FOLLOW THE MECHANISM
- 1Creation and allocation
Rules determine who receives units.
- 2Use and payments
Users or other participants supply economic flows.
- 3Distribution or burn
Rules route value, issue units or remove units.
- 4Control
Governance and administrators may change parameters.
A conceptual sequence. Real implementations can add steps, intermediaries, and conditions.
Start with the supply ledger
Supply can increase through issuance or minting and decrease through burns. Circulating-supply figures also depend on which locked, treasury or otherwise restricted balances a publisher excludes. A maximum supply is a rule or promise that must be connected to actual minting authority and upgrade powers. Vesting releases can change who is able to sell without creating new units at that moment. Keep those events distinct.
Ask who pays each reward
A reward can come from new issuance, user-paid fees, borrowing interest, trading counterparties or a treasury subsidy. Issuance distributes additional units; fees transfer existing units; subsidies consume a fund. Calling every flow “yield” hides the difference. An incentive may attract activity temporarily without generating enough recurring revenue to continue. Follow the payer, recipient and obligation before interpreting a displayed percentage.
Units and value are separate measurements
An expanding token balance can lose value if its market price falls. Supply growth can also change a holder’s share of the total supply. These are different comparisons: absolute units, ownership fraction and value in a reporting currency. Burning tokens does not mechanically guarantee a price increase, because demand, liquidity and expectations can change at the same time. A protocol rule is only one input to a market outcome.
Rights depend on explicit mechanisms
A governance token might permit voting without granting dividends or a redemption claim. A receipt token might represent a contract position, while an issuer-backed token may have separate redemption terms. A project’s revenue can exist without automatically flowing to every token holder. To understand incentives, identify enforceable permissions and cash flows, allocation concentration, unlock conditions and who can alter the rules. Treat a story about future utility as interpretation rather than an existing obligation.
MAKE IT CONCRETE
A larger balance with a smaller share
Illustrative supply begins at 1,000 tokens and a holder owns 100, or 10%. New issuance increases total supply to 1,200 while the holder receives five extra tokens. Their balance rises to 105, but their supply share becomes 8.75%. No price assumption is needed to show that unit growth and ownership-share growth differ.
FAILURE PATHS & COMMON MISREADINGS
Where the model can break
- A fully diluted valuation is a price-times-supply calculation, not money already invested.
- Protocol revenue does not automatically create a holder’s legal or contractual claim.
KEEP EXPLORING