Disclaimer: This article is not a financial advice and shouldn't be considered as one. This is solely the perception and ideas of the author and is written as an informative resource exclusively for the t2 community. Feel free to copy and extract any part of it with or without crediting it.
Everyone in the web3 space has heard about the tricky term "Tokenomics," referred to as "the economy of the Blockchain," and that is somewhat right. The problem is that this definition makes it seem much more complex than what it really is, as well as less important for our daily activities, something that we need to change right now.
I promise you that in simple and easy terms I will let you understand 3 very important points:
- Tokenomics are extremely simple.
- Tokenomics impacts our web3 journey very much.
- Not all projects need Tokenomics.
Are you ready? Prepare "a coffee" and be ready for the roller coaster seamless and soft sailboat travel through a calm and marvelous lake in the Alps :-Y
Tokenomics are an instrument to exchange value between a project and the people involved in it, nothing more, very simple and clear.
This means that any token (a.k.a. cryptocurrency) we can get (or buy) from a project should have a clear purpose of value (not necessarily monetary). Having said that, you can start thinking about all the projects without a clear or real purpose and understand why people call them "memecoins" (to be gentle) or "rugs." Because that token is for nothing, it's just a fake perception of some value that you can get or exchange for.
This is quite simple!, but let's explain it with an IRL example:
If tomorrow I wake up and tell the people in my town that I'm issuing some new currency (exchange of value) and I start distributing it (selling or gifting). Let's analyze this:
- Why will it have value? I need to have a plan, a purpose and it should be real and tangible, right?
- If I don't have a clear plan it's nonsense, right?
Well in Blockchain it's the same! Promises are not a value, and luckily a simple Tokenomics analysis can help us to detect this.
Note: In blockchain there is also the "collectivism" activity as happens IRL. So we can see a market for novel or special tokens, especially "the first of a kind." That value is a different concept and should not be considered here. This is like buying the first-ever made car, which is not a utility or a clear "value storage" besides the collectivism value.
That's enough! First concept clear. Let's continue to shape this... so then you found a token (cryptocurrency) that is promising a lot of future for the token that we are getting and now we need to check which kind of token it is and if it is possible for it to accomplish the goals it has.
...ok, then?... cri cri... well, are you sure you found a token that is promising... bla bla bla...?
Well, if yes, if "you found a token that is promising," you must have in front of your shiny and clever eyes a very well-structured (or at least a text) that is the "WhitePaper" or "AnyPaper" of the token clearly explaining all the purposes, the roadmap, and the intentions of that token for the project. If you don't have it or there is not one, it's very likely that the project and/or token is a "memecoin", a "wrong design" or tipically a "rug". This is not a sentence and it doesn't apply to everyone, but if the project is serious they should make a better effort on this.
Ready, you have it now! Let's talk about the most common scenarios:
1. Utility tokens
This tokens are made to let a protocol work and the community involved in the project accomplish tasks, such as taking decisions, exchanging efforts, keeping the functionality alive.
These tokens are very common in DAOs as voting tokens, as reputation points, as community rewards to create a hierarchy, access some benefits, etc.
That's easy, right? Well, now the interesting thing comes in, like a detective, let your inner paranoid come out, wear your incognito wig and let that shot of adrenaline come to your veins... you are going to find out how all the Tokenomics are a lie >)
Let's analyze the most common promises:
1.a. Voting systems pretending to get fair decisions and decentralization.
- Is the token (votes) distribution unfair from your point of view?
- Can someone farm (get) a lot of tokens (votes) in a simple way?
- Is there the possibility for a small portion of people to get enough tokens to decide by themselves?
If you answer YES to any of this, regardless of other factors, the Tokenomics are not good and there is a big risk of failure. There are many more questions but this is in a nutshell.
1.b. Exchange for a Thing:
- Is the value of what I get (action or thing) unequal to what I'm doing to get the tokens?
- Do I get tokens (so I get a thing) for just getting more people getting tokens?
- Is there a mechanism to get a continuous and infinite quantity of tokens while the "thing" is limited in supply?
If you answer YES to any of this, regardless of other factors, the Tokenomics are not good and there is a big risk of failure. Again: There are many more questions but this is in a nutshell.
2. Asstet / Financial / Payment tokens
This tokens are designed to facilitate transactions where users can obtain something with monetary value or earn value themselves. These tokens are typically available for swapping (exchanging for a common token) on an exchange platform or within a Liquidity Pool (e.g., Uniswap).
Such tokens are prevalent in memecoins (caution), rugs, and in projects that offer a stake in "future company profits" or serve as a crowdfunding method for various ventures, projects, ideas, etc. These tokens essentially represent a digital form of financial assets, allowing for seamless and decentralized transactions in the digital economy. They can be used as a means of investment, payment, or to represent ownership or a stake in a project.
Let's analyze the most common promises:
2.a. Investment
- Does my investment increase in price just because others will buy later?
- Are the project owners controlling more than 20% of the tokens without a clear and understandable reason?
- Can the project team create more tokens anytime?
- Do the project owners say that they "burned" tokens when launching? huge red flag!
If you answer YES to any of this, regardless of other factors, the Tokenomics are not good and there is a big risk of failure. Again: There are many more questions but this is in a nutshell.
2.b. General & Financial (including Stablecoins)
- Someone told you about it but you can't find information about it's creation on discord, social networks or any other kind of groups?
- Is it missing in all well known Centralized Exchanges?
- Is it not used by any BIG web3 project?
If you answer YES to any of this, regardless of other factors, the Token/Project is not reliable and there is a big risk of failure. Again: There are many more questions but this is in a nutshell.
Well, that's all folks! you now understand what Tokenomics means a little, just a little, but this will make you avoid 50% of the failures and scams where I and many others failed at least twice.
Creating a token is a fashionism for many project that ends killing them (driving them to the failure) so think twice before creating a token for your project; and most important for your web3 journey, check the Tokenomics of every project you get in to verify if it fits into your idea, plans, criteria, compromise and finally: if it make sense to you.
It's fair to say that in the red flags are included very nice projects, with great teams behind, a lot of good intentions, and no scam at all. But because not every wrong Tokenomics are scams, great teams with poor tokenomics will also fail, if not... talk about Tokenomics to the Bitcoin community hehe (just kidding... not!)
So... I loved it! I need more!! What's next, bro?
If you want to dive deep into this world, there is a fantastic book, which I learned from and I recommend 100%, written by Matty Tokenomics for anyone who wishes to take the first step into the rabbit hole: Tokenomics for Builders: The Comprehensive Practitioner’s Guide to Token Design
If you want to check out a crazy experiment by Ivor Voshy Ivosevic to understand how NOT TO BE a token degen, please see this video.
I hope you enjoyed this trip, I'm ariutokintumi the CEO of Roll a Mate 🧉 doing our Tokenomics right now, we are a token transfer protocol that lets anyone send ETH without paying gas on L1 Ethereym Mainnet! and enjoy being part of this community.
