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Tokenomics Design: An Ultimate Guide for Crypto Founders

29 Jan 2024 updated
11 min

Table of content

If you’re sincerely interested in understanding the factors contributing to a crypto project’s success, tokenomics should be at the top of your list. This is what large-scale investors pay attention to; it determines the success of your token sale; it also shapes the initial token price. The rest is done by the developer team, business and technical advisors’ concerted effort, investor contribution, etc. This guide is meant to help new crypto project founders, blockchain analysts, and crypto investors come to grips with the concept of tokenomics, or token economics.  

So, what is tokenomics? As its name suggests, tocenomics is the economic model of a crypto project’s token. This broad term encompasses the considerations of the token’s distribution approaches, incentives, the project’s governance principles, utility, etc. A well-formulated economic model makes a blockchain project reliable and sustainable. 

Key Elements of Tokenomics 

With tokenomics boiling down to the economics of a cryptocurrency project and its token, one should know the wide spectrum of tokenomics components. They should all be covered in the project’s whitepaper to attract investors and present a complete, well-developed vision of your token design and the project’s overall architecture. 

tokenomics components

 

Total Supply and Circulating Supply 

The token’s total supply is the total number of existing tokens in the ecosystem. The circulating supply is the number of tokens openly circulating in the crypto market; it is usually lower than the total supply because some tokens can be locked or stored by owners. The higher the percentage of total supply is in circulation, the better for the project because the token’s market capitalization is higher, and its value in the crypto world is greater.  

The token supply aspect is of much significance for investors because it shows the number of available and circulating tokens. Limited supply means there may be token scarcity in the crypto market, which can be a strong driver for the token’s demand and price. Otherwise, excessive supply may create a surplus of tokens in the project’s ecosystem and drive the prices downward. That’s why an optimal supply structure is vital to the project’s success, with the token’s utility clearly understood by users and stimulating stable demand. 

Distribution Mechanism 

The token’s distribution may be conducted via initial coin offerings (ICOs) and airdrops. Some projects also distribute their tokens via business partnerships, grants, and direct token purchases. Besides initial token distribution, projects need to consider the elements of ongoing distribution, i.e., the processes by which new tokens become available to users (e.g., token vesting, liquidity mining, community rewards for activity, etc.).  

Token Utility and Use Cases 

The basic principle of making a token demanded and sustainable is to give it utility within the blockchain system. The token’s utility is determined by its purpose (it can be applied for on-chain payments, access to services, governance, and staking for passive income). Tokens should also be functional, i.e., they should allow users to perform certain activities in the system, such as covering transaction fees, voting for the ecosystem’s development, and receiving rewards for token ownership. 

Token Allocation 

As a rule, the token’s initial supply is divided between the project’s founders, investors, the company’s blockchain consulting partner, early adopters, and the development team. Some part of the token’s total supply is reserved for further distribution among users as the project grows and welcomes new users.

Emission Rate 

When it comes to the token emission aspect, you need to consider the creation and burning parts of the token mechanics. Minting/mining refers to how the tokens will be created and which rules will determine their governance. The burn mechanisms are needed to ensure the token’s steady price; the supply gets smaller after token burn, thus serving as a balancing act within a system where new tokens’ mining increases supply and causes deflation. 

Inflation/Deflation Model 

A vital part of any token economics is the token’s model design following inflationary or deflationary principles. The supply of inflationary tokens increases over time, thus driving the price downward, while the supply of deflationary tokens gets smaller over time (due to token burning).  

Governance and Voting Rights 

The basic principle of blockchain is decentralization, so most projects are based on decentralized governance principles. It means that users holding the project’s tokens in sufficient quantity have a say in the project’s decision-making and can affect the direction of the project’s development. The voting weight and voting rights for token holders are also part and parcel of the tokenomic design. 

Economic and Financial Models 

When you design tokenomics for the upcoming project, it’s important to determine what will give your token value; typical value drivers are scarcity, utility, and user demand for the token. You should also take care of the revenue generation essentials – how will the project bring profits to token holders, users, and investors? 

Regulatory Compliance 

No crypto project can succeed if it’s created without regard to regulations. It should be KYC/AML-compliant to avoid accusations of sponsoring terrorism or money laundering and comply with the legal requirements of its jurisdiction (e.g., the GDPR requirements in the EU, user and data safety laws, and other legislation relevant to the Web 3.0 project’s specialization). 

Security Measures 

Cybersecurity is key in any crypto project, as cyber hackers are highly active in the new, unregulated crypto field. Therefore, new projects should have advanced security safeguards in place to protect users’ assets and data, as well as the overall blockchain protocol’s ability to withstand exploits or hacking. 

