Tokenomics design is so hot right now. I’ve been involved in a few token design projects that are pretty fun and challenging. The art of designing a token is a bit more niche and complex than a regular website loyalty program. The “market” will determine your floor price, but the least you can do is check all the boxes before participating in the open “crypto” secondary market.
- Is your token fungible or non-fungible? – NFTs are unique per design but tend to follow the same set of metadata variations through collection launches. Fungible tokens, which is the focus of most of the economics design work, mainly covers interactions and distributions at a larger scale with exchanges and AMMs rather than marketplaces.
- What is your token doing? (besides always going up in value?) – Describe it simply in the context of your project and product. This will be the starting point to your whitepaper and simple blogpost.
- Who in your ecosystem will buy the token and why do they buy it? – Are these all speculators? Are they users of your platform? Other application developers? Advisors?
- Are there additional partners or ecosystem players that would want to use or buy your token? – Web3 requires the momentum and influencers of Web2 in order to succeed. Who else as stakeholders and partners are key to your tokens’ success?
- How is the token utilized in conjunction with your platform? – Are they earned when interacting? Is there voting and governance involved? Some notable patterns include: subscription / licensing, NFTs mirroring access and identity, micro-tipping, fundraising, staking, governance, direct rewards, and B2B Incentives.
- How does the token interact with other tokens? – Do they rely on any DeFi oracle market data? Are they linked to NFTs in any way?
- What are the specific % allocations for your tokens? – A protocol looking to attract dapp deployment is likely distributing 50%+ to the community through user rewards, grants, marketing, liquidity incentives, and listing fees. The other % allocations may be to private sale, project development (teams + advisors), DeFi liquidity management, and foundation reserves.
- What is your maximum token supply? – We’ve found most tokens that are meant for large distribution have a variation of circulating supply for 10M, 100M, or 1B tokens. The design of this really depends on the balance between your floor price and distribution sizes in round numbers. If you think about points for airlines, they psychologically distribute whole number points at high value even though the redemption and actual market value is opaque. As a base mental model for floor price calculation, you can see L1 chains have around 100M to 500M total circulating supply with some deflationary mechanism (e.g. burning of tokens for processing TXs). A larger circulating supply like XRP with 50B or DOGE with 132B will likely struggle to reach valuation over a penny or a dollar. There’s no right answer – it’s just a psychological preference and can be preferred at a higher supply if there’s heavy usage and distribution of tokens through your platform.
- What’s your vesting schedule for your tokens to different allocations? – The emissions schedule occurs at different epoch times. There’s a clear strategy for the internal team and investors (in order to prevent rage quits or just jumping from one smart contract dev project to another) – you’d want at least an 18-24 month vesting period of equity and tokens. The other allocations may depend on your own milestone events like airdrops for beta testers.
- Will your token add a single-sided staking mechanism? – This supply control mechanism allows holders of your token to send it back to the protocol treasury thereby reducing the circulating supply. There are complex staking designs that feed into using these tokens for creating new projects or feeding multiple pools for balancing mint/burn functions. At the end of the day, employing a staking mechanism can add another layer of token interaction and investment back into the project for dividend payouts. This staking is beneficial for “believers” and early investors that do not want to participate in liquidity mining programs.
- What type of liquidity mining program would you leverage? – Liquidity mining is the early distribution of tokens into AMM Pools in order to create a market with reasonable depth and minimal slippage. This means you’re taking tokens from the users’ or protocol’s supply and placing it into a <Your Token>/ETH or <Your Token>/USDC pool so that it can be swappable through different aggregators/DEXes. The LPs of these token pairs receive trader fee rewards. There are traditional Liquidity mining programs with Uniswap or Balancer and more complex ones with Fei x Ondo, Tokemak, or Olympus Pro.
- Will there be an airdrop? – Airdropping tokens are another way to distribute the token more broadly and to gain momentum for projects. A well-designed airdrop will be able to prove participation in a project or protocol and quantify the amount of tokens claimable based on such participation. The skew of participation could be basic like a <name>.eth address is equivalent to X ENS tokens or maybe more nuanced if you take into account specific timeframes of adoption and granting more tokens to earlier TX snapshots.
