Introduction: Tokenomics demystified
When a problem is solved, value is created. The study of “Tokenomics” in Web3 looks at how that value is distributed, shared, and moved between different users engaged with a decentralized protocol. Tokenomics are a set of rules or conditions that determine how value flows within a blockchain project.
To understand Tokenomics, it’s important to understand why various blockchain projects have native cryptocurrency. All cryptocurrencies were created to enable some decentralized application or protocol. A decentralized application or protocol is a service that no single individual or entity operates. Rather than relying on a centralized organization, such as a corporation, to oversee day-to-day operations, a decentralized application or protocol is governed by a community of individuals with aligned interests.
The native cryptocurrency tokens or coins (referred to here as “tokens” for simplicity) of a specific decentralized application or protocol (referred to here as a “blockchain project”) exist for two reasons:
- First, to access and operate the blockchain project and enable it to uniquely achieve its business goals.
- Second, to incentivize individuals to contribute the time, energy, and resources necessary for the blockchain project to function – essentially a means to convert customers to stakeholders.
Tokenomics respond to a few key questions related to any blockchain project. The table below outlines these key questions and their alignment to various components of Tokenomics.
| Component | Questions |
|---|---|
| Token Utility | How is the token used in the protocol? Is it essential for the operation of its products? |
| Demand Drivers | Where does demand for the token come from? What aspects of the token serve to motivate individuals to purchase and hold the token? |
| Value Capture | How does the token capture the value created by the protocol? |
| Business Model & Incentive Structures | What is the core business model of the blockchain project? How is value shared between different users of the decentralized ecosystem? |
| Token Distribution & Emission Schedule | How are tokens distributed to various stakeholders aligned to the project and at what rate do these tokens enter the circulating supply? (The equivalent of a cryptocurrency capitalization (“cap”) table) |
In sum, Tokenomics is a fancy piece of crypto-centric vocabulary used to:
- Summarize the purpose of a token’s existence and breakdown the composition of its value.
- Describe how value flows from a protocol to token holders.
- Dictate a set of rules to govern the value flows from the protocol to token holders.
- Describe the evolution of a blockchain project’s equivalent of a capitalization table (i.e., token supply).
Orienting yourself within this guide
The content to follow serves as a comprehensive framework for documenting and designing your project’s Tokenomics. You can read through it top to bottom and use it as a reference while you are working your way towards a successful token launch.
In our experience, most projects have a strong grasp of Business Assessment and require support as it relates to Token Assessments – particularly when drafting their project’s Token Distribution & Emission Schedule and thinking through who buyers of their token would be (i.e. Token Demand Drivers). These aspects of Tokenomics have strong ties to a project’s Go-to-Market Strategy which is also covered in detail here. We’ve found the Go-to-Market Strategy to be the least well-understood concept amongst blockchain entrepreneurs. A thoughtful Go-to-Market Strategy is essential for fostering a sustainable token economy and includes activities such as exchange listing strategy, market-maker collaboration, and optimizing Token Emissions to determine reasonable Market Capitalization and Fully Diluted Valuations as your project transitions from “Primary” to “Secondary” markets.
Completing this guide should be treated as an iterative exercise with findings from one set of tasks informing potential adjustments to previous sections.
How to utilize this framework and leverage your Tokenomics
The goal of the content to follow is to serve as a comprehensive framework for documenting and designing your project’s Tokenomics. Projects that complete the framework will find themselves well equipped to conduct the below “mission critical” tasks involved in scaling from ideation to a fully operational, decentralized application or protocol (i.e., going from “Zero to One”):
- Author a whitepaper summarizing protocol design and Tokenomics.
- Document protocol value flows with “sinks” and “faucets”.
- Raise capital from strategic investors to bootstrap development.
- Attract and onboard community members and end users of the protocol.
- Engage with centralized exchanges & market makers to facilitate listing and liquidity provision for your token.
- Optimize token & protocol performance following your token generation event (“TGE”).
This holistic guide two main phases, each packed with educational content, tasks, helpful prompts, templates, and links to helpful resources to build your knowledge base:
Bring your idea to life by helping you map your business’s value flows, identify opportunities to capture value in your token, and design a compelling value proposition. You’ll also find best practices and templates for designing critical aspects of your Tokenomics such as your Distribution & Emissions schedules. Sections within phase 1 include:
- Designing the Core "Business"
- Finding Product Market Fit
- Value Flows & Feedback Loops
- Determining your Valuation
- Memorializing the Vision
Comprehensive guide to all things related to preparation for token generation event ("TGE") including market maker collaboration, exchange listings, launch mechanisms, and iterating your tokenomics to optimize for price performance. Each section includes in-depth educational content and commentary about the inner workings of these less understood mechanics in the industry. Sections within phase 2 include:
- Strategic Launch Mechanisms
- Liquidity is King
- Partnering with a Market Maker
- Exchange Listing
- Post-TGE Performance Modeling
Each phase is a part education, part action oriented guide. As such, there will be sections that purely focus on teaching you the skills required and others will be more hands-on prompting you to think through or write down something using our templates. The framework is closely linked to the suite of tools Forgd offers and will be complemented by spreadsheets wherever required.