Token Economics: Supply, Demand, Sinks

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Why this matters

Every DeFi protocol has a token, and every token's value depends on supply, demand, and sinks. Supply is what's printed and unlocked. Demand is who wants to hold or use it. Sinks are mechanisms that destroy supply (burns, fees taken in token, etc.). Token economics done wrong is the #1 reason DeFi protocols collapse mid-cycle.

Demo

Tokenomics calculation worksheet.

Try it yourself

Pick a DeFi protocol; chart its supply unlock schedule against current price.
Compute the 'burn vs inflation' ratio for AAVE, COMP, UNI. Identify which has the strongest tokenomics.
Identify three protocols whose tokens died despite strong tech — usually tokenomics failure.

Prompt your AI

Use these three in order. Each builds on the one before.

1. Basics & terminology

In one paragraph, explain DeFi tokenomics: supply, demand, sinks.

2. Why it works (the mechanism)

Walk me through how vesting unlocks affect a token's price.

3. Advanced — application & what's next

Given a new DeFi protocol planning $100M raise + token launch, design the tokenomics to survive both bull and bear markets.

References

EXAMPLE: a hypothetical $PROT token

SUPPLY:
  Total supply:          1,000,000,000
  Circulating today:     100,000,000   (10%)
  Vesting unlocks:       50M/month for 18 months
  Inflation post-vest:   2% annual

DEMAND DRIVERS:
  Governance: holders vote on protocol changes
  Fee discount: 25% off swap fees if you hold $PROT
  Staking: stake for share of protocol fees (real yield)

SINKS (supply reduction):
  Burn: 30% of fees burned permanently
  Lock: 40% of fees locked in treasury (effectively burned for circulating supply)

ANALYSIS:

  Monthly inflation (today): 50M unlocked
  Monthly burn (at $1M monthly fees, $1 token price): 300K tokens burned
  Net monthly supply change: +49.7M (inflationary)

  Implications:
    Token price under pressure for 18 months from vesting
    Even with strong protocol, burn alone can't offset unlock
    Once vesting ends, math flips: 2% inflation - burn = potentially deflationary

  Survival check:
    If protocol fees fall to $300K/month, burn drops to 90K/month
    At 2% post-vest inflation: 1.7M/month inflation, 90K/month burn
    Still net inflationary even after vesting

KEY METRICS:
  TVL / market cap ratio (higher = undervalued relative to deposits)
  Fees / market cap (higher = more revenue per dollar of market cap)
  Burn rate vs inflation rate
  Token velocity (low velocity = stickier holders)

GOOD TOKEN ECONOMICS:
  Real demand (utility beyond speculation)
  Sustainable sinks (don't depend on infinite emissions)
  Long vesting (founders + investors locked up)
  Aligned incentives (holders benefit from protocol success)

BAD TOKEN ECONOMICS:
  Token exists only for emissions
  Founders unlock quickly (< 1 year cliff)
  No utility beyond governance
  Sinks scale slower than unlocks
  "Ponzinomics" — depends on new entrants buying