Why Tokenomics Matter?
- While tokenomics may be overlooked in bull markets, poorly designed models become problematic in downturns (e.g., OlympusDAO, Axie Infinity, Luna Classic).
- Projects with weak tokenomics often face death spirals, leading to large price declines.
- Tokenomics must balance protocol growth with economic sustainability to ensure long-term success.
To establish a healthy token economy, we posit that there are four key design objectives:
- Fair Distribution of Token Supply – Ensuring tokens are allocated to the right stakeholders (investors, team, community) to align interests and prevent excessive sell pressure.
- Sustainable Supply Emissions – Managing token issuance schedules to avoid oversupply that could harm the protocol’s growth.
- Distinct Demand for the Token – Encouraging intrinsic demand over speculative demand through mechanisms like staking, governance, and buybacks.
- Active Governance – Enabling decentralized decision-making to maintain adaptability and avoid centralization risks.
Beyond Tokenomics: Other Considerations for Success
- Launch Valuation – High FDV models often struggle post-launch; community sales and fair launches are gaining traction.
- Team Vesting Transparency – Market skepticism over team vesting and token sales should be addressed with clear policies.
- Evolution of Governance Tokens – The future of governance tokens may include value accrual, potentially leading to token-based ETFs.
- Product Focus – A well-designed token model cannot compensate for a weak product; teams must prioritize achieving product-market fit.
The future for tokens is exciting, albeit uncertain, as we enter a new regulatory landscape with an unprecedented cryptocurrency working group. However, teams can only work on what is within their control – focussing on the fundamentals of their product. Tokenomics design should be carefully considered to incentivise and convert prospective users into long-term users for their product.
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