Wen Token?
The Crypto Founder Dilemma
Since the dawn of tokenization on blockchain with early prototypes like colored coins and multicoin through the explosion of coins in the Ethereum ICO boom, one phrase usually brings a lot of anxiety to any crypto founder, the call from the masses of “Wen token?” The launching of a token is something that can hugely benefit a project or could potentially limit growth or worse yet, kill a project.
By creating a token for a protocol or project, it introduces a microcosm of an economy to exist externally from the coin and blockchain network it is on.
Since a mini-economy is introduced through the creation of a token, it’s critically important to understand the elements that make the economy work both in terms of stability and value exchange.
Cubic Nature of Tokens
Taking a look at the graph of a cubic function (for example any function that’s highest power is x^3), it highlights how the design of the tokenomics and token engineering that went into it can benefit a project. A cubic function can be described where one side of the function sees exponential decline and growth on opposite sides (similar to the graphical image above). Any project that introduces a token to be utilized will inherently have a profile like a cubic function. The design of how a token is created, distributed, utilized, and maintained will define the shape of the curve of this cubic function. In principle, tokenomics can help to propel or enhance the value that is created by the product of a project or contrarily they can tank or death spiral the value. So with good and bad tokenomics, additionally non-optimized tokenomics could be in the flat, horizontal region where the tokenomics do nothing to affect the value.
Tokens and tokenomics do not create the base foundation of the value for any project. It’s the services and/or products delivered by the project.
Liquidity Bootstrapping
To Launch or Not to Launch?
A common reason projects look to launch a token early on is to help raise funds to start and maintain a project. Logically, the introduction of a token allows a community to acquire tokens giving them a stake in a project and providing some value/liquidity. A folly of this logic is that launching too early before any real development is done can lead projects and community members down many paths that build distrust, dissatisfaction, or betrayal. A best case for a project launching too early is that some of the token engineering and tokenomics are very short-sighted and don’t take into effect some of the scope changes that a project naturally can take during development. This could require forks and/or redemption techniques to enable the token to function in an optimal sense. On the opposite side, the worst thing that can happen is a rug or failure to launch, be it malicious or benign. Malicious rugs would be an example of a project that launches a whitepaper (ie an idea), generates support around it creates and distributes a token to raise funds, and then disappears. A benign failure to launch could be that a project hits roadblocks that ultimately don’t allow it to launch fully.
Don’t Fade the Demand-Side!
A hugely overlooked aspect of tokenomics revolves around what it is. Largely most people conflate tokenomics to be purely total supply and supply distribution or the infamous pie-chart. This only takes into account the supply-side look of tokenomics. It’s commonly highlighted because this is an area that a project team can directly influence. Demand-side tokenomics are the real essence of tokenomics and represents how users will take ownership and use a token as well as interact with a protocol. Failure to create solid demand-side tokenomics will beg the question why do people want to even own it.
Consideration for Founders
From a founder’s perspective launching a token is something that should be taken with deep consideration. The timing of the token launch could also have detrimental effects if done too early and not really thought through. Some key themes or areas to understand when considering launching a token can be pulled from the Token Trilemma, which is a framework being developed by Token Dynamics, that looks at three aspects that have tradeoffs between them and helps to lay out what a protocol hopes to accomplish. The Token Trilemma is:
- Protocol Utility
- Value Capture
- Economic Security
The combination of the three helps to understand the bounds that a project can exist under and helps level set expectations in the design/formulation period of a project’s token.
The Community Take
As always, the question from the community will be “Wen Token?”, but careful analysis and understanding of tokenomics is just as important to understand if founders are making the right decision to build their project. Although the general public or community members might not need to understand some of the design aspects or modeling techniques utilized, an awareness of tokenomics should be something everyone understands. Exploring and understanding some key ways that tokens are created and designed can help a community member make an informed decision about their involvement in a project and avoid getting burned or scammed.
Resources:
Token Dynamics — A team focused on tokenomics and providing assistance to projects on optimization and analysis of token-specific opportunities
Mechanism Institute — A work-in-progress project that is building out a library of various design mechanisms that can be utilized with simple and easy-to-understand explanations
Token Engineering Commons— A great resource and community of like-minded engineers, designers, and planners that focus on various aspects of token economies and how to build them.