Interoperability 

The blockchain ecosystem is growing increasingly interconnected, so it’s important to take care of interoperability at the design stage. Your project will have higher adoption chances and popularity if it can interact with other blockchains without friction. 

Market Dynamics 

Last but not least, you should take care of the token’s liquidity; it should be traded on most major crypto exchanges to enjoy good circulation and growing capitalization. Besides, you need to develop a marketing strategy to boost your project’s visibility and broader use in the crypto community. 

Definition and Scope of Tokenomics 

The major misconception dominating the crypto world is that token distribution and unlocking schedules are enough for a well-planned tokenomic design. Yet, these are only a few of the many elements that make a reliable project attractive to investors. 

In reality, tokenomics is a much more complex and comprehensive field that lays out your approach to coordinating the emerging digital economy. That’s why tokenomic design should go far beyond the money distribution considerations. Poorly designed tokenomics may cause a project to fail, thus betraying investor trust; thus, it’s essential to include demand drivers, value creation, and project incentives along with the token supply aspect. 

The main points to include in the tokenomics scope are: 

  • The general ecosystem’s design 
  • Value creation congruent with the reward structure 
  • Token demand and supply balance 
  • Token’s purpose in the ecosystem

Further sections will cover these aspects in more detail to guide you through the successful tokenomic design.

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Understanding the Key Types of Tokens for Successful Tokenomics Design 

Crypto founders can choose among several tokenomic models for their tokens: 

  • Layer 1 tokens are applied for investment, storage of value, and purchase of assets and services in the project. 
  • Layer 2 tokens are meant for dApp scaling in the blockchain network. 

Tokens can also be fungible and non-fungible. Fungible tokens are divisible and are usually referred to as coins (meaning that a user can buy, sell, and store a token’s fraction), while non-fungible tokens like NFTs are non-divisible and can be owned, sold, and bought only as whole units. 

Finally, tokens are differentiated by use cases into utility, security, and governance tokens. 

  • Utility tokens may be both fungible and non-fungible, serving as an internal currency within a specific project that can also be exchanged for other cryptocurrencies and fiat money on crypto exchanges.  
  • Security tokens represent tokenized real-world assets, or securities, such as real estate property, a company’s shares, works of art, etc. 
  • Governance token ownership allows users to participate in the project’s governance and have a say in voting for important project decisions and changes. 

token types

 

Identifying Tokenomics Design Challenges 

How can you detect a poor tokenomic design? The main sign of flawed tokenomics is the lack of clarity on token use. In this case, users have no idea about how to use tokens and what value they will obtain by purchasing or earning them. The vagueness of token issuance schedules and models can also erode investor and user trust.

Another criterion is the lack of token utility; in other words, there are no use cases for the tokens that would encourage users to spend their money and utilize the system’s goods and services. Other symptoms of flawed token utility are: 

  • Mandatory token adoption. 
  • Overlapping utility of several tokens within the system. 
  • Complicated and fuzzy utility principles. 

Experienced investors also judge projects as flawed by the following signs: 

  • Absent or vague roadmap. 
  • Unclear token distribution mechanisms. 
  • No hard cap on token emission and circulation. 
  • Too high reserves allocated to early investors, founders, and developers. 
  • Poor-quality token metrics. 
  • Unrealistic promises of guaranteed profits to users and investors. 

The consequences of underestimating tokenomic design can be disastrous. In some projects, the token sale strategy presupposes nothing beyond plain fundraising, offering no token value afterwards. Such projects are doomed to fail soon after their deployment, staining the owners’ and developers’ reputation and failing investors. That’s why project owners should invest enough time in the proper tokenomics by engaging in blockchain platforms comparison, making a project with practical utility and functionality, and entering the market with a clear vision and goals. 

Core Principles for Well-Planned Tokenomics 

To make sure your tokenomics is sustainable and balanced, you should follow several success criteria: 

  1. Logical ecosystem design. Tokens should be secondary to the project’s ecosystem design, as the latter fosters a value-driven architecture that can give users real value. 
  2. Consistent value creation. Rewards should be well-designed to give users incentives to use the token and contribute to your project’s growth and development. 
  3. Limitations on toxic user conduct. Crypto projects are highly vulnerable to manipulation and fraud, so your tokenomics should address these potential risks. It may be achieved by high-quality smart contract design and testing for extreme cases with a honeypot and other cybersecurity measures. 
  4. Balanced supply and demand structure. Demand is key when it comes to token success; you can drive consistent token demand with good utility parameters and use cases.  
  5. Goal-based design. Create tokens consistently with their goals (e.g., stable and volatile assets) and give users a clear idea of how each may be used to their advantage. For instance, tokens in play to earn projects will differ from DeFi or stablecoin ones in use cases and tokenomics.  