- Does your fundraise include cryptocurrency? – The legal aspect to accepting cryptocurrency as an investment in exchange for equity or tokens is a bit hairy. It might seem simple enough to just create a fundraising wallet and reconcile transactions with the agreed upon day of transfer market data rate, but apparently it’s a nightmare overhead in treasury management.
- Does the DAO model assist with your fundraising or token launch? – There’s a lot of legal pieces here that split the entity fundraising with the community that might hold some of the issued tokens. If the fungible token is a gating mechanism to join the DAO or if the treasury of the DAO valuation is connected to the token itself, then the project can technically increase the token value when the growth of your community multiplies. We’ve seen a DAO-like structure get created for communication and distribution purposes. The “initial discord offering” is another way to create the public distribution. This also applies to NFT collections that get released and distributed in a public sale before the collections have a coordinated offering on Opensea or other NFT marketplace.
- Does a community DAO make sense for your token project? – Not all DAOs require unique fungible tokens in their treasury, but it does create an interesting ground-up participation for a project with the advantage of a transparent on-chain set of votes on structured proposals. I like the idea of protocols leveraging the basic framework to encourage on-chain voting and governance for some of the parameters built in the protocol. DAO creation on projects is an added layer of nuance and discussion like deciding a project creates an Open Source license. Proposals and distributed control is a commitment.
- Are there deflationary mechanisms built into your token? – Standard protocol tokens like Ethereum have a minting schedule based on the consensus reaching mechanism at set block times (e.g. Every 10 minutes). These rewards are for infrastructure providers and validators. The creation of a burning mechanism reduces the total circulating supply as the network continues to get utilized. This design is fairly positive for the economics of the token in the long term as the full total supply is minted.
- Will your protocol require a custodian to host the core keys? – The usage of a custodian is highly recommended and even required for the management and hosting of large pools of assets. Similar to the security used for admin password and authentication access to web2 platforms, your dev level protocol wallets should not just be stored on your private Github.
- If you’re self-hosting keys, what security mechanisms and operations are being implemented? – It is recommended to create multiple keys and failsafes. The executor of the DAO multisig vault actions or smart contract owner will have a lot of responsibility and coordination.
- Which testnet will your token launch? – This was just me trying to adhere to my questions format, but emphasize how important it is to first test your code
- Do you require a smart contract audit for your token design? – Have you made significant changes in the token business logic that would require this? Note that most audits are booked out 3-6 months in advance and cost $60k-100k depending on complexity.
- During the private sale, how will your investors claim your tokens? – Token portals with secured wallet generation technology are often needed for the initial allocations of the tokens mirroring some spreadsheet capital table. This is probably easier if Carta created an on-chain publishing version of shares.
- How are you monitoring and measuring the success of your launch? – Not only do you need to explicitly list your tokens to explorers and market data providers, but you will need to monitor your fungible token set of smart contracts.
- What is your strategy for token launch price discovery? – Floor price of tokens are fairly arbitrary (unless they have already done some fundraising inside a DAO before launching the token mostly owned by the DAO). There’s the standard option of just funding a Uniswap 50-50 pool. There are also Liquidity Bootstrapping Pools created by Balancer.
- Are there any limitations on different regions or types of users that can purchase your token? – This will determine whether or not you need to design a whitelist function or use your portal for KYC and reporting.
- What will host your DAOs or protocol documentation? – Everyone basically uses gitbook for pure tech documentation and notion wiki for providing key documents for onboarding.
- What is your budget for liquidity pool allocations? – Some protocols teach their investors how to be LPs. Other protocols hire professional market makers to coordinate pool allocation.
- How are you communicating with your token holders? – The project can send bi-weekly, monthly, or quarterly updates like you would for a regular investor newsletter. I would imagine the broader audience would also read a mirror or medium blog for long-standing pieces. You’d probably hire a social media expert to run the Twitter account or write announcements on discord.
- Which network will you launch your token and DAO to? – This is never an easy choice because mainnet has the highest fees, but the most liquidity. It may be a good idea to ask your investors or the DAO. The announcement of interest is just as important as the launch itself.
- Is your token press release and FAQ understandable at all levels of interested investor personas? – Another filler question here – it’s important to clearly represent your project vision and token value. Most people would distill this into a white or yellow paper, but you’ll also need multiple versions of this for pitch decks and press release kits.
- Which conferences will you go to when you announce your token? – Can I come too?
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