Tokenomics is not the heart of the project. However, this does not mean that it is not an important or even key element of it. Since we are already at anatomical associations, I would rather compare it to the bloodstream. For inexperienced teams, tokenomics is often of tertiary importance – their emphasis is more on capital acquisition and the function of the token itself. They are not fully aware of the economic impact of doing so. And they should, because they are often dire.
What is tokenomics anyway? As we have already established, likening its role to the circulation of blood in the body, in its framework you need to plan the circulation of tokens and funds in the project – their distribution, funding rounds and vesting. If you do it incorrectly, blood will be poured on the market, and you can only watch helplessly as the value of your token flies down. So what can you do to avoid such mistakes?
Mistakes in tokenomics design
What no project forgets is to prepare a token distribution model. Part, of course, is for sale, part for the founders, part for the team, partners and for marketing in the broadest sense. Some immediately set aside some pool to be burned, which is an absurdity that deserves a separate entry. Two categories, however, are often forgotten or mistakes are made when designing them.
Rewards from staking cryptocurrency
The first potential trap is the pool for community rewards. Its size and distribution model should be tailored to each project individually, but a few basic rules should not be forgotten. First of all, its very existence is essential if the project is just starting out and the utility of the tokens at the time of listing is low. Any way to reduce sales pressure is good. The primary one, of course, is vesting, while enabling token staking as early as the day of the TGE is almost equally important. However, in order for staking your tokens to make economic sense, you need to provide an adequate prize pool.
While setting aside a prize pool seems essential, remember moderation. By giving away tokens, you are actually causing inflation, which with poor planning can get out of control. This is the price you pay for the extra time to get your ecosystem in motion. The optimum you should aim for is to design such a balance between rewards from staking and vesting of tokens sold that token buyers on IDO can get APYs of several hundred percent for the first few months.
Liquidity on crypto exchanges
The second element that is often overlooked when designing a tokenomy is setting aside some funds for liquidity. We are talking here about both raised funds and tokens. The market standard is to allocate 10-20% of the total capital raised for this purpose. A sizable fraction of this is allocated to market making on centralized exchanges. In this section, however, I will focus on their decentralized counterparts.
I would like to introduce you to the basic principle of DEX that you need to keep in mind when planning a tokenomy. Namely, the smaller the liquidity pool, the higher the rate fluctuations caused by a single transaction, and vice versa. If you have taken care of marketing to generate demand on the one hand, and limiting the supply of tokens on the other, reducing the liquidity pool at the start will allow you to proportionally increase the increase in the value of the token. However, you must not forget that this sword is double-edged. It is good practice to keep the liquidity pool at 10% of the circulating market cap ratio. As the capitalization of the token increases and the funds allocated for liquidity are depleted, this value can slowly decrease.
How to design crypto funding rounds
The next issue to discuss is funding rounds. The basis will be to divide them into private and public. Nomenclature is a secondary issue, while their number should rather not exceed four. The higher the difference in the price of tokens between the first and last round, the worse it is received by the community. What is clear, however, is the need to compensate early investors for the additional risk and longer waiting time compared to IDO token buyers.
The temptation to significantly increase the rate of return of early investors may grow, especially if there are difficulties in raising capital while still in the seed round. However, this is the wrong way to go. First, subsequent funding rounds will be negatively affected. It will hurt the hardest when previously sold tokens appear cheaply on the market. Let’s not cheat ourselves, convincing someone to enter a project only by guaranteeing a high return on investment will cause that return to be realized whenever possible.
Vesting in the IDO process
Your best weapon when designing a tokenomy is vesting. However, it is not a wunderwaffe and has its limitations. Vesting is nothing more than unfreezing tokens as a predetermined amount of time passes. It serves to limit the influx of tokens into the market, allowing it to partially protect project stakeholders from sharp price drops.
The better the conditions for acquiring tokens, the more severe the vesting must be and spread over a longer period of time. As you’ve probably already guessed, the founders’, team’s and partners’ funds should remain frozen the longest. Slightly better terms should be presented to early investors. Small concessions can be made to them, allowing them shortly after listing to realize part of the profit earned. The mildest vesting in this case is due to investors buying tokens in the IDO phase – some compensation for the higher purchase price of the tokens.
Vesting should be subjected to absolutely every element of tokenomics. Here we can’t forget about such elements as airdrops or community rewards. However, as mentioned earlier, it is not a miracle weapon and an antidote to all problems. Too severe vesting will have a negative impact on investment decisions or the popularity of staking.
When designing a tokenomy, one can afford a fair amount of flexibility. Every ill-considered element, however, may turn out to be a pebble that will stir an avalanche from under which your token will no longer recover. At the same time, a well-designed tokenomy can bring many benefits.
We will be happy to help you implement this better scenario.