Background TL; DR.
Tokenomics is the study and application of economic principles in the field of designing, implementing, and regulating blockchain-based token and cryptocurrency systems. It is concerned with understanding and incentivizing certain user behavior, and designing rules that govern the creation, distribution, and use of tokens to implement, grow and maintain crypto-economic networks and applications.
Tokenomics are a core part of the value proposition that Web3 has promised — i.e. “the internet of value”. Without sound tokenomics, the “value” aspect of Web3 falls apart and there is no significant change between the traditional Web2 products and their Web3 counterparts.
How tokenomics are designed and how cryptocurrencies and tokens are launched is evolving all the time. We’ve come far since the Bitcoin fair launch in 2009, to the Ethereum crowd sale in 2015 and the Uniswap airdrop in 2020, and beyond.
Project teams looking to enter the Web3 space and tokenize should have an understanding of what tokenomics are best suited for their specific product, communities’, or users’ needs, and should work with trusted advisors that can bring solid expertise and hands-on experience to the table.
Fungible Token Landscape.
There are many types of tokens, each serving specific roles and needs, some of which are related to how networks are governed, some providing utility within native dApps, and some facilitating the role of a currency within an ecosystem, to name a few.
The table below provides a high-level overview of different types of tokens and examples that exist in the market today (for illustrative purposes only).
Designing Tokenomics.
Tokenomics design can be broken down into multiple key component parts:
- Purpose and utility — what are the purposes and use cases of the token within a specific ecosystem or application (such as a governance and utility token for a blue-chip NFT project, a token that powers a DeFi application, etc.)
- Blockchain — on which blockchain will the token be launched and what are the key technical and other considerations (e.g. launching a token on Ethereum and understanding how gas fees may impact the use of a dApp)
- Token supply and emissions — what is the supply of the token (fixed or variable), how many tokens will be circulating at any point in time, and how the issuance of tokens will be implemented and managed (e.g. if the token is inflationary, what are the mechanics that regulate the emission of new tokens)
- Token distribution — who would be the primary recipients and users of the token, and what the token distribution between the different groups looks like (tokens allocated to contributors, users, ecosystem treasury etc.)
- Initial distribution — what is the initial distribution of the token and what are the specific mechanics to implement that (e.g. IEO, token airdrop, or token claim event)
- Token unlock/vesting schedule — are there any unlock and vesting schedules that tokens are subject to and how those are implemented (e.g. over what time period should the tokens unlock, are the unlock schedules managed by off-chain or on-chain solutions)
- Ecosystem Treasury — what initiatives might be funded from the Ecosystem Treasury and how to budget for long-term sustainability (tokens allocated to ecosystem grants, growth initiatives, dApp rewards, etc.)
- Supporting integrations — what are the integrations that will support the token and what considerations need to be taken into account when designing tokenomics (e.g. exchange integrations, DeFi and CeFi integrations)
- Governance — is there a governance function that the token serves and what are the specific mechanics around that (e.g. tokens providing voting rights within a DAO, tokens used for on-chain governance of smart contracts)?
When designing tokenomics, it is important to consider what are the key goals and the target audience, as well as how the tokenomics will incentivize the different groups of participants to achieve those goals, whilst maintaining the commitment of users to the project and ensuring a healthy token economy in the long term.
Key Considerations.
At HLV Advisory, we’ve supported work on multiple token launch projects across the landscape of NFTs, GameFi, Web3, and Consumer Applications. Despite the nuances within these categories, the same sounding principles guide the way we approach designing tokenomics. By considering each component part that goes into developing tokenomics and understanding how each part ties together to create higher-order synergies, HLV Advisory is able to bring a unique perspective when it comes to tokenomics engagements.
A glimpse into how we think about tokenomics at HLV Advisory is provided further:
- Protocol Utilization: What is the product, service or dApp the token is incentivizing users to engage with? For instance, is it a DEX that wants to attract users to trade on the platform and can issue rewards from fee pools similar to SushiSwap? Is it a game that can tie incentives within the core gameplay loops like Axie Infinity or Jewel Game? Or is it an infrastructure project that can use tokens to decentralize the network such as Helium or DIMO? The token should supplement the underlying product or network, not the other way around.
- “Sinks and Faucets”, and Circularity: These are key to sustainable tokenomics. “Sinks” are ways for users to “spend” or “use” the token within an economy and “faucets” are ways for users to “obtain” or “earn” tokens. Circularity speaks about the act of combining both sinks & faucets to drive sustainability by creating flywheel effects that are centered around the token and product or network at hand.
- Benchmarking Against the Market: HLV does extensive research and analysis on comparable projects for Clients to distill the best tokenomics practices within a particular market segment, determining what works and what doesn’t to guide suggestions and design considerations. By understanding how other market players have structured their token launches, where they have succeeded and failed, and what are the latest market trends, we are able to develop and validate the Client’s go-to-market strategy.
Conclusion
Tokenomics is the core aspect when it comes to designing and successfully launching a fungible token and ensuring its long-term viability. It is detrimental to the underlying network’s or application’s value and the potential for growth. Well-thought-out and sustainable tokenomics are in large part what enables the top Web3 projects to remain in the spotlight and continue serving their communities, whilst unsustainable tokenomics is a sure bet for a project to fail and upset your community and users.
