[Circulating Supply Series#1] Circulating Supply: The Canary in the Crypto Mine

Jaewook Lee외 1명
Research Associate/
Nov 21, 2023

[Circulating Supply Series#1] Circulating Supply: The Canary in the Crypto Mine


Table of Contents

1. The Canary in the Crypto Mine: Understanding Circulating Supply

2. Circulating Supply and Its Importance

3. Calculating Circulating Supply

4. Circulating Supply on Wings of Regulation


1. The Canary in the Crypto Mine: Understanding Circulating Supply

A World of Transformation and Innovation: Cryptocurrency Market

On May 9, 2022, the value of LUNA tokens dramatically dropped from $80 to $0.001, causing a massive loss of $40 billion in market value. What triggered this sudden change? It was the exponential growth in the circulating supply of LUNA tokens, which had previously maintained a price of approximately $80. This surge in supply diluted the token's value, ultimately driving token holders' values down to $0.

  • ** To simplify the terminology for our readers, in this article, we'll use the term "token" interchangeably with "coin" to describe the concept that serves as a means to secure a network's economic stability.

LUNA circulating supply during UST Depeg Event

The UST depeg event for issuing $LUNC (formerly $LUNA) tokens persisted to maintain the $1 peg of $USTC (formerly $UST). Over the weekend when this event took place, the quantity of tokens issued saw a staggering increase of around 19,000%, going from the initial 35 million to an astounding 65 trillion. The influx of these tokens found its way into the hands of numerous users on different exchanges, causing market imbalances and leading to subsequent losses for investors in the secondary market.

Failed LUNA UST Repegging Mechanism

Even today, new and risky ventures persist in the market, albeit with differences in size and risk levels. The ongoing efforts to create an efficient financial infrastructure, leveraging the trustless nature of blockchain, must continue. Nevertheless, the rationale for developing solutions to reduce financial losses stemming from imperfect blockchain assets is evident.

Circulating Supply: A Key Metric for Projects and Investors

The primary solution likely lies in effective government regulation. However, due to the global, cross-border nature of blockchain networks, implementing a universal regulatory framework immediately faces limitations. Despite these challenges, a common metric exists that can partially address investor protection and information imbalances: thecirculating supply of tokens.

The Canary in the Crypto Mine: Circulating Supply

The circulating supply metric is often regarded as a significant indicator in the cryptocurrency market. It signifies the agreement between projects and investors, primarily due to the distinctive circulation structure in the post-launch phase of crypto assets. However, it serves a more extensive purpose, acting as an excellent indicator for detecting risks when security vulnerabilities are exploited to arbitrarily increase token issuance or when stolen assets are liquidated. It even becomes a valuable gauge when the token economic system, like Terra (LUNA), faces a collapse. From ethical concerns to the stability of tokenomics, this versatility positions it as the canary in the coal mine, alerting all participants in the complex world of cryptocurrencies to potential dangers. So, how did circulating supply come about, what is it, and why does it matter? Let's delve into it step by step.


  • Canaries were known for their sensitivity to oxygen levels, and the demise of a canary in a cage indicated oxygen depletion or the presence of hazardous gas leaks. Hence, the phrase "canary in the coal mine" was born, metaphorically representing an early warning system for potential dangers. Photo Credit: MIRRORPIX VIA GETTY IMAGES

2. Circulating Supply and Its Importance

The Origin of Token Circulating Supply

The concept of a token's circulating supply had its origins in the Bitcoin whitepaper. Satoshi Nakamoto, the author, implemented a mechanism where Bitcoin's block rewards were halved every 210,000 blocks mined, thereby capping the maximum number of Bitcoins that could ever be issued at 21 million. This laid the foundation for the early principles of tokenomics and the notion of circulating supply.

The concept of circulating supply mentioned in Bitcoin whitepaper

Subsequently, these principles of circulating supply were adopted and adapted by later participants in the crypto world. Within the diverse space of tokenomics, circulating supply became a standardized metric used by various market participants, including investors and projects, to compare and assess cryptocurrencies.

