The Three Considerations in Tokenomics
We’ve been getting three times more requests for tokenomics consulting than whitepaper writing lately, and my theory is that it’s because almost everyone recognizes that nothing any tokenomics expert has told them makes any sense. They tell me that all the tokenomics experts tell them it’s about the marketing and the burn rate and they can’t understand where the real value it.
In other words, tokenomics seems to be complete baloney to most people. And they’re not wrong. In this post I’m going to go into three considerations in constructing your tokenomics model and how each one should affect the model. I won’t go into any fancy mathematical models, just the basic logic.
The three considerations, in order of importance are:
- The founders’ goals and desires.
- What “the market/ investors” will invest in.
- Sustainable and logical tokenomics that move the project forward.
Just separating these three out is a revelation for many founders. It may be completely possible to raise a lot of funds on a model that is completely at odds with the sustainability of the project. It’s equally easy to raise a lot of money and have a successful company and not accomplish any of your personal goals. Many entrepreneurs go into business thinking that once they succeed, they’ll have more money and time for the things they really want to do. How’s that working out?
What do you REALLY want?
Issuing a token seems to be a fast way to big money, and there’s also some stuff about freedom and democracy, so blockchain naturally attracts a huge crowd. Let’s assume that you do raise the money you want for your project.
What do you really want as a founder?
- To create a successful long-term business that contributes value to the world?
- To expand or get a better valuation for an existing company?
- To build a better form of democracy?
- To build cool tech stuff?
- To rescue the rainforests?
- To prove yourself in the blockchain industry so you’ll have a future career?
- To have enough money to buy an island and retire?
- To provide a way for poor people to make a living in crypto?
- To get rich and show everyone they were wrong about how crypto is a bubble?
- To get out of the existing rat race before the economy completely collapses?
- To save others from the collapse by getting everyone a bitcoin wallet and a few satoshis?
Usually you and the other founders will have a combination of personal goals, commitments to your family, values that you want to promote, and excitement about a particular project.
The tokenomics should align with your goals. Generally speaking:
- There are serious legal implications and potential repercussions to raising money through a token launch. If you have an existing, profitable business, you do have something to lose by getting it wrapped up in crypto.
- Projects do need money and pretending you have a good tokenomics model can get you there.
- If you have an idea for a blockchain project, chances are 98% that someone else has already done something similar. Ask yourself honestly why you aren’t just joining them. If you think you can do it better, ask yourself why you don’t just help them be better. Do your research to understand the challenges they are facing, because you are about to face them.
- If your main inspiration is building a great business or getting career experience, joining a project that already raised money might get you there faster.
- If you are doing a “social good” project, monetary incentives will corrupt the project.
- If you love DeFi, yield farming, and all that stuff, and just want to make money, you probably will do better working hard and investing in the right projects rather than taking the legal and personal risks involved in your own token.
Personally, my core reason for writing whitepapers and consulting in Web3 is because I love helping people accomplish their goals. I’ve been working with entrepreneurs for 30 years, and nothing beats the satisfaction of watching people accomplish their dreams.
Investors, what’s an investor?
The second consideration is what the “investors” will perceive as a good tokenomics model. If you’ve gotten this far, you’ve already decided to raise money through a token sale. The only way to do that is to create tokenomics that investors will love.
- It does not matter if the tokenomics model makes sense.
- It does not matter if the tokenomics model works in practice.
- It does not matter if the tokenomics model works in theory.
All of those models of burn rate and stuff do not matter for the purposes of selling your token EXCEPT that they need to align with what the investor-de-jour thinks the calculation-du-jour should be. All of those charts and models are pure poppycock. With rare exception, none of the people who are modelling are central bankers, monetary theory experts, mathematicians or data scientists. If they were, they would either tell you it doesn’t work or that it’s speculative and unproven, or they would create something that would never pass your legal team.
The good news is that you don’t have to understand tokenomics or make something sensible to create a useful tokenomics model. You just have to copy the thing-du-jour and have good marketing.
After all, these people aren’t really investors, are they? They are going to dump your coin as soon as they can. They aren’t going to use the token for the “ecosystem”. They aren’t going to advise or critique you on anything beyond the token price. They are in for the quick profits. Your job is to figure out how to pump the coin for as long as possible and do whatever it was you planned in step one (what you want) with the money you raised. Nobody is being fooled around here. Let’s not pretend that there was actually some project you wanted to do with the money. If there was, also fine, and you just keep doing that with the funds raised, and if it succeeds, that’s a bonus, but it doesn’t matter to these “investors”. They weren’t hodling for the long term.
If you have real investors who are in it for the long term, BTW, you might be coming to me to write a whitepaper for you, but you wouldn’t be reading my advice on tokenomics. You’ve probably got those people on board already.
To summarize, in today’s market, what you are trying to create is a speculative deflationary model that you can market for as long as possible. This is not sustainable for the actual product, as I’ll cover in the next section.
What would actually work?
As far as I can tell based on my experience working with more than 300 project, there is no empirical evidence that any of the tokenomics models work, other than Security Tokens where you really give investors equity in the project.
Token models are not designed to give the token holders profit. So far, all of the cryptocurrency market is based on speculation. You can potentially to argue that Bitcoin and a few other coins are really useful as a store and exchange of value, but it is too late to invent Bitcoin again.
Let me clarify that, because it’s not customary for a tokenomics expert to say “none of the token models work,” so let me discuss Ethereum as one of the best possible outcomes but which also triggers a failure mode.
Ethereum is one of the very few cryptocurrencies that works as advertised in the whitepaper: it is used as the utility token on the Ethereum network. It’s also a great investment, because it has generally gone up in value. So it “works” as advertised, but the failure mode is that it’s gotten too damn expensive. Yes, it rose in value, which is great for investors. But using the Ethereum network is prohibitively expensive. The best thing to do with ETH is hodl, not utilize. For your project, think of the following models:
- You create the BeanCoin which allows the holder to get a bushel of beans for 1 coin. You are successful and the BeanCoin is now worth $500, but nobody wants to spend $500 to for a bushel of beans. Investors are happy but the coin is useless.
- You create the PollCoin, a governance token that allows the holder to vote for community proposals and elections. You are successful and the PollCoin is worth $500 and now it costs a minimum of $500 to become a citizen of the community and $2500 to submit a proposal to the community. The best companies/people to do the work don’t want to submit a proposal because the risk is too high of losing that money. Anyone who bought in early to PollCoin sells because they would rather have money than a vote in a community of elitist rich people with poor execution because nobody wants to submit proposals to do work.
In other words, when you create a deflationary coin or token, by default, the success of the token is also it’s failure.
But what about Pay-to-Earn models? Haven’t they been a success? How about DAOs where the community does the work?
First of all, any project younger than 3 years old can’t be considered as a model for long-term tokenomics success. The best we can say is “good so far”. Secondly, nobody has ever been able to explain to me how “giving away money” is a potential long-term business model.
So, can I help you?
This blog posts summarizes what I call “the world’s worst sales pitch”. If you still want to work with me, I work with projects to figure out tokenomics, DAO, product, and people strategies. I also write whitepapers and other content, minus the snarky style. Feel free to join my free DAO hours on Thursdays or set up a consultation if you want me to take a deeper dive with you on your project.