Cryptocurrency Economics and Tokenomics Flashcards

What is 'tokenomics,' and why is it considered critical when evaluating a cryptocurrency project?

Answer: The economic design of a token, including its supply, distribution, incentive mechanisms, and monetary policy, which determines long-term value sustainability

Tokenomics encompasses all economic aspects of a cryptocurrency: total supply, circulating supply, emission schedule, distribution among founders/investors/community, vesting periods, burn mechanisms, and incentive structures. Poor tokenomics (e.g., excessive founder allocation, hyperinflationary supply) can doom a technically sound project.

Bitcoin's supply is capped at 21 million coins. Approximately every 4 years, the block reward for miners is cut in half in an event called the 'halving.' What is the primary economic purpose of the halving?

Answer: To control inflation by gradually reducing the rate at which new Bitcoin enters circulation, mimicking a deflationary monetary policy

The halving is Bitcoin's programmatic monetary policy. By cutting the block subsidy in half approximately every 210,000 blocks, Bitcoin's issuance rate decreases over time, reducing sell pressure from miners and enforcing digital scarcity. Historically, halvings have preceded significant bull markets as supply growth slows while demand may continue.

Which of the following best describes a 'deflationary' cryptocurrency, and what mechanism is commonly used to achieve deflation?

Answer: A cryptocurrency designed so the total supply decreases over time, often through token burning, creating increasing scarcity

Deflationary cryptocurrencies are designed so that the total circulating supply shrinks over time. The most common mechanism is 'token burning' — permanently removing coins from circulation by sending them to an unspendable address. Ethereum's EIP-1559 introduced a burn mechanism that makes ETH deflationary when network usage is high.

In a typical cryptocurrency project's token distribution, what is a 'vesting schedule' and why does it matter to investors?

Answer: A time-lock mechanism that prevents early investors, founders, or team members from immediately selling their allocations, protecting against large dumps

Vesting schedules release tokens to founders, early investors, and team members over time rather than all at once. This aligns incentives (insiders must hold for project success) and prevents massive sell-offs immediately after launch that could crash the price. Investors scrutinize vesting schedules to assess dump risk.

What is the difference between a cryptocurrency's 'circulating supply' and its 'total supply,' and why does this distinction matter for market cap calculations?

Answer: Circulating supply is the number of coins actively available in the market; total supply includes all created coins minus burned ones. Market cap = price × circulating supply.

Circulating supply is the number of coins actually in public hands and tradeable, excluding locked, reserved, or unvested tokens. Total supply includes all coins ever created minus burned ones. Market capitalization is calculated as price × circulating supply. Investors compare market cap to fully diluted valuation (FDV = price × max supply) to assess inflation risk from future token unlocks.

Ethereum shifted from a Proof of Work to a Proof of Stake consensus mechanism in 'The Merge' (September 2022). What is the primary economic difference between how new ETH is issued under PoW versus PoS?

Answer: Under PoW, issuance was determined by block difficulty; under PoS, issuance is determined by the total amount of ETH staked, resulting in approximately 90% lower annual issuance

The Merge dramatically reduced Ethereum's issuance rate by ~90% because PoS validators require far less reward than PoW miners (who must cover large energy costs). Combined with EIP-1559's fee burn mechanism, Ethereum's net issuance often becomes negative (deflationary) during periods of high network activity.