Tokenomics: Unlocking the Value of Blockchain

Web3, often touted as the “internet of value,” hinges on effective tokenomics — the economic principles guiding the design and management of blockchain-based tokens and cryptocurrencies. Without it, the ‘value’ proposition of Web3 is undermined. There are many benefits to having a well designed token and launch event, and just as many detriments to having a poorly designed one.

Tokenomics is not one-size-fits-all. It involves careful deliberation on several factors, from the token’s purpose and utility, the chosen blockchain for launch, to token supply and distribution, and governance mechanics. It also requires a keen understanding of the target audience and how to incentivize different participant groups to achieve project goals.

There are three main areas to consider when deciding on a token strategy:

• Protocol Utilization: Horizen Labs Ventures — one half of the partnership that makes up Denarii Labs — emphasizes that the token should enhance the underlying product or network. It should incentivize users to engage with the product or application, be it a decentralized exchange or a game or a marketplace. Ways a token could do this is governance (voting on proposals in a DAO), in-protocol payment for services (sometimes called a ‘work token’), or rewards (LPs could be paid yield in a native currency).
• Sinks, Faucets, and Circularity: A sustainable token economy requires a balance between “sinks” (where tokens are used) and “faucets” (where tokens are earned). Circularity, combining both elements, creates a sustainable cycle around the token and product. Careful balance of these is an important part of protecting the soundness of a token economy. Unbalanced loads in the velocity of a token could open up vulnerabilities to flash loan attacks; there are many examples in the history of DeFi where this very mistake resulted in total loss of liquidity in a protocol.
• Benchmarking Against the Market: HLV conducts thorough market research, studying successful and failed token launches, to inform design considerations and strategies for their clients. Token projects must be economically sound and resilient not only in their own protocol, but in exchanges and derivative products in the global market as well.

Beyond these three areas of thought, there are many more specific questions that arise in the token design process. How should the token be distributed between the team, investors, and community? Should it be mintable or have a set supply? What should be the rules around governance? The complexity of the subject belies the value of quality tokenomic advisory services. The strategies involved could enable the token to bolster a protocol or game economy that takes it to new heights.

Denarii Labs offers our cohort the way to navigate these aspects of designing tokenomics, from design to acquisition to retention and beyond! Parties interested in launching a successful token project, apply here www.denariilabs.xyz