Tokenomics: supply schedules, unlocks and valuation pitfalls
Read a token's supply schedule, calculate circulating and fully diluted values, and judge how unlocks and emissions dilute holders.
What you will learn
- The difference between circulating supply, total supply and maximum supply.
- How to calculate market capitalisation and fully diluted valuation, and why the gap matters.
- How cliffs, linear vesting, emissions and burns change the number of tokens over time.
- How to measure an upcoming unlock against circulating supply and trading volume.
Explanation
Tokenomics (token economics) describes how many tokens of a project exist, who holds them, how new tokens are created and how tokens are removed. The Bitcoin course showed one fixed issuance schedule. Most other tokens have far more complex schedules, often written by the project team itself, and these schedules can change through governance votes.
Three supply numbers
- Circulating supply: tokens that can be traded today.
- Total supply: tokens that already exist, including locked tokens held by the team, investors or a treasury.
- Maximum supply: the upper limit, if the rules define one. Some tokens have no maximum.
Market capitalisation = price × circulating supply. Fully diluted valuation (FDV) = price × maximum supply (or total supply if no maximum exists). FDV asks: what would all tokens be worth at today's price? A small market cap with a very large FDV means most tokens are not yet tradable. This is often called "low float, high FDV".
How new tokens arrive
- Cliff: a period during which allocated tokens stay locked completely. When the cliff ends, a large block may become tradable at once.
- Linear vesting: after the cliff, tokens unlock in equal amounts, for example every month.
- Emissions: new tokens paid as rewards, for example to stakers or liquidity providers. Staking yield paid in newly created tokens is partly a transfer from holders who do not stake (see the lesson on staking).
- Burns: tokens permanently removed, for example a share of fees. Net issuance = new tokens − burned tokens.
Valuation pitfalls
- Market cap is not money invested. A thinly traded token can show a high market cap although little money could be realised by selling.
- Price can stay the same while value per holder falls: if supply doubles and total demand stays constant, the price halves.
- Unlock dates are public. Markets may price them in early, or not at all. No rule says the price must fall at an unlock.
- Allocation tables in project documents are claims. Check whether wallets and vesting contracts can be verified on-chain.
Worked example
Hypothetical example: token "ABC" trades at $2.00. Maximum supply is 1,000,000,000 (1 billion); circulating supply at launch is 100,000,000 (100 million). Team and early investors hold 300 million tokens with a 12-month cliff, then 24 months of linear vesting. Staking emissions add 2 million tokens per month. No burns. Fees, spreads and taxes are ignored.
- Market cap = $2.00 × 100,000,000 = $200,000,000.
- FDV = $2.00 × 1,000,000,000 = $2,000,000,000. Only 10% of the maximum supply is tradable.
- After year 1: circulating = 100m + 12 × 2m = 124 million.
- Monthly vesting from month 13: 300m ÷ 24 = 12.5 million per month.
- Month 13 new supply = 12.5m + 2m = 14.5 million = 14.5 ÷ 124 ≈ 11.7% of circulating supply in one month.
- Year 2 new supply = 12 × 12.5m + 12 × 2m = 174 million. Circulating at end of year 2 = 298 million, an increase of about 140%.
- If total market cap stayed at $200 million: price at end of year 1 = $200m ÷ 124m ≈ $1.61; at end of year 2 = $200m ÷ 298m ≈ $0.67. That is about 58% lower, with no change in total demand.
The example does not predict a price. It shows how much new demand is needed just to keep the price stable.
Common mistake
Practice activity
On paper: hypothetical token "XYZ" trades at $4.00 with 50 million tokens in circulation. Next month, 10 million investor tokens unlock. Average daily trading volume is $3 million. Calculate (a) the market cap, (b) the dollar value of the unlock at today's price, (c) the unlock as a percentage of current circulating supply, and (d) how many days of average volume the unlock equals.
Show solution
(a) $4.00 × 50,000,000 = $200,000,000.
(b) 10,000,000 × $4.00 = $40,000,000.
(c) 10m ÷ 50m = 20% of current circulating supply. After the unlock, the new tokens are 10m ÷ 60m ≈ 16.7% of the larger supply.
(d) $40,000,000 ÷ $3,000,000 ≈ 13.3 days of average volume.
Limitations: not every unlocked token is sold, volume figures can include wash trading, and part of the selling may happen off-exchange. The numbers measure potential pressure, not a forecast.
Key takeaways
- Market cap uses circulating supply; FDV uses maximum supply. A large gap signals future dilution.
- Cliffs create one-off supply jumps; linear vesting and emissions create steady dilution.
- Compare unlocks with circulating supply and with daily volume, not with price per token.
- Supply schedules are rules written by people and can change; verify them on-chain where possible.
Next step
In the next lesson you will look at a different kind of risk: the code itself, the bridges between chains and how real hacks happened.
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