Understanding Tokenomics: Supply, Inflation, and Burns

Detailed Instructions

Begin by locating the token's genesis block or initial distribution data. This is the foundational supply created at launch. Examine the project's whitepaper, token sale documentation, or on-chain data to map the initial allocation. This typically includes portions for the team, investors, foundation treasury, community rewards, and public sale.

• Sub-step 1: Use a block explorer like Etherscan for Ethereum-based tokens. For example, find the contract creation transaction for the token.
• Sub-step 2: Query the contract's totalSupply() function at the earliest block to get the initial minted amount. For a token like 0xA0b86991c6218b36c1d19D4a2e9Eb0cE3606eB48 (USDC), you would call totalSupply() on its first block.
• Sub-step 3: Analyze the token holder distribution from the first few blocks to see initial transfers to known addresses (e.g., team multisig, vesting contracts).

Tip: Many projects use a transparent vesting schedule. Check if the initial supply is locked and released linearly over time, impacting circulating supply.

Detailed Instructions

Determine the inflation schedule by examining the token's smart contract for minting functions and governance proposals. Key metrics include the annual percentage rate (APR) of new token issuance and the entities with minting authority. Inflation can be fixed, decaying, or governance-controlled.

• Sub-step 1: Search the contract code for functions like mint(address to, uint256 amount). For example, many staking rewards are minted via a dedicated distributor contract.
• Sub-step 2: Calculate the current annual inflation. If 100M new tokens are minted yearly for staking against a 1B total supply, the inflation rate is 10%.
• Sub-step 3: Use on-chain queries to track minting events. On Ethereum, you can filter for Transfer events where the from address is 0x000...000 (the zero address, indicating minting).

codeCopy
// Example query for mint events on Etherscan API
https://api.etherscan.io/api?module=logs&action=getLogs&fromBlock=0&toBlock=latest&address=TOKEN_CONTRACT_ADDRESS&topic0=0xddf252ad1be2c89b69c2b068fc378daa952ba7f163c4a11628f55a4df523b3ef&topic0_1_opr=and&topic1=0x0000000000000000000000000000000000000000000000000000000000000000

Tip: High inflation can dilute holder value unless offset by strong demand or burning mechanisms.

Detailed Instructions

Identify all token burn functions and their triggers. Burns reduce the total supply, creating deflationary pressure. Common mechanisms include transaction fee burns, buyback-and-burn programs, and supply caps. Analyze the burn address (commonly 0x000...dead) and the rate of tokens sent there.

• Sub-step 1: Find the burn function in the contract, often named burn(uint256 amount) or embedded in a transfer function that deducts a fee.
• Sub-step 2: Calculate the burn rate. For instance, if a project burns 2% of every transaction and daily volume is 10M tokens, the daily burn is 200,000 tokens.
• Sub-step 3: Compare the burn rate to the minting rate to determine if the net supply is inflationary or deflationary. A net negative supply is deflationary.

codeCopy
// Example: Checking balance of a common burn address on Ethereum
const Web3 = require('web3');
const web3 = new Web3('RPC_URL');
const burnAddress = '0x000000000000000000000000000000000000dEaD';
const tokenContract = new web3.eth.Contract(ERC20_ABI, 'TOKEN_ADDRESS');
const burnedBalance = await tokenContract.methods.balanceOf(burnAddress).call();
console.log('Total Burned:', web3.utils.fromWei(burnedBalance, 'ether'));

Tip: Look for verifiable, on-chain burns rather than promises. Some projects use a blackhole address where tokens are irretrievable.

Detailed Instructions

Create a supply model to forecast the circulating and total supply over time. Incorporate all variables: vesting releases, minting schedules, burn rates, and governance proposals that could change parameters. Use this to assess token velocity and potential price pressure.

• Sub-step 1: Build a spreadsheet or script modeling monthly supply changes. Input initial supply, monthly minting for rewards (e.g., 5M tokens/month), and estimated monthly burns based on projected transaction volume.
• Sub-step 2: Run scenarios: a bull case with high adoption and burn rates, a base case, and a bear case with low activity and high selling pressure from unlocks.
• Sub-step 3: Calculate key metrics like fully diluted valuation (FDV) and circulating market cap for each future date. FDV = Price per token * Total Supply.

Tip: Always factor in governance risk. A community vote could suddenly increase the minting cap or change burn parameters, drastically altering your model. Monitor governance forums and snapshot votes.

Detailed Instructions

Begin by investigating the total token supply and its distribution across wallets. The total supply includes all tokens that currently exist, while the maximum supply is the absolute cap that can ever be minted. A fixed maximum supply, like Bitcoin's 21 million, creates a deflationary pressure model.

