a useless “air token.”

3. Token Distribution

There are two ways to launch and distribute tokens:

(1) Fair launch: A fair launch means that no one gets tokens before the public distribution or in small private allocations. A typical example is Bitcoin.

(2) Pre-mined launch: Pre-mining refers to the practice of creating a portion of the cryptocurrency before it is made available to the public, and then distributing it to a specific group (such as the founding team or investment institutions). Ethereum implemented pre-mining.

Now, let’s look at Roam. It is clearly not a fair launch but rather a pre-distribution, which aligns with the commercial logic of venture capital (VC) tokens, as investors are looking to make a profit.

We also need to pay attention to the token holders. Large institutions and individual investors behave differently.

Once we understand the types of entities holding the tokens, we can further infer how they might trade them, and their trading behavior will influence the token’s value.

On the other hand, we need to consider whether the token distribution is balanced. Generally, if large institutions hold most of the tokens, the risks are higher.

If patient investors and the founding team hold the majority of tokens, the interests of the holders are more aligned, and the project is more likely to succeed long-term.

The Web3 industry standard is to allocate at least 50% of the tokens to the community, which effectively dilutes the ownership retained by the founding team and investors.

We also need to understand the token’s lock-up and release schedule to see if a large number of tokens will enter circulation, potentially putting downward pressure on the token’s value.

4. Token Governance

How to incentivize participants to ensure long-term sustainability is the core issue of tokenomics.

Many Web3 projects also integrate staking mechanisms into their token economic models.

Staking tokens can increase their value in two ways:

First, staking incentives mean locking up tokens to earn passive income, so the minimum value of the token is a multiple of the future rewards.

Second, locking up tokens prevents them from being traded, which helps reduce market supply and can boost the token price.

Now, let’s look at Roam. In order to reduce selling pressure after listing and lower the actual circulating supply, Roam also offers staking services, which has become a standard feature.

Finally, let’s summarize:

Roam’s economic model design is quite reasonable, overall following the principles of long-termism and sustainability.

Only by controlling supply, increasing demand, and implementing governance mechanisms can the value of tokens be maintained in the long run.

We can see that a good token economic model must have three key elements:

(1) A reasonable staking mechanism: Staking can tie users’ interests to the project’s value and regulate the token’s supply. Curve’s VE staking model has proven to be relatively more optimal.

(2) More application scenarios: This is the biggest challenge for any project. Expanding use cases must be based on the growth of the business itself.

(3) Steady growth in business revenue: While token incentives can attract new users, Ponzi schemes will eventually collapse. Therefore, the key is whether the business itself can create value.

Token economic models are very important, but everything depends on the business value itself; otherwise, it is just an “air token” without any value backing.

Currently, token economic models are still rapidly evolving and changing very quickly, so it’s important to keep an eye out for any new models emerging in the market.

But in general, the fundamentals remain unchanged, and token economic models can always be analyzed from the four dimensions of supply, demand, distribution, and governance.

Disclaimer

1. This article is reproduced from [TechFlow]. The copyright belongs to the original author [TechFlow]. If you have any objection to the reprint, please contact Gate Learn team, the team will handle it as soon as possible according to relevant procedures.
2. Disclaimer: The views and opinions expressed in this article represent only the author’s personal views and do not constitute any investment advice.
3. Other language versions of the article are translated by the Gate Learn team and are not mentioned in Gate.io, the translated article may not be reproduced, distributed or plagiarized.