Circulating Supply as a Fundamental Metric in the Crypto Asset Market

In particular, as projects began publishing whitepapers and conducting Token Generation Events (TGE), where project rights and utilities were recorded in the form of tokens, the practice of sharing future plans related to circulating supply became widespread among project teams. This aligned with objectives related to liquidity provision and token circulation obligations. Today, when projects get listed or investment activities take place, they share their circulating supply plans. Data aggregators such as CoinmarketCap, CoinGecko, DeFiLlama, TokenUnlocks, and others collect and make this information accessible to the public. This has greatly improved the accessibility to information related to token supply.

The circulation supply status disclosed via data aggregators

So, what gives supply its significance, making it one of the most widely used key metrics? In the broadest sense, investors, projects, and ecosystem participants all require a clear definition of the number of tokens available for trading in the market. In this section, we will explore its specific importance from three angles: (1) safeguarding investors, (2) assessing sustainable tokenomics from a project perspective, and (3) serving as a reference for market analysis and valuation.

2-1. The Crucial Role in Investor Protection

To begin, circulating supply plays a pivotal role in protecting investors. This is because the token price of a project, which can be challenging to evaluate, is heavily influenced by supply and demand dynamics. The distribution plan responsible for token supply and its execution are critical aspects that need thorough verification for investor protection.

Moreover, cryptocurrencies exhibit a substantial gap between their issuance and circulation volumes compared to traditional finance. The listing process is relatively straightforward, even when conducted through platforms like DAXA, and there's a lack of regulatory oversight and robust punitive measures. Consequently, it's not uncommon to encounter discrepancies in circulation volumes, whether accidental or intentional.

The Crucial Role in Investor Protection Xangle

Most cryptocurrency projects voluntarily share their foundation's token management plans on platforms like Xangle and Medium.

In some instances, the project issuing the token also provides details of the distribution plan, a form of self-regulation. However, it's not uncommon for projects to omit internal information entirely or even make false disclosures, circulating more coins on exchanges than they claim. Currently, there's no system for real-time transparent monitoring and management, underscoring the importance of reliable circulation data.

2-2. Serving as an Intermediate Indicator of Sustainable Tokenomics

Furthermore, circulating supply serves as an intermediate indicator of a project's sustainable tokenomics. For instance, if a project releases an excessive number of tokens in the early stages, it can encounter various issues: (1) depleting funds quickly, risking the project's sustainability, (2) failing to retain community interest due to depreciation, and (3) facing mismanagement from rapid, excessive distribution.

circulating supply is a key metric in tokenomics

Certainly, the significance of comprehending tokenomics and the associated system design has yet to be sufficiently emphasized. However, for projects envisioning a large-scale and sustainable ecosystem, a more sophisticated approach is necessary to establish the initial distribution plan or inflation rate. Efforts should be directed towards enhancing every facet of tokenomics, with the distribution volume serving as an intermediate gauge.

Various methodologies have been put forth thus far, including OlympusDAO's (3,3), Curve's ($CRV) veTokenomics, and Solidly ($SOLID) and their forked variations. However, there is still no universally "stable enough" tokenomics or methodology. As the quest for answers continues with ongoing exploration and experimentation, the importance of token circulation metrics, providing insights from the supply side, will only grow for both projects and investors.

2-3. Essential for Establishing Valuation Metrics

Last but not least, circulating supply is a fundamental element in shaping market capitalization, the primary benchmark for valuation. Any significant alteration in the circulating supply can lead to substantial changes in market capitalization, which is calculated based on the circulating supply, and subsequently impact valuation metrics like PER (Price-to-Earnings Ratio) and PSR (Price-to-Sales Ratio).

how supply relates to market capitalization

  • Market Capitalization = Circulating Supply X Token Price, a metric used to reflect both performance and future growth expectations.

In practice, discrepancies in circulating supply data often arise* between platforms, influencing metrics like exposure rankings when investors are deciding which projects to target. These inaccuracies and varying standards for supply calculations can lead to market imbalances.