• Sub-step 1: Query the blockchain for the current total supply using a block explorer or RPC call. For Ethereum-based tokens, use the totalSupply() function on the token contract.
• Sub-step 2: Analyze the token holder distribution by checking the top 10-100 wallets. A concentration in a few wallets (e.g., >20% in the top 10) indicates high centralization risk.
• Sub-step 3: Review the vesting schedule for team, investor, and treasury tokens from the project's official documentation. Locked tokens that unlock linearly over 3-4 years reduce immediate sell pressure.

Tip: Use Etherscan for ERC-20 tokens. For the USDC contract (0xA0b86991c6218b36c1d19D4a2e9Eb0cE3606eB48), you can call totalSupply() to see the circulating supply.

Detailed Instructions

Calculate the annual inflation rate by understanding the token's emission schedule. This is the percentage increase in the token supply each year, which dilutes the value of existing holdings if demand doesn't keep pace. Staking rewards and protocol incentives are common inflation drivers.

• Sub-step 1: Identify emission sources. Check the whitepaper for block rewards, staking APY, or liquidity mining programs. For example, a token might emit 5% annually to stakers.
• Sub-step 2: Build a simple supply projection model. Use a spreadsheet to project the total supply for the next 5 years. Formula: Future Supply = Current Supply * (1 + Annual Inflation Rate)^Years.
• Sub-step 3: Assess the real yield. If the inflation rate is 7% and the staking APY is 5%, stakers still experience a -2% real yield dilution unless the token price appreciates.

Tip: For a token with 100M supply and 5% annual emissions, the supply in 5 years will be 100,000,000 * (1.05)^5 ≈ 127,628,156 tokens.

Detailed Instructions

Token burns permanently remove tokens from circulation, creating a deflationary counterforce to emission schedules. Analyze if burns are automatic (via smart contract logic) or discretionary (via governance). The burn rate should be compared to the emission rate to find the net inflation.

• Sub-step 1: Locate the burn address. On Ethereum, the common dead wallet is 0x000000000000000000000000000000000000dEaD. Verify tokens are sent there and are irretrievable.
• Sub-step 2: Examine the burn trigger. It could be a percentage of transaction fees (e.g., 0.05% of every trade), protocol revenue (e.g., 50% of profits), or a buyback-and-burn program.
• Sub-step 3: Calculate net annual supply change. If emission is 10M tokens/year and burns destroy 4M tokens/year, the net inflation is 6M tokens/year.

Tip: For BNB, check the real-time burn tracker on BNB Chain's website. The burn is based on a formula using gas fees and the price of BNB.

Detailed Instructions

Combine your findings to compute standard valuation metrics. The Fully Diluted Valuation (FDV) values the token at its maximum supply, while the Circulating Market Cap uses only liquid, tradable tokens. The Market Cap to FDV Ratio shows how much inflation is priced in.

• Sub-step 1: Compute FDV and Circulating Market Cap. FDV = Token Price * Max Supply. Circulating Market Cap = Token Price * Circulating Supply. Use data from CoinGecko.
• Sub-step 2: Calculate the FDV/Circ Ratio. A ratio of 2.0 means the circulating supply is only half of the max supply, indicating significant future dilution.
• Sub-step 3: Model token holder dilution. Estimate the future price per token using the formula: Future Price = (Future Market Cap) / (Future Supply). This requires projecting both market cap growth and supply changes.

Tip: A token priced at $2 with a 1B max supply has an FDV of $2B. If its circulating supply is 250M, its circulating market cap is $500M, giving an FDV/Circ ratio of 4.0—a high dilution warning.

Detailed Instructions

Create a dynamic model to test the token's valuation under various conditions. This scenario analysis helps understand the sensitivity of the price to changes in adoption rate, inflation schedule adjustments, and burn mechanism efficacy.

• Sub-step 1: Define base, bull, and bear cases. For example: Base case assumes 5% annual adoption growth and constant emissions. Bull case assumes 15% growth and increased burn rates.
• Sub-step 2: Build a discounted cash flow (DCF) model for revenue-generating tokens. Value the token as a claim on future protocol cash flows, discounting them back to present value. Use a discount rate of 20-40% for crypto's high risk.
• Sub-step 3: Stress test the emission schedule. Model what happens if staking APY is cut in half or if a governance vote accelerates token unlocks, increasing sell pressure.

Tip: In a spreadsheet, use variables for annual demand growth (g), net inflation rate (i), and starting market cap (MC0). Projected price = MC0 * (1+g)^t / (Supply0 * (1+i)^t).