In order to simplify my explanation I will cover only a token that is listed on a single decentralized exchange because things would get a lot more complicated if we include centralized exchange liquidities in our calculations. Let’s take a look at a new crypto-currency which is called Peppa Inu ($Pepa), it obviously sounds like a meme coin devoid of any real value, so it’s perfect for what I want to explain.
At the time of this writing, $pepa was $0.000000000029534 with a 61.7% growth in the last 24 hours and a 4,123% growth in the last 8 days.
Let’s take a look at the token allocation. There are 210,000,000,000,000,000 tokens in circulation of which 71,000,000,000,000 tokens are in the liquidity pool that is composed of $387K (50% of which is BNB: USD $193,500). This means 210,000T - 71T = 209,929T tokens were sold in pre-sale. The total value in circulation being half of $12,436,816 means that current holders including the pre-sale investors have $6.2M of accumulated wealth, but the actual bank (liquidities) are only $193,500. Thus, at any point, when early investors decide to start selling, there is only $193,500 of money that can be taken out of the bank. There is no mention of vesting for pre-sale investors, but they own 209,929T / 210,000T = 99.996% of the circulating supply. The project attempted to obfuscate how bad the tokenomics was by burning 50% of the total supply at the launch. So, clearly this project looks like a scam, but understanding how small the size of the liquidity pool (bank) is in comparison to the in-circulation supply is critical to understanding how certain crypto-projects can crash massively when adoption starts to plateau and early investors start cashing in their gains that generated 4000% in 8 days.
Overall, liquidity pools are always vastly smaller than the accumulated value generated by crypto-assets, except when it comes to stablecoins which supposedly have $1-$1 collateralized treasury backing the in-circulation tokens. With a small liquidity pool, it mathematically guarantees that $1 of buying volume leads to more than $1 of accumulated value to previous holders, making bank runs inevitable and spectacular crashes.
For these reasons, I recommend web3 ventures to launch tokens without pre-minted allocation. The team, and early investors should rely on transaction fees or other mechanisms for their upside instead of token supply. Too many projects have roughly 50% of the token supply allocated to the project team, treasury, ecosystem, rewards, advisors, etc all of which have not contributed liquidities to the bank.
Projects such as $pepa may grow insanely and reward early adopters with riches, but at any point in time when the selloff starts, anyone caught will lose all the accumulated gains without having time to react. Everyone who bought at the peak will lose nearly all their money and turned them off from the crypto-industry entirely. Overall, it makes the industry worse for everyone. Show Less