The Role of Tokenomics in Investment 

The crypto industry has witnessed many audacious rises and falls in the past couple of years, so modern crypto investors are extra cautious when evaluating a new project. Tokenomics is one of the key criteria they pay attention to for the following reasons: 

  1. Tokenomics offers a comprehensive view of the token’s utility, demand, and value proposition within the project, which may aid the understanding of this project’s long-term value and the token-project consistency. 
  2. Tokenomics shapes the token’s scarcity or abundance in the crypto market. That’s why an in-depth look into the tokenomic design helps investors make predictions about the token’s price and adoption potential. 
  3. Token distribution, carefully laid out in the tokenomics documentation, also gives an idea of how the token price will change at various project stages. The number of tokens distributed to the development team, investors, owners, and treasury affects the price due to the stakeholders’ degree of impact on the circulating supply and price dynamics. 
  4. A glimpse at the lockup periods and token vesting also allows for predicting the token’s price fluctuations. 

This way, investors can derive much useful information from studying the project’s tokenomics, which shows whether the project enjoys solid network security, can incentivize user adoption, and is generally sustainable. If the tokenomic design looks flawed or vague, the project may be vulnerable to manipulations and imbalances, so the chances of its failure are high. 

Given the fundamental significance of tokenomics in determining the project’s quality, all careful investors evaluate this aspect inside out before making their decisions. The components they look at include: 

  • The project’s vision, mission, business value, economic model, and technicalities (all these details should be present in the whitepaper and technical documentation). 
  • The vesting schedule for all token holders (allocation principles, the duration of the vesting period, vesting smart contract logic). 
  • Private token sale, seed sale, and public sale round comparisons. 
  • Token utility and use cases in the blockchain ecosystem. 
  • Long-term monetary policy of the project (funding, burns and buybacks, staking, rewards, existence of treasury, project’s funding sources). 
  • Cybersecurity measures (they can be comprehensively assessed by hiring a smart contract audit company). 
  • Market analysis (competitor landscape, entry fees and barriers). 

Real-World Examples of Great Tokenomics Design 

The best way to build excellent tokenomics is to learn by example. Here are a couple of projects that reasonably deserve the title of the best-in-class tokenomic models in the modern crypto space. 

MakerDAO  

This DAO has three tokens with varying goals and use cases: DAI, MKR, and ETH. DAI is a stablecoin pegged to USD, given to the system’s users in exchange for ETH staking. The MKR token is used as a governance and collateral instrument, giving users participation incentives and playing a central role in the system’s governance. The project has been increasing token supply in line with demand dynamics to avoid supply surplus; its tokens also possess unchangingly high real utility for users. The MKR token also comes with great liquidity due to its presence on all major crypto exchanges. 

BNB 

Another inspiring example is the BNB token – an instrument of the Binance crypto exchange. The token possessed clear utility since the project’s launch, as its ownership and use allowed for lower transaction fees, launchpad participation, staking/farming-related profits, and generous cashback. Binance uses a system of burns and buybacks to regulate BNB supply and demand. Besides, BNB use cases diversify as the Binance ecosystem grows (the BSC blockchain and dApps built on it).  

Key Steps to Design Tokenomics for a Crypto Project 

If you’re planning a crypto project, this step-by-step guide can help you out by streamlining the tokenomic design process.  

#1 Research 

The basic precondition for successful tokenomic design is a clear idea of how it works in reality. You need to choose the blockchain network, programming language, and technology stack for the project’s design. Different blockchains have different tokenomics, so you should determine all technical details first before proceeding. 

#2 Token Type Selection 

Next, you should choose the token types needed for your project (we discussed the typology above). It can be fungible or non-fungible tokens, security or governance tokens, stablecoins, etc. The project’s type and goals will drive the choice. 

#3 Economic Model 

Decide whether your token will be deflationary or inflationary and choose the mechanisms for its supply and demand regulation at this stage of planning. 

#4 Token Utility Development

The token should have real utility instead of being only an instrument of investor enrichment. Besides interesting use cases, the token’s utility can be increased with transparency, fair distribution mechanisms, and a reasonable governance structure in the ecosystem. 

#5 Risk Management 

Flawed token infrastructures and tokenomics open the gates for various kinds of manipulation, exploits, and hacks. That’s why you should consider all potential flaws and risks at this point to protect your interests, ensure the project’s health, and guarantee the integrity of user data and funds. Don’t nurture the illusion of a smooth flight; there will always be times of turbulence, with hackers willing to take advantage of your system. So, it’s better to get ready for the tough times and test your tokenomics against extreme cases. 

