tokenomics for people who only kinda sorta understand basic math

In this week’s issue:

• Touch Grass: Basic-Ass Tokenomics (the opposite of a math wizard gets into spreadsheets)

So I'm definitely figuring out tokenomics as I write this—which feels very on-brand for both me and this newsletter. I've got like twelve browser tabs open right now and am about to wing it. Learning in public is both exposing and fruitful, for myself and hopefully for you. Minus the exposing part.

From what I'm gathering in real-time, tokenomics is basically the DNA of every crypto project—and much like actual DNA, it determines whether something thrives or becomes a cautionary tale that people reference in hushed tones.

Tokenomics 101: Can We Get a Schoolhouse Rock episode on This Shit?

Tokenomics is just "token" plus "economics"—and it’s basically the study/analysis of how digital tokens work within their blockchain ecosystems. Think of it as the rulebook for how a crypto project's money works. Like the rules of a game, tokenomics defines how tokens work within a particular blockchain ecosystem.

To widen the view here a little bit: tokenomics encompasses a number of different aspects like token supply, distribution, utility, and incentives. All of which collectively influence a token's value and functionality within its ecosystem. It's not just one number you can quickly Google—it's like trying to understand a recipe where the ingredients, cooking method, and final dish all affect each other.

The anatomy of not losing your money

After shimmying down this rabbit hole for the past hour (yes, hour—I'm researching as I write this), I've learned there are basically five things you need to wrap your head around if you don't want to accidentally fund someone's Lambo:

1. Token Supply (aka how rare is this thing?)
   The total supply refers to the maximum number of tokens that will ever exist for a particular cryptocurrency. Some tokens are like Bitcoin—capped at 21 million, making them theoretically scarce. Others have unlimited supply, which is like printing money forever and wondering why your purchasing power keeps shrinking.

Here's where it gets spicy: fully diluted market capitalization differs from current market capitalization because it is calculated using the maximum possible supply multiplied by the current market price. Translation: if you buy a token today, and tomorrow they release 10x more tokens into circulation, your slice of the pie just got a lot smaller. It's like buying 10% of a pizza and then watching the paisan cut it into 100 slices instead of 10.

2. Distribution (aka who's getting rich here?)
   Far too many projects turn their public buyers into exit liquidity for early investors and insiders. Nothing destroys community faster than watching early insiders dump tokens while public buyers hold withering bags.

This is where tokenomics gets political. Distribution outlines how tokens are allocated among different stakeholders, Think: developers, investors, the community, and even reserve funds. The red flag? When 80% of tokens go to the team and early investors, leaving retail investors (that's us, babe) holding the bag when everyone else decides to cash out.

3. Utility (aka does this thing actually do anything?)
   Unfortunately, there are occasions when the token is used just for fundraising purposes and has no subsequent use or value. Some tokens are like swiss army knives—they do everything from paying fees to voting on governance. Others are basically digital beanie babies with no purpose beyond speculation.

The question we should all ask: If this token disappeared tomorrow, would the project still function? If the answer is yes, you might be looking at what crypto Twitter calls a "useless governance token."

4. Incentives (aka what's in it for me?)
   Good tokenomics create a system where staking and yield farming use game theory models to incentivize users without affecting the interests of token holders. Bad tokenomics are like pyramid schemes with extra steps and fancier marketing materials.

The key difference: good incentives pay you for doing something useful, bad ones pay you for just existing (until they don't); also, if it sounds too good to be true it most definitely is.

Annnd, for some real-world examples:

Good Incentives

• Ethereum staking: Lock up ETH, help secure the network, earn ~4% APY. Everyone wins—network gets more secure, you get paid.

• Uniswap liquidity mining: Provide trading liquidity, earn fees + UNI tokens. Users get rewarded for actually making the platform work better.

Terrible Incentives

• Terra Luna: Promised 20% APY on stablecoins with no real revenue source. Spoiler: it was basically musical chairs with extra steps.

• Ohm forks: "Stake for 80,000% APY!" Yeah, that's just printing tokens to pay earlier investors. Classic pyramid vibes.

5. Burns and Buybacks (aka supply destruction as performance art)
   Some projects periodically destroy tokens to reduce supply. Burning mechanisms have the opposite effect of inflation, as they are used by cryptocurrencies to reduce total token supply over time. It's like a company buying back its own stock, except more dramatic because they literally delete the tokens from existence.

The theory/why: fewer tokens = higher price per token, but in practice this only works if people actually want the tokens in the first place; otherwise, you're just burning garbage more efficiently.

Tokenomics red flags (not that different from the ones you saw flapping in the breeze on your last Tinder date)

And now, the tokenomics red flags that should send you sprinting.

The "Trust Me Bro" Distribution
While it’s standard practice for projects to offer early investors lower-priced tokens compared to later rounds, founders should be careful in allowing wide pricing spreads between these early rounds and public buyers. If early investors paid $0.01 per token and you're paying $1, guess who's going to be selling first when the price hits $1.50?

The Infinite Money Glitch
Projects with unlimited token supply and no burning mechanism are basically printing money forever. Economic theory holds that the value of a token will increase if there are fewer tokens in circulation. This phenomenon is called deflation. On the other hand, if the total number of tokens increases, the value will decrease.

The Vague Utility Promise
Sadly, there are cases where the token is a pure fundraising instrument but does not find use or value later on. If the whitepaper spends 50 pages explaining the technology but only mentions token utility in a footnote, that's not great.

How to not embarrass yourself, but also it’s ok if you do (research edition)

Most crypto projects outline their tokenomics in a document known as a whitepaper. I know, I know—super fun reading. But apparently it's where you'll find the real information about token distribution, vesting schedules, and utility.

You can also get a lot of tokenomic info from online resources such as Coinbase, CoinMarketCap, CoinGecko, and Messari.

Pro tip from someone who definitely didn’t do these things before her first token investment (because not only am I learning in public, I’m also learning in reverse—which I’m pretty sure is called raw talent). Before investing in any cryptocurrency, thoroughly research the project's fundamentals. Examine the technology, use case, development team, tokenomics, and competitive landscape.

My extremely unsophisticated takeaway

Good tokenomics can make a lazy project viable, while poor tokenomics can kill even the most exciting of projects. It's like having a great product with a terrible business model—eventually, the numbers catch up with you.

The more I learn about tokenomics, the more I realize it's not just about understanding supply and demand curves from Econ 101. The most successful projects approach tokenomics as an extension of product design rather than exclusively an exercise of financial engineering. It's about creating sustainable economic systems that actually work for more than just the people who designed them.

Also tbh and zoom out again for a second—tokenomics is a blueprint for determining a token's possible value trajectory, but it’s still only one part of the matrix. Market sentiment, larger adoption trends, legislative changes, and technology breakthroughs can all influence token value. Perfect tokenomics won't save you from a bear market, and terrible tokenomics can somehow pump during bull runs.

The shit I’m working on daily (aka goals that you may or may not want to adopt as your own): Learn enough to spot obvious red flags, understand what I’m buying, and remember that even with perfect analysis, I’m still essentially betting on magic internet money. Oh, and figure out how to identify assets with strong fundamentals that are currently undervalued.

PS: Subscribe now if you want in on this arithmetic. Miss the last issue? It’s right here. Also literally NONE of this is financial advice. I’m sharing what I learn through Babe, and perhaps you’ll learn from my mistakes. Hopefully, maybe, who knows, ily.