The curriculum is beginning to heat up, as this is the week about the “plumbing” of a good tokenomic system: Sinks and Faucets. At this point in the program, our cohort companies have discovered where the value should go, and who the stakeholders in this network are; now the subject is to determine which actions should be rewarded or punished by the tokenomic system.
Users that provide value to a system should, if possible, be rewarded for that value. Token holders that participate in staking, governance, liquidity, or other ways will be incentivized to continue doing so though receiving a token that represents value.
The way users are rewarded will change over time as well, with different actions being more important at different times. For example, in the beginning of a token project journey, users that provide initial liquidity are more important while there’s very little, rather than if there’s already institutional liquidity providers.
Where faucets are a relationship where a user provides value and is given a token, this is where users provide the token and receive value. For many token projects, this is what you’d call the “utility” part of the token. An example everyone might recognize is Chainlink (LINK): users that want to call the oracle must send a fee of Chainlink tokens before they receive the data. This LINK is then distributed to the users that provided the utility — in this case the oracle operators and data providers, both “Faucets”— to pay for their operating costs.
On the other side of the equation, these operators can do things that are considered “Sinks” behavior. In order to provide oracle calls, sometimes they are required to stake a large amount of LINK, as a collateral that can be surrendered if they have downtime or return incorrect data. In that case, they buy and stake the token to receive the utility of participating in the network.
Mentor Talk: Lindsey Winder, Co-founder and CEO at Hedgey
Mr. Winder educated our cohort with his insight on the history of token design evolution, from simple ERC-20 utility tokens to complex ERC-1155 standards. He also gave insights to common pitfalls in token plans, both within the on-chain ecosystem of the token, as well as considerations outside the ecosystem like listings, liquidity, and various token sale mechanisms.
Both sinks and faucets are important parts of a tokenomic system, and this complex dance of incentives and value, these carrots and sticks so to speak, is what makes such a system thrive. Our tokenomic advisors at Horizen Labs Ventures are industry leaders in creating these complex plans, and that value is one of the greatest things we offer our cohort.