Comparing the circulating supply of AXIE between platforms

As of December 23, 2022, the market capitalization for the Axie Infinity differed between CoinMarketCap (99.7M) and CoinGecko (113.9M).

In particular, as we will delve into further in Part 3, with the introduction of token project ETFs within regulatory jurisdictions, driven by the surge of institutional investors, precise circulating figures will become crucial for equitable inclusion and rebalancing in ETF management.

3. Calculating Circulating Supply

So, how is supply actually calculated? Is there a specific method for determining it, rather than just considering it the amount of a cryptocurrency available for trading in the market? To answer these questions, we must first comprehend the terms and concepts that constitute the circulating supply.

3-1. Components and Calculation Methods

What makes up circulating supply?

To ascertain the true meaning and quantity of circulating supply, we take into account the components of circulation, including the total issued, burned, and undistributed tokens. Additionally, we consider the concept of maximum supply, often used as a planning concept. It's essential to understand that maximum supply and distribution plans are projections and do not reflect actual data.

planned actual circulating supply-related data

Moreover, it's essential to consider the dynamic nature of data for each concept and the reliability of data sources*. For instance, project-related concepts like distribution plans and maximum supply have limited room for data changes after submission, but they do not represent actual data, resulting in lower dynamicity and veracity. On the contrary, real data such as total token issuance and amount burnt directly mirror blockchain transactions in real time, ensuring a certain level of data consistency through the consensus protocol. As a result, both dynamicity and veracity can be considered high.

circulating supply data dynamicity veracity

  • Dynamicity and veracity of data: (1) t's essential to consider both (1) whether the value can change after the data is specified and (2) whether it represents real data derived from on-chain transactions. For instance, Bitcoin's Max Supply of 21 million is characterized by its fixed and unchangeable value (1) but has high reliability because it corresponds to a planned value recorded in immutable computer language rather than real data.

This article does not delve into an in-depth conceptualization of the distribution component. Instead, we will use Bitcoin, Ethereum, and a random token, $XNG, as examples to illustrate and enhance your understanding of supply and its calculation based on the components described earlier.

Methodology for Calculating Circulating Supply

The typical method for calculating circulating supply is based on (1) estimating it using on-chain balances or transactions of tokens,* and (2) calculating it based on collected data by category, and subtracting the burn amount and non-circulating supply from the totally supply.

  • In the case of tokens distributed by a specific entity, you can either (1) sum the quantities in wallets where all tokens have been circulated or (2) calculate it by aggregating the non-circulating wallet list from the foundation and each token balance based on transactions or balance data.

components of circulating supply

While there may be differences in specific details due to the design* of the blockchain, project-specific tokenomics, or issuance and circulation** in a multi-chain environment, in most cases, you can calculate the circulating supply using the above methodology. We will now apply this method to Bitcoin, Ethereum, an arbitrary token $XNG, as well as projects that have implemented a zero-reserve policy.

  • In blockchain (distributed ledger), many update balances by account. This is especially true for recent architectures like Aptos and Sui, which provide balance data directly from the raw blockchain data. Such methods are expected to become more scalable in the future.
  • ** A notable example of calculating circulating supply on multiple blockchains is WEMIX. In October 2022, they based the Klaytn 3.0 chain distribution of WEMIX tokens (currently $WEMIXC) on the same snapshot from the Klaytn chain. This situation led to some overlapping counts of circulating supply, which should have been counted as non-circulating supply, and they had to mix transactions and balances to calculate it. For more details, you can read an in-depth report on Xangle (available in Korean).*

