Tokenomics design is the art of creating a system where participants of your ecosystem can exchange value with each other using your token as the currency. In the quest for decentralization, many projects adopt a crypto token economy as the infrastructure to facilitate this.
However, designing a token economy is a very complex task, since it requires a deep understanding of your value proposition, and how users will interact with it. Additionally, a failing token economy can burden otherwise successful projects, making it an aspect that cannot be ignored.
At Cenit, we've helped dozens of projects with their tokenomics design, always focusing on the mathematical aspects of it.
Today, we will explore the process of tokenomics design, including the optimal timing, considerations to keep in mind, and how to ensure your token remains healthy.
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When starting a crypto project, many teams immediately seek investments, leading to promises of token allocation with investors. Moreover, providing a clear vision of your token economy is increasingly becoming a requirement from investors during pitches.
This urgency often results in putting the cart before the horse, as teams may define an economy for a use case that may not be final, causing undue stress on the token price. This approach leads some teams to develop tokenomics prematurely. From our experience with clients, we've seen projects that invested significant time and resources to define the best economic design, only to pivot to something else and start over.
As mentioned, designing a token economy is about facilitating value exchange within your ecosystem. To achieve this, it's crucial to have a clear understanding of how the product you're developing generates and accumulates value. Therefore, the best time to design your tokenomics is once you have validated your initial value proposition and, ideally, when you have a product that can achieve product-market fit
In a token economy, there are three major groups of participants: users, providers, and shareholders. Developing the right tokenomics involves finding a balance between capturing value to satisfy stakeholders while maximizing the value created for both users and providers. To devise a good design, two main questions should be considered:
To answer this question, you need to go to the fundamentals of your project: What value does the product generate? What is my product's business model?
Based on those two questions, you'll be able to devise methods for capturing value for your token (which doesn't necessarily have to align with the project's value capture mechanisms) and this can greatly depend on your business model.
Many projects capture value through the utility of the token, while others redirect a portion of the value captured by the project back to the token itself. The latter is often the simplest way to define value capture. Examples of token value capture mechanisms/utilities include:
Each of these mechanisms impacts the degree to which your token will accrue value over time.
Also, it is important to note that the pace at which a project accrues value is not the same as the pace at which it generates buying pressure (to understand the effects of buying pressure on your token utilities, check out our previous post here).
So there are two main tasks here, understand the place where your token will accrue value and the value accrual mechanisms that benefit you the most.
Once you have defined how the token benefits your economy, it’s time to define how your economy benefits from your product.
Liberating your economy is an extremely powerful way of aligning your shareholders, allowing users and providers to become stakeholders in a natural way. This is achieved through a reward policy that provides value to the more relevant members/stakeholders of your ecosystem.
This strategy can also be used to increase the project's value. Often, a project depends on flywheels and network effects: the more users there are, the more value is perceived by each, or the lower the production costs will be. Accelerating the project's flywheel with incentivization is, therefore, a great way to increase the token's value in the long term. You should ask yourself, what are those potential flywheels in your project, and try to maximize them.
At the same time, the potential for dilution/selling pressure should be carefully balanced to ensure that the economy does not collapse.
If you have determined your mechanisms, you already have a plan for how the token will gain value. Now, the next step is to understand if the value captured will lead to a proper balance between selling pressure and buying pressure. The main sources of selling pressure are:
Based on the agreements you have with your investors, translated into a specific allocation and vesting schedule, along with your costs and marketing expenditure, you will experience different forms of selling pressure over time.
Now, the challenge is to determine how much of the value captured by the project should be allocated to the token.
At Cenit, we have developed the most advanced tokenomics simulation software on the market, enabling you to understand how your token will evolve organically over time within minutes.
This allows you to verify that the original calculations you had in mind are indeed logical. In our tool, by inputting key information about your project, such as utilities, vesting schedules, and incentives, you can run as many scenarios as needed to optimize your token economy. Once fine-tuned, you'll have a comprehensive dashboard to present to stakeholders or investors, ensuring they grasp the value of your token.
In mastering the art of tokenomics design, it's crucial to continually balance and recalibrate, ensuring your token effectively aligns your ecosystem's interests and maximizing value creation. Embrace the challenge with insight and innovation to ensure your token not only captures but also enhances the value of your project for all stakeholders involved.