Token Economics: Understanding Circulating Market Cap vs Fully Diluted Market Cap

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When evaluating a crypto project, one of the most fundamental yet often misunderstood aspects is its token supply. Many investors focus solely on price, but understanding the dynamics of token supply—how many tokens exist now, how many will exist in the future, and how quickly they will enter the market—can significantly impact your investment returns.

This article will guide you through the key concepts of token supply economics, helping you make more informed decisions by looking beyond surface-level metrics.

Why Token Supply Matters

Token supply isn’t just about the total number of tokens. It’s about:

These factors directly influence a token's price stability, growth potential, and long-term viability. Projects with poorly designed token emission schedules often struggle with inflation pressure, while those with well-planned distributions can create sustainable ecosystems.

Key Metrics: Market Cap vs Fully Diluted Valuation (FDV)

Two essential metrics help us understand token valuation:

Market Capitalization (Market Cap) = Current Price × Circulating Supply

Fully Diluted Valuation (FDV) = Current Price × Maximum Supply

Consider a token priced at $10 with:

This would give us:

The relationship between these two numbers reveals critical information about the project's token distribution. A large gap between market cap and FDV indicates many tokens are still locked and waiting to enter circulation.

Why the Ratio Matters

If market cap is only 10% of FDV and all remaining tokens will unlock within one year, the project would need to grow by 10x (1000%) just to maintain its current price. If the unlock period is four years instead, the project would only need to grow by approximately 4x (400%) over that period, or about 40% annually.

This ratio serves as your first checkpoint when evaluating whether a token's current price is sustainable given its future supply dynamics.

Circulating Supply vs Maximum Supply

While maximum supply is straightforward (the total tokens that will ever exist), circulating supply requires deeper investigation.

Public data sources like CoinGecko attempt to calculate circulating supply by subtracting "inactive" tokens from the total released supply. This includes tokens locked in staking contracts, vesting schedules, or other mechanisms that temporarily remove them from active trading.

For example, Crypto Raiders had released approximately 16 million tokens from their 100 million maximum supply, but CoinGecko showed only 6.7 million in circulation because 9.5 million were locked in staking contracts. This dramatically changes the perceived inflation rate and growth requirements for maintaining price stability.

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Case Study: Curve Finance

Curve's FDV is approximately 9x its market cap, suggesting only 11% of tokens are in circulation. However, further examination reveals that a significant portion of "locked" tokens are actually participating in the ecosystem through voting escrow mechanisms. When considering these actively used tokens, the effective circulating supply is much closer to the FDV, indicating less future selling pressure than initially apparent.

Understanding Emission Schedules

The timing and mechanism of token releases are equally important as the total numbers. An emission schedule answers two crucial questions:

Types of Emission Schedules

  1. Linear Vesting: Tokens unlock gradually over a set period (e.g., 4 years)
  2. Cliff Vesting: Tokens remain locked for an initial period before linear vesting begins
  3. Performance-Based: Token emission tied to platform metrics (e.g., Convex's CRV-based minting)
  4. Accelerated Releases: Sudden increases in emission rates at specific times

The JonesDAO example demonstrates how dangerous accelerated releases can be. Their emission rate more than doubled during a 6-month period when early investors' tokens unlocked, creating significant selling pressure regardless of price movement.

The Impact of Initial Distribution

The starting point of token distribution dramatically affects how emission schedules impact price. If only 10% of tokens are initially circulating, a 2% monthly release represents a 20% increase in circulating supply each month. If 30% are already circulating, the same 2% release represents only a 6.7% monthly increase.

This explains why projects with small initial circulations often struggle with price stability during early unlock periods.

Liquidity Mining Considerations

Many protocols distribute tokens through liquidity mining programs, where users provide liquidity and earn tokens as rewards. While seemingly community-oriented, these programs can sometimes disproportionately benefit early investors and team members.

The LooksRare case demonstrated how half of all mining rewards actually went to early investors rather than community participants. Similarly, when teams or investors can participate in liquidity mining with their unlocked tokens, it effectively circumvents intended vesting schedules.

Locking Mechanisms and Unlock Events

Projects like Convex implement token locking mechanisms where users voluntarily lock tokens to receive enhanced rewards. While beneficial for reducing immediate selling pressure, these programs create future unlock events that can significantly impact price.

When Convex introduced their locking mechanism, many users locked tokens for 17 weeks. When these tokens began unlocking simultaneously in January, the resulting selling pressure contributed to notable price declines.

Frequently Asked Questions

Q: Why is fully diluted valuation important?
A: FDV helps you understand what the project would be worth if all tokens were in circulation at current prices. A large gap between market cap and FDV indicates significant future dilution risk.

Q: How do I find a project's emission schedule?
A: You'll typically need to consult project documentation, whitepapers, or community resources. CoinGecko and other trackers don't usually provide this detailed information.

Q: What's a healthy ratio between market cap and FDV?
A: There's no perfect ratio, but generally, a smaller gap indicates less future dilution risk. Consider the unlock timeline—if tokens are unlocking over 4+ years, even a large gap might be manageable.

Q: How do locking mechanisms affect token economics?
A: Locking mechanisms temporarily reduce circulating supply but create future unlock events. Always check when locked tokens will be released and how much they represent of total supply.

Q: Should I avoid projects with large investor allocations?
A: Not necessarily, but you should check their vesting schedules. Gradual unlocks over years are better than sudden unlocks after short cliffs.

Q: How does liquidity mining affect token distribution?
A: Liquidity mining can be beneficial for decentralization but problematic if early investors can participate with unlocked tokens, effectively circumventing vesting schedules.

Conclusion

Understanding token supply dynamics is essential for making informed investment decisions. While public metrics provide a starting point, deeper investigation into emission schedules, locking mechanisms, and distribution plans reveals the complete picture.

Remember to:

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By thoroughly analyzing these factors before investing, you can identify projects with sustainable token economics and avoid those likely to suffer from excessive inflation or concentrated selling pressure. Token supply is only one piece of the tokenomics puzzle, but it's often the most predictable and analyzable component, making it an essential foundation for any investment decision.