Economics of the Web3 Project, part 1– tokenomic model
The rise of cryptocurrencies has made it possible for everyone to issue coins.
0x01 web3.0 Economic system
With the advent of Web3.0, Crypto’s infrastructure has the opportunity to be used in more complex social scenarios, such as Gamefi in the game field and DAO in the direction of organizational change. The token economy has also played an essential role in many scenarios.
For example, a key challenge in Gamefi is: how to make the game run stably as a carrier of an economic system so that the inflow and outflow of funds can be balanced instead of skyrocketing and falling?
In the DAO, there is an issue: how to prevent giant whales from buying community tokens in large sums to occupy an overwhelming advantage in voting and control the project's decision-making and development of the project?
The immutability of smart contracts further emphasizes the importance of the initial token design. Once the contract is published, a fork is required to update the protocol. Despite the complexity of token economics, it is still subject to the fundamental law of economics, namely supply and demand. Simply put, token economic model is all about designing a method that affects short-term and long-term supply and demand. Ideally, the best design would encourage demand while reducing supply, but that’s easier said than done.
- Circulating Supply: The number of tokens circulating in the market
- Maximum supply: Theoretically, the maximum number of tokens that the protocol can generate
- Total Supply: The number of issued tokens. This includes burned and locked tokens. Even these tokens are not part of the circulating supply.
Comparing circulating supply with total supply and maximum supply reveals interesting phenomena. For example, if the circulating supply is low and the total supply and maximum supply are high, this is a huge red flag because the value of your tokens will be diluted, see below example:
The circulating supply of this token is about 133M, and the maximum supply is 10B. There is about an 8x dilution risk for your token, which is a major concern. If all tokens are released tomorrow, your token value will be 1/8 of yesterday’s. Assuming you buy today at a market cap of 305M, expect to be 100x in 5 years. This would give a market cap of 30B (pretty high, but not uncommon in cryptocurrencies), but a fully diluted valuation of 2.3T (higher than today’s cryptocurrency market cap). Furthermore, even if the market cap increases, the regular issuance of these tokens will increase the circulating supply, which will put downward pressure on the price.
Another example is the opposite, where the circulating supply is close to the maximum supply. But this does not mean that the project is a reliable project, but it does reduce the risk for investors.
A good distribution design is to distribute tokens to as many people as possible. That way, if someone wanted to get out, their sell-off wouldn’t have much impact on the price. The best way to query the distribution of tokens is to look at the token distribution chart in their whitepaper and check the distribution of wallets on a blockchain explorer.
Monetary policy determines whether the token is an inflationary or deflationary model, and also determines the degree of inflation/deflation and the overall consensus mechanism of the project. As mentioned earlier, high inflation causes asset prices to fall over time. Low inflation combined with POW (like Bitcoin) can be a good thing as it creates productivity in the ecosystem.
Utility of Tokens
• $CRV is used to guide the governance of emissions
• $LUNA is used to mint $UST
• $PTP for APR boost
In conclusion, token economics is complex. The agreement needs to ensure the correct alignment of the four pillars with the economic system. Additionally, they will need to innovate on top of these four pillars to remain competitive.
The veToken economic model is a big step forward and a huge improvement over the previous token economic system. It reduces supply, rewards long-term investors, and combines protocol and investor incentives. In 2022, more protocols will continue to add the veToken economic model to their design architecture, and innovate with the veToken economic model as a middleware foundation on top of the four pillars to create unique economic systems.
Stay tuned for the next part!