The Importance of "Tokenomics"
Why tokenomics matter, stake of the week, and a brief intro to Sifchain (ROWAN)
TL;DR
Tokenomics
To understand Tokenomics is to understand the supply and demand dynamics of a crypto token, and these dynamics directly affect token price.
Token price performance often hinges upon Tokenomics variables and current market environment, and some are constantly changing.
Tokenomics that are not working can be identified, and should be avoided.
Stake of the Week
Staking ROWAN tokens directly yields ~160% APR (~394% APY)
Sifchain is off to a promising start and the token (ROWAN/EROWAN) has the potential to return multiples on itself through staking, compounding, and potential price appreciation.
See our latest guide: How to Stake ROWAN Tokens.
Hello dear readers and intrepid pioneers,
Another week, another BAYC/NFT scam (hack). Sad that these happen so frequently. As a reminder, do not click any links that someone sends you directly on any platform (this hack involved Instagram). I have enabled two-factor authentication to my newsletter to secure this account, and will never ask you for your password or recovery phrase (if anyone does this, it is a scam). The link to our official Substack newsletter is https://angelcity.substack.com. Beware of imposter websites in crypto. If you’re using a Ledger, this is more secure, but you should always know what transactions you’re signing and where. And the security of your Ledger is only as secure as your seed phrase is, so make sure you a) have your seed phrase and b) secure your seed phrase, which is the key to your funds.
Angel City Stakes Newsletter Update
On a lighter note, a couple of changes and note on the newsletter:
This is a reminder per my first newsletter that this newsletter is considered “Alpha” stage and has not been tested nor standardized. We’ll look to move to “Beta” with a broader audience and testing and feedback in the coming months.
You may have noticed we’ve added a “TL;DR” section at the top. The section TL;DR - a popular acronym on message boards that stands for “Too long; didn’t read” - will highlight the key concepts that are explained in the body of the piece so readers can quickly get the nucleus of the content, and read only what’s relevant to them.
“Tokenomics” - A Hugely Important Concept
“Tokenomics” or token economics, refers the economic variables affecting token price. Cryptocurrency tokens don’t report quarterly earnings like publicly traded companies and are not grounded in fundamental financials (balance sheet, cashflow, etc.). Alexandria defines tokenomics as “the topic of understanding the supply and demand characteristics of cryptocurrency.” The supply and demand characteristics are very important to know as they help you determine risk factor of a given token. Some major tokenomic variables include:
Supply-side Tokenomics
Inflation rate or distribution schedule - The supply of new tokens coming into the market, usually set prior to a protocol launch.
Supply cut dates - The date or mechanism by which a crypto token’s inflation is reduced, and can be set prior to protocol launch or contingent on an algorithm. Usually inflation rate is high in the beginning and cut gradually over time.
Remaining token supply - A good measure to look at is the current coins to max coins ratio, or the market cap to Fully Diluted Valuation (FDV). Projects that are at 100% mean new coins are no longer being generated into the market. A project at 50% would mean that the number of tokens will double before inflation stops.
Unlocking/Vesting schedule - A common practice for projects is to lock tokens either for users, for the treasury, or for staff that receive tokens for their work. Unlock schedules could be something like, tokens will be locked for 6 months and then beginning locking at 1/12th the amount each month for a period of 12 months. Similarly with vesting, when a token becomes “earned” after a certain period of time.
Voluntary lockup period(s) - Does the network incorporate (in a major way) voluntary lockup periods for earning stake or liquidity rewards? For Osmosis, this would be the 14-day undelegating period for stakes, or the 1, 7, or 14-day unbonding period for all liquidity pools.
Negative Price Momentum - If the price trend for a given crypto is consistently or sharply down, this can lead to further sell pressure as holders decide to bail, which can bring in further selling, creating a downward spiral of negative momentum. These can continue until a critical mass of holders are washed out, or if demand is weak, indefinitely.
Timing of Project Team Delivery - Another possible supply-side variable is whether or not the project team delivers at key dates around the project roadmap. If the team is missing deadlines on delivery of items mentioned in their roadmap, this can create sell pressure as investors lose confidence.
Demand-side Tokenomics
Product/Feature Launches - The inverse to the last bullet on the supply-side, is whether the project team is able to deliver a working “product” or feature enhancement that generates strong demand from the market. It could be as big as a mainnet launch, or as small as improved functionality (E.g. Superfluid staking).
Sustainable APR - For Proof-of-Stake (PoS) networks, a “good” APR can generate sufficient demand for users to purchase tokens. Defining a “good” APR is a little tricky, as “good” does not mean high or relatively high if the APR is driven by “too high” token inflation. I think the key here is more of finding a “Goldilocks” value that is just high enough to garner interest and decreases at a pace that is able to maintain the interest
Brand Value - A crypto’s brand alone can generate demand as people learn about it or crypto in general. Bitcoin has the biggest brand and people are drawn to it because of the functionality it offers as well as what it stands for.
Utility - Probably the biggest - what utility does the token have? What is the use case? What problem does the crypto token solve and how many people have a need to solve that problem? For a token to have utility, its users should be able to derive value by holding or spending the token (can be any type of value not just financial).’
Positive Price Momentum - It’s human nature to want to buy when prices trend up and sell when they’re down. A price that is consolidating or up over time can generate further investment as more people want a part of the action. Price trend can be analyzed on both short and long-term periods, with respective influences.
As you can see there are many variables when it comes to tokenomics. The thing is that some of these variables are constantly changing, like launch timing, price action. And some are set in stone from the get-go, like distribution schedule. Some red flags:
If you notice gradually declining price, the inflation may be too high for the demand.
If the project team doesn’t deliver on deadlines, negative price action could result.
If major lockup periods are upcoming, price could take a hit if owners decide to sell.
These are some examples, always do your own research.
Angel City Stake of the Week
Last week we introduced the “Pool of the Week” which I’m now changing to “Stake of the Week” as this could be a pool but could also be something else, as in this week’s Angel City Stake of the Week, and it looks juicy.
Last week’s pool was ROWAN/OSMO and ROWAN token is up an incredible 48%+ (0.113 last week to 0.168 today via CoinGecko), while OSMO is down ~19% (5.32 last week to 4.25 today), leaving a one-week net gain of ~30%, which includes ~2% of APR rewards.
This week’s stake of the week is directly staking ROWAN tokens, which will net you ~162% APR currently, and the annual return can be increased with compounding.
Angel City has created a user guide with step-by-step instructions to stake your coins, as well as our list of preferred validators, which is available through the link below:
As we discussed last week, Sifchain is an exchange of exchanges, similar to Uniswap on Ethereum network. Sifchain uses elements of the Cosmos Hub SDK but the exchange will reach beyond the Cosmos network. They have a “Protocol Monetary Trade Policy” (PMTP) that supposedly helps increase token value, although we have seen other projects claim the same without offering substance. Still, based on early initial research we feel price could run to $0.40 per ROWAN in the short to intermediate term simply due to flat-to-positive price action and attractive APR’s both via staking and the DEX itself, which we’ll cover in a later newsletter.
If you would like an overview, this guy’s video is pretty good and I recommend watching it if you’re considering purchasing ROWAN tokens:
A funny tidbit I came across while researching Sifchain, the protocol lists various possible risks including one that made me laugh: “bad management by the user”. Well, I suppose that can be true of almost anything, and highlights why empowerment through financial and crypto education is just so darn important.
Stay nimble,
Mike