Welcome back to the second part of our tokenomics series. If you missed our first article, be sure to check it out here. In part 1, we introduced the basics of tokenomics, the different types of tokens, as well as their respective use cases.
Part 2 will focus on utility; arguably the most important factor when designing a tokenomics ecosystem. Simply put, token utility is about making the token an integral part of the project’s ecosystem and providing demand side incentives to ensure the token gets used as much as possible.
Token Necessity
Before we get into more detail, you should ask an important question: Is there a need for a token?
Over the past 2 years, a multitude of projects have incorporated a token in their project simply for the sake of having one. Granted, raising funds via a token is often easier, due to less paperwork and increased liquidity, which is why it is preferred by most web3 venture capital firms (VCs). However, launching a token when there is no real need for one, is setting you up for failure. The end result, will be a community which does not use the token, VCs selling as soon as their vesting period ends, and a chart which looks something like this:
To analyse the necessity of a token, and what kind of utility can be implemented, you should analyse the different stakeholders of your ecosystem. A great framework for this is the “action actors approach” outlined by Christian Blanquera. In this approach you want to map out the actors (different type of users) as well as the actions (what the actors can use the token for).
ACTORS
Below is an example from the Monicho whitepaper where they have mapped the different actors.
One thing to note is that you want to outsource tasks to your stakeholders, if possible. For example, instead of paying for promotion, reward your community for promoting the project in the way you intend, by airdropping tokens to them.
ACTIONS
By having many actors, you increase the ways people can interact with the token. This in turn creates a more stable token economy. Be sure to list out the different actions of each actor and how they might be connected to one another. As an example, we can take another look at the Monicho whitepaper. In this example it is clear how each actor can benefit, as well as the platform itself.
ADDING UTILITY
Once you have established the need for a token and have identified the stakeholders, you can start adding utility to the token. To do this, ask yourself which desired behaviours you want each stakeholder to have and determine which incentives you can provide. A recommended token solution should be established for each behaviour and incentive. Finally, prioritize them according to the business requirements. Be sure to check out part 1 where we covered different token use cases.
Additional Incentives
A great way to give your token added utility, as well as reward your stakeholders, is by including incentives in your token model. Incentives should aim to increase the token usage and will ease sell pressure. Which incentives to implement, depends on your business model and overarching goals. Below are some examples, which can serve as a guideline.
Profit sharing: reward token holders by distributing a percentage of the revenue the protocol makes. This can be in the form of airdrops, fee sharing or other distribution events.
Burning: Burning a token means to permanently removing tokens form the ecosystem, this is done by sending them to a “burn” address which is inaccessible. By burning a given token amount you are reducing the overall supply, thus making the remaining tokens more valuable. There are different ways to burn tokens. For example, through regular token burning events or immediately when a transaction is initiated.
Staking: Generally speaking, staking refers to the following scenarios.
Validator staking:
In the first case the user stakes the underlying network token of a proof of stake blockchain and becomes a validator for future transactions. The user will then receive a reward in the form of minted tokens.
Staking to provide liquidity:
In the second case, the user can stake tokens in the project’s own staking contract, for example on a decentralised exchange, to provide liquidity. As a reward the user will receive a percentage of the transaction fees generated from the liquidity pool.
Staking for revenue share:
Staking can also be used in protocols with a revenue sharing token model. By staking, the user proves ownership to the distribution contract and will be eligibile to claim rewards accordingly.
Vesting
Until tokens are distributed or available to claim they are considered vested. By implementing adequate vesting schedules for the respective stakeholder groups, you make sure that everyone’s incentives are in line with the project’s mission. For example, to demonstrate a team’s conviction in the project they could vest the team’s tokens supply over 5 years with a 1-year cliff. This would mean that only 1 year after the token creation event the team can start selling the tokens which have are being distributed over the 5 years.
In conclusion, token utility is a critical factor in the success of a tokenomics project. By analysing the business model, token-ecosystem, stakeholders, and determining the token’s utility, you can ensure that the token provides value to the platform and its stakeholders. Most importantly, the token’s utility should align with the platform’s goals and objectives. This marks the end of our second article in our tokenomics series. In the next issue we will take a closer look at how to structure the economic design of your token.