#6 Long-Term Tokenomics Design 

It’s not enough to plan the tokenomics of project launch; sustainable projects require long-term planning. So, you should develop strategies that would give investors and users value over time, incentivizing them to contribute to your system. 

Tools and Frameworks for Tokenomics Design 

Tokenomics development is done in stages, each requiring you to engage a specific set of tools and frameworks. The typical algorithm of tokenomic model design involves three stages: 

  1. Discovery. This stage is formative for your project concept, so you should have a clear problem statement framework (i.e., the rationale for this project as a solution to a real problem). You should also determine stakeholders, create the project’s mind map, design incentives to drive the initial demand, analyze the market data and competitors, and clarify how you will engage the community. 
  2. Design. Next, you should use whiteboarding and mind maps to build a project based on the elements you have formulated at the previous stage. You also need to implement mathematical equations to create consistent token-based incentive systems. 
  3. Testing. Use simulation software (e.g., cadCAD) to see how your tokenomics works in a variety of real-world scenarios and under changing system circumstances. 

Where to Start? 

The most important question worrying all crypto business owners and founders is how to get funding for crypto startup. Though there is no one-size-fits-all answer to this question, your chances for attracting serious investors are sure to be higher with a smart, well-designed tokenomic model. Thus, as soon as you think of launching your own project and want to make own cryptocurrency, it’s important to plan everything well. Here is a checklist for the planning phase: 

  • Is the project compatible with the legal framework of your jurisdiction? 
  • Do you need to create a new token? Will its launch be beneficial for the project? 
  • What will be the token’s goals and use cases? What about real utility? 
  • What are the potential challenges and risks the token may cause? How can they be addressed?
  • What will drive user adoption? 
  • What will be the token economy participants’ role in your project’s growth? 
  • What factors will affect the demand for your token? 
  • Is the system of token distribution and unlocking fair and clear? 
  • How will you move tokens to and out of the project’s ecosystem? 
  • How will governance be conducted? Will tokens be used for governance? 

Answering this question will give you a better idea of your project’s real-world functioning and the role of tokens in that system. You can even launch a tokenomics simulation to see how your design works in real life and correct any inconsistencies before your token gets disseminated to users and early investors via a crypto launchpad or through direct sales.

What to Include into Tokenomics Design File?

If you’re still unsure about what to include in tokenomics design documentation, focus on the following points. The most important point is to include data on token allocation:  

token allocation

 

You should also cover the details on token emissions (e.g., the schedules of token unlocking, the dynamics of token supply after unlocks, and transaction distributions for the token). It is  vital to give investors an idea of the project’s long-term plans, which are best illustrated with a timeline or roadmap. 

Conclusion 

As you can see, tokenomics is much more than a fashionable term in the crypto world. A careful and insightful analysis of the DeFi project’s tokenomics can save you much money, time, and effort if you’re an investor. For project founders and owners, tokenomics may become a powerful tool for investor and user attraction and a great contribution to the project’s sustainability. That’s why we recommend taking tokenomics seriously; you can hire smart contract developer team at 4IRE and get inside-out consulting on the proper tokenomics design for blockchain game, NFT projects, dApps, P2E projects, move to earn apps, and a realm of other exciting business ideas in the blockchain industry.  

FAQs

Why is tokenomics essential for crypto projects?

Tokenomics is at the heart of any project’s design and economic justification. It explains how the tokens will be produced, distributed, and used to pay for the on-chain goods and services. The tokenomic design explains all principles of project management and token circulation, thus giving a glimpse into its value, utility for all stakeholders, and long-term potential. 

What are the key elements of successful tokenomics?

The components of well-planned tokenomics are the token’s demand and supply structure, utility, distribution principles, and security measures for the project. 

What tools and frameworks can be used for tokenomics design?

At the discovery phase, you will need mind maps, whiteboards, a consistent framework for setting the project’s rationale, stakeholder analysis tools, etc. During the design phase, you will need to take care of the token value flow and develop a token-based incentive system. The final stage involves testing, which may be done in a simulation environment.

How should crypto founders prepare for the tokenomics implementation?

The best way to prepare for tokenomics implementation is to define token utility, choose an economic model (deflationary/deflationary), and determine concrete workflows for it. You should also have a consistent plan for token emission and distribution. It makes sense to think of the percentage of gas fee for the in-project transactions. 

Can 4IRE help with tokenomics development?

4IRE is a provider of high-quality dApp development services that can also render white paper services to lay out your project’s value, goals, and vision to investors and users. Our skilled market analysts and engineers can create a consistent, attractive tokenomic model for your project that will drive user interest and encourage the token’s adoption for your project’s sustainable growth.

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