Have you ever thought about the factors that determine whether a project is interesting or not for an investor? The solution can be super revolutionary, change the world, but if the token economics are not good, there is no business for the investor.
In the traditional market, in practice, you buy a stock and expect it to appreciate in value. In the crypto world, each token represents a different story.
WHAT IS TOKEN ECONOMICS?
Token economics gives us a guide as to whether or not it is worth investing in a project from an economic point of view.
When we talk about token economics we refer to all the economics surrounding the solution that the project proposes to solve: how the investor will be rewarded and when he will be rewarded, for example. It’s about understanding whether or not it is worth investing from an economic point of view. It’s no use simply having a very good solution and the token economics being bad. In this case it might be very nice for the world, but not for the investor.
TOKEN ECONOMICS | HOW IT WORKS?
The mainstream doesn’t talk much about Token Economics. The biggest issue is that there is usually a lack of know-how to study them and see what makes sense, because there are differences between the projects. There are even many people saying things that don’t make much sense. For example: “This coin is much cheaper than Bitcoin!” Yes, it may be cheaper, but you have to look at the market capitalization, not the price of the asset itself, because it depends on how many units are in circulation or will exist in the project. You can find all this and more by looking at Token Economics.
In the logic of investment value, it is very important to pay attention to the trading of tokens in each round and how they will be distributed over time.
- When will be the release schedule for the tokens;
- The different rounds (seed, strategic, KOL, private and public rounds, depending on the project);
- Whether they have differences between their prices (usually they do, seed is the cheapest, followed by strategic private, KOL and then public price, in general terms); and
- What percentage is going to be available already at the time of the TGE (Token Generation Event). We need to see if the percentage available is going to be higher when, for example, you participate in a later round like public or strategic, or is it going to be lower when it is there at seed or private. So we need to do all the measurement of this vesting schedule to know if it is really in accordance with the round we get, because it varies.
Token Release Schedule
As much as we know the vesting, we need to find out what we call the dump day: which usually occurs on a specific day, usually when there is a large release of tokens, either for the team or even for the rounds negotiated with investors.
This day is important because it is a moment when we have a lot of selling strength and the price tends to fall, because supply exceeds demand, investors with a lot of profit tend to sell the tokens received to take some of the risk out of their initial investment.
The price paid in each investment round
It is important to analyze the price that is being negotiated in all the rounds and see which round has an advantage. We must establish a comparison between the value of each round and vesting, this analysis will show whether it is really worth investing in a particular round or in another. The idea is to recover the initial investment in the shortest possible time.
Total Funds Raised
This is a very important point that few people analyze. Usually people look only at the initial market capitalization, which in practice doesn’t mean much.
To consider a project good, we need to analyze the sector in which it is inserted. Let’s take a simple play-to-earn game, without big backers, as an example: if it is raising from US$ 3 million dollars, it is considered bad.
So we have to do all this analysis of how much the project is raising, based on what the competitors have raised, on the current moment of the market, and also how this money will be allocated in percentages for each sector: whether it will go to the development of the project, to the ecosystem, and even to the team. Special attention is needed if the project team receives more than 15%. Most of the time we tend not to invest, with rare exceptions.
Another point that we should also highlight is the team’s vesting. The ideal is that the team stays allocated, and cannot sell the tokens for x amount of time, this shows the minimum commitment to the project. After all, they will have already received the money from the other rounds of investment to invest in it. So for them to make the same money it has to be later, when the solution is already up and running etc. That’s in the best of worlds.
When the project we are looking at is a Layer 1 solution, they tend to raise more. For example, a Layer 1 solution that raises $10 million is roughly equivalent to a simple play-to-earn that raises $2 million, because they are totally different projects.
There is no fixed rule, it is very customized, that is, we have to look at each project one by one. According to our calculations, there is a maximum that each project can raise so we consider a deeper study of token economics. In case the project is raising too much and is too outside what we consider adequate, we don’t even proceed with the rest of the analysis.
WHEN TO INVEST ACCORDING TO TOKEN ECONOMICS
We must identify whether Token Economics makes sense from analysis:
both of the vesting and the percentage made available in each of the rounds, teams and advisors. And whether or not there was a difference in price between each round.