3-2. Examples of Circulating Supply Calculation

Circulating Supply Calculation of Bitcoin

circulating supply calculation of bitcoin

Let's use the above methodology to calculate the circulating supply of Bitcoin. Bitcoin adopts a UTXO-based block architecture, making it a straightforward case when it comes to confirming the total amount of Bitcoin issued in each block. You can calculate the total supply of mined Bitcoin by querying "bitcoin-cli gettxoutsetinfo" on a Bitcoin full node. The calculated total issuance is 19,520,875 BTC. Furthermore, as there is no separate burning mechanism, the burn amount is considered 0 BTC. As for the non-circulating supply, in this case, since there is no entity controlling the project's sovereignty and holdings, one can also assume the amount to be 0 BTC. However, if one wants to strictly define the amount of tokens burnt, he/she may do so by summing the quantity of tokens in every provable lost coin transactions. In addition, to precisely consider non-circulating supply in Bitcoin, one can subtract the Genesis block reward from Satoshi Nakamoto’s wallet, which all comes down to 22.6 BTC. However, typically, Bitcoin’s circulating supply means Total Issuance – Tokens Burnt – Non-Circulating Supply, which results in 19,520,875 BTC.

  • If we consider Satoshi Nakamoto's wallet and holdings as part of the non-circulating supply, it's essential to note that out of Satoshi's 72.6 BTC, 50 BTC were originally rewarded in the Genesis block (Coinbase) and were only recorded by Satoshi's nodes, not decentralized nodes. So they are effectively burnt as they cannot be transferred. When viewing Satoshi as the entity of the Bitcoin project, only 22.6 BTC could be considered the non-circulating supply as they are the only accessible by Satoshi.

Circulating Supply Calculation of Ethereum

circulating supply calculation of ethereum

Next, let's calculate Ethereum's circulating supply. Ethereum's total issuance would include the initial ICO and pre-mine events, the amount of Ethereum mined in the PoW consensus before the Shanghai upgrade, and the Ethereum issued in the PoS-based Ethereum after the upgrade, which amount to 123,912,338 ETH. The burn amount is the 3,646,818 ETH that occurred from the burn mechanism by the EIP-1599 (London hard fork). As for the non-circulating supply, it’s been known that the Ethereum Foundation holds a small portion of the total issuance, approximately 0.24%. But since there is no separate circulation plan and if these tokens are already in circulation, it’s safe to say that there is no non-circulating supply. Thus, Ethereum's current circulating supply is calculated as 120,265,519 ETH (123,912,338 - 3,646,818 - 0 = 120,265,519).

Calculating Circulating Supply of Token $XNG

It should be noted that both Bitcoin and Ethereum have already experienced significant circulation and decentralization, making their supply calculations different from other projects. It’s hard to determine the operating entity of both projects in terms of development and direction. So what about projects with clear foundations and operating entities? In such cases, projects initially pre-mint a fixed amount of tokens for fundraising, burn the issued tokens, and then liquidate the remaining supply according to their circulation plan. Let's take an arbitrary token, $XNG, as an example.

xng circulating supply with Total issued-burn volume-non-circulating formula

In the case of this token that was issued as an ERC-20 contract on an EVM-based chain, you can calculate the total issuance by calling "totalSupply()"of the contract and the burn amount by summing the tokens sent to "0x000...". Additionally, you can check wallet-specific balance data by calling the "getBalance()" function. Suppose you confirm that take the data taken from above actions and issue 100 tokens, burn 10 tokens, and retain 50 tokens in the foundation wallet. In that case, the circulating supply at that moment would be 100 - 10 - 50 = 40 $XNG.

Zero-Reserve and Inflation-Based Circulating Supply Calculation

Projects like Finschia ($FNSA) have introduced a zero-reserve policy, meaning that the circulating supply depends solely on LINK tokens distributed to date (approximately 6.73 million) and inflation from block generation.

LN zero reserve tokenomics, different Layer1 L1 competitors

Some projects also mention the possibility of implementing a zero-reserve policy that entirely relies on inflation for long-term sustainability without the presence of non-circulating supply. In such cases, all issued tokens are considered part of the circulating supply. However, if some of the issued tokens are moved to wallets under foundation control and satisfies non-circulating purposes, the project could request for such amount to be defined as non-circulating supply since these amounts are trackable via real-time on-chain data stream and its distribution status can consistently be checked.

