Part 1 – Introduction to tokenomics
Part 2 – Token utility
Part 3 – Economic design
Part 4 – Token Design
Part 5 – Testing & Adaptation
Welcome back to the fourth part of our tokenomics series. This 5-part series will be published once a week and cover everything from the basics of tokenomics to the nuances of token design.
Today’s article will focus on token design, this means exploring the different options available to you regarding token characteristics. Once your token has been launched it is very difficult to change different aspects of your token. It is therefore paramount to not only focus on the overarching goals of the token economy but also consider more minute details.
The market cap can be defined as the total value of the tokens currently available in your ecosystem.
For example, your total token supply might be 10 million tokens. However due to the different distribution methods (such as vesting), at launch there might only be 1 million tokens available.
Your market cap is therefore calculated by: 1,000,000 * token price
Needless to say, your market cap should be chosen carefully. This is because at any given time it will be used to measure the value of your ecosystem. Choosing the right market cap will depend on how much money you are trying to raise as well as how large of a market cap you can justify to potential investors. This will be affected by internal factors (such as project progress) as well as external factors (such as macroeconomics and the funding environment).
In our last week’s article we talked about the economic design and whether you should chose a deflationary, inflationary or mixed model. Depending on which model you are implementing it will also influence the total token supply. However, regardless of the economic model, you want to make sure your token supply is not too small but also not too large. A project’s token supply should be balanced and proportionate to the project’s goals and use case. The token supply should be large enough to facilitate adoption and usage, while also maintaining a stable value for the token. As a reference point, you will rarely see projects with a token supply of less than 100,000 or larger than a quadrillion.
When it comes to token issuance there are to main options:
- Tokens are issued through mining (Proof of work)
- Tokens are issued through minting (Proof of stake)
Depending on the type of project you are building you might want to use proof of work of proof of stake. In this article we covered the exact explanation of each validation method as well as their benefits and drawbacks. Generally speaking, the industry standard is moving towards proof of stake.
A transaction fee is a fee taken from the network form each transaction. How high the fee is and what the fee is used for can be specified in the protocol’s smart contracts.
Transaction fees are a great way to achieve different ecosystem goals, for example:
- Project funding – the transaction fee can be sent to the projects treasury wallet to fund further development and improvement of the product.
- Adding liquidity – Having adequate liquidity is paramount for a smooth trading experience of a user. The transaction fee can be used to further increase the size of the liquidity pool decreasing slippage.
- Burning – The tokens taken from the transaction fee can also be sent to a burn contract. This makes the tokens inaccessible to the ecosystem and thus reducing suppl and increasing the token value over time.
- Profit sharing – To increase token utility you could distribute the transaction fee to existing token holders, this way users will receive continues rewards decreasing the chance of selling.
You can of course also implement multiple features. For example, if your transaction fee is 1% you could send:
- 5% Profit share
- 25% Burn
- 25% Project funding
Keep in mind that you do not want to high of a transaction fee since this will deter investors as well as user. As a rule of thumb, you should keep your transaction fee between 0.2% and 1.5%.
To add additional utility and make your token more attractive you can add a series of incentive mechanisms. We covered incentive mechanisms in the second part of our series where we looked at token utility. Some of the incentive mechanisms include:
- Profit sharing
Overall, token design plays a crucial role in the success of a project, and it is important to carefully consider the various options available before launching a token. By choosing the right design features and implementing them effectively, a project can add additional benefits for stakeholders as well as aid in the stability as well as sustainability of the token ecosystem.