TOKEN ECONOMICS DATA
All serious projects have their token economics publicly available. All the information is usually in the whitepaper of the project. Sometimes it’s not so easy to find this token economics information, it’s not in plain sight — you have to click a few more times to find it.
Some projects present Token Economics in a separate form in another document and some projects, although they have it in public form, are not on the website; they are on Telegram or Twitter. This is why these two platforms are so important for those in the crypto universe.
All the data necessary for analysis are public, but people don’t analyze much because of lack of know-how and also because they don’t know that this information exists. They think that all projects are the same.
For example, Bitcoin. They assume that it will have controlled inflation. Bitcon is not deflationary as many people talk about, it is inflationary. But it is a controlled inflation, and it drops by half about every 4 years when it has the so-called “halving” — which decreases the mined Bitcoin rewards by half.
TOKEN ECONOMICS | SMALL CAP PROJECTS
There is a gigantic lack of interest for investments in small capitalization projects. Which is understandable, because it is more difficult. It’s just like investing in a startup: you don’t know where you are going, you need to do a series of much deeper studies.
Only, in reality, it is much more difficult than investing in a startup. You buy, for example, a portion of the company, and you leave it there. In the crypto world you can’t just “leave it there. You have to monitor at least once a week the asset you have invested in, because everything can change. You can open a staking platform, so you may be able to monetize your assets for a certain period of time and earn some interest on top. You can even not do that, but you run the risk of being diluted in inflation.
TOKEN ECONOMICS | INVESTMENT SUCCESSES
At Uniera, we have more than 200 examples. We could mention AIOZ for example. AIOZ is a layer 1 protocol focused mainly for streaming and cloud storage.
It is like a decentralized Dropbox and streaming like, for example, Netflix, Youtube and others can use AIOZ’s technology through their token. The project token is the only form of payment.
Validators around the world also need to have their token to be able to have a node. It is important to have their token to do staking — which is when you lease the asset — you take it out of circulation, so you take the selling pressure off and you end up having a remuneration for that.
TOKEN ECONOMICS | INVESTMENT FAILURES
When the team receives more than 15% of all tokens in the project, it can turn on the warning sign. We have to look deeper to see why this is happening. In general, we don’t invest in this at Uniera.
Another point: we are looking for projects that raise little funds, because we can get a bigger upside. There are exceptions, such as, for example, Layer 1 protocols, because they are much more robust and raise much more money than a play-to-earn project.
Another issue that few people analyze in token economics is in which network it will be distributed, in which way, if there is enough liquidity to sell. In general terms, unlike the traditional market, which in practice has a single stock exchange in Brazil, within the crypto world you have several possibilities to buy and sell assets — either in centralized or decentralized exchanges.
So depending on the blockchain that has the asset it can be traded on a decentralized exchange and, obviously, has to have liquidity for that. If you have little liquidity, you have to make small sell orders in order not to move the price, which ends up being more complicated. We do all this analysis here at Uniera; from the beginning of the investment to the moment of settlement of the tokens, our diligence is gigantic.
When talking about investment in the crypto world, one of the goals of the Uniera is to cover all tips: regarding token economics, all this analysis of the release schedule, how it will be released, whether or not the saft (contract you sign to receive future tokens) is being fulfilled.
Having said all this, we have seen that the importance of token economics is gigantic in the analysis of a project and whether or not we should invest in it. Much more than simply analyzing the solution as a whole.
Uniera has investing in game changing business models in the blockchain sector Uniera is dedicated to supporting early stage (pre-seed, seed and private) projects across the Web 3.0 space, including DeFi, Metaverse/GameFi, DAOs, and infrastructure layers. Through our investment vehicle in Cayman Islands, we manage proprietary and qualified investor`s funds into some of the most promising opportunities in crypto market.
Founded in March 2021, Uniera is a crypto exchange and manager dedicated to the portfolio of professional investors and family offices. Conceived by partners Caio Villa and Gustavo Albanesi, the company seeks to become the the main access route for investors to the best projects in the digital assets market. With tokens audited by Grant Thornton, one of the largest and most respected in the segment, Uniera seeks to raise the level of reliability in cryptocurrency trading in the country.
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