3-3. Limits of Circulating Supply Calculation

While it may seem that data integrity can be guaranteed on an irreversible and transparent blockchain, and updates are made in real-time, there are still limitations to the current circulation supply calculation method. These limitations arise from the ambiguity of the criteria for non-circulating supply and the uncertainty of wallet ownership.

unclear standards for calculating non-circulating supply and verifying wallet ownership

Limitation of Circulating Supply (1): Unclear Criteria for Non-Circulating Supply

One limitation is the lack of clear criteria for calculating non-circulating supply within projects. The lockup forms and storage methods that manage supply, and usage purposes vary significantly from one project to another and depend on the project's specific definitions and tokenomics. A good example is circulation/non-circulation of the staking supply. Some reduce circulation by considering the staking supply as non-circulatory. Others consider it circulatory for being sued in economic activities. Also, there are many variables to deciding non-circulation such as lockup supply stored in the contract using the lockup method, token volume tied to legal contracts, and separately announced holdings by foundations.

Limitation of Circulating Supply (2): Wallet Anonymity and Uncertainty of Ownership

Another challenge is the need for improved anonymity of wallets registered as non-circulating supply. Some projects can falsely claim that some wallets under or not under their control in order to falsely manipulate the circulating supply. Additionally, most foundations manage crypto assets through third-party custody institutions to comply with regulatory guidelines. However, there's currently no unified method, both on-chain and off-chain, to manage the link between the foundation's reserve and the wallets that hold it. This leads to a wide range of scenarios for non-circulating supply verification, making it difficult for third parties to review the foundation's wallets.

xangle's standard to calculate non-circulating supply

Xangle, when operating products related to circulating supply, goes off a simplified framework as described above, and determines ownership of wallets based on actual usage status.

Ultimately, to achieve effective solutions, it's essential to introduce a clearer framework at the regulatory level for both of these issues. This is because there is a clear difference in influence between authoritative institutions issuing mandatory regulations or directives and private-driven self-regulatory bodies.

4. Circulating Supply on Wings of Regulation

Starting from January next year, uncertainty in circulating supply will be resolved

Fortunately, uncertainty in circulating supply, particularly in South Korea, seems to be resolving faster than expected. First, in July of this year, the Financial Services Commission (FSC) mentioned in the "Digital Asset Accounting Guidelines"* a mandatory disclosure for the reserve part of the issuance volume would be included during audit. Additionally, following the "Virtual Asset User Protection Act" enacted in June, internal controls and standards for issuance and circulation will be established as a follow-up measure. These results are expected to provide a clearer outline around January next year when results from government-funded research project on circulating supply will come in. With the uncertainty related to circulating supply gradually dissipating from early next year, both projects and investors should pay attention to the emerging standards and regulations.

circulating supply regulation timeline wemix sui

  • **The mandatory disclosure clause in the guidelines states, "The development and issuing company must stipulate detailed disclosures, including general information such as the quantity and characteristics of the virtual asset, business models utilizing it, revenue recognition, accounting policies, and progress in complying with the obligation for revenue recognition of the sales price of virtual assets. In particular, it is required to disclose information on holdings and utilization history, including the volume, for virtual assets that the company has reserved after issuing virtual assets."

So, what changes can be expected when specific criteria for circulating supply and related regulations are established? The most noticeable difference will be the establishment of infrastructure for enhanced market transparency and investor protection and the resulting long-term growth potential for the cryptocurrency market. There has been constant controversies and damages for both projects and investors as there have been a lack in standards and regulations regarding the use of blockchain technology. Thus, clear standards in circulating supply and the resolve in information asymmetry will ultimately serve the purpose of investor protection. And this is the surest way to fully leverage the inherent trustlessness of blockchain technology. So there are definitely high hopes for growth across the industry following the circulation supply regulations.

To be Continued: Circulating Supply and Disasters

So far, in Part 1, we’ve touched upon the origins and importance of the concept of circulating supply. We’ve also had a brief overview of the general methodology in its calculation and the current regulatory status. In part 2, we’ll analyze the most controversial cases in which the concept of circulating supply has been challenged and where it’s been problematic. Hoping that we’ve conveyed the importance of the circulating supply as the canary in the coal mine, stay tuned for Part 2.

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