EOS has several unique characteristics when it comes to its cryptonomics, including its token supply, ICO structure, and overall liquidity in the market. EOS was the first of its kind in several of those aspects. At the time, it set records for the amount of capital raised and it was the first coin to engage in a year-long ICO. However, there is one aspect of EOS’ cryptonomics, I want to focus on today – Circulation Ratio.
A critical factor to take into account when evaluating any project is the circulation ratio of a token. This number, expressed as a percentage, is the number of tokens currently released divided by the total number of tokens that will ever exist. For instance, Bitcoin has a circulation ratio of 81.8% currently, 17,170,585 / 21,000,000 = 81.8
EOS is unique in that, unlike the vast majority of other tokens, it was purposely designed to have an infinite supply. So, it’s circulation ratio is technically 0% because 1 billion / Infinity = 0.
Circulation ratios have important implications for the long-term value of the token. When you do have a finite supply, you create scarcity for that cryptoasset. Because of this fixed scarcity, the value of the cryptoasset increases as demand increases. In other words, the more people that want to participate in the network and hold the native cryptoasset, the higher the valuation the token will hold. That principle is the basis for a lot of the cryptonomics going on in the space. However, EOS has elected for a different approach.
Initially, the EOS team decided to create 1 billion EOS tokens during its ICO and distribute all 1 billion. (I have included the founder’s allocation, though it is subject to certain lock-up terms.) However, going forward new EOS tokens will be created through an inflation process. The number of new EOS tokens created will be voted on by the EOS community, but will have a limit of a 5% increase. All new tokens created will go to the 21 witnesses that produce blocks and keep the network secure.
This inflation mechanism hurts the long-term value of the token. The elimination of scarcity drastically undermines its potential in price. That being said, it is likely that, in the short- to medium-term, scarcity will exist as adoption (i.e. demand) will likely grow faster than the supply. However, in the long-term, this mechanism looks very similar to how traditional fiat currency functions, the only difference being that inflation is voted on democratically rather than engineered by a singular financial institution, such as a central bank. Overall, from an investor’s perspective, this makes EOS have a greater long-term risk. However, another upside would be that its inflationary features may make it less volatile than other cryptocurrencies.
With regard to allocation of tokens to founders, EOS has one of the lowest allocations as a percentage. Of the initial 1 billions EOS tokens created, 10% of that, or 100 million tokens, is allocated to Block.one, the core development team, which will be even less over time considering the unlimited supply. This allocation is on the lower end, meaning the founders are keeping less of a percent share for themselves than most other projects. Additionally, there is a lock up period for one year and a vesting schedule of 10% of that each year, meaning 10 million tokens will be released to the founders annually. However, in terms of sheer dollar amount, the EOS team has accumulated the highest payout in the space thus far. At the current valuation levels, the EOS team has just under $1 billion allocated to themselves, which is so far largely untouched. This has raised some concern for a project that has just released a working final product.
This segment is from the 24-page Tokenscope EOS Report, which is available for purchase.