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As a web3 founder, you should heavily consider the layout of your tokenomics If you’re looking to release a token. Tokenomics is the study of the supply and demand of tokens. Moreover, tokenomics is concerned with asset mechanics and their implications on adoption and future market prices. Designing sound tokenomics will set your project up for future growth while bad tokenomics will fail to incentivize the use of your platform.
Let’s discuss the supply side of tokenomics — who receive tokens, how many they receive, how they receive them, and when they receive them.
Token Vesting Allocations (Cap Table Management)
Depending on the complexity of your ecosystem, tokens can represent anything from “yield boosters”, and governance power, to treasury funds for the project. It’s important that tokens are split among the right groups so the project has funding, and the community is incentivized to interact with the protocol, as well. In doing so, tokens are usually vested among five main groups —though there are some unique cases:
- Core Team
- Private Investors
- Public Sale
- Ecosystem Incentives
The core team category represents founders, employees, and project contributors. These tokens generally reflect the team’s equity ownership of the project or salary.
Private investors are people who have purchased equity in the project before the token’s public release (ICO). Private investors purchase tokens at discounted prices to offer founders immediate funding.
The treasury represents the underlying value of the protocol and gives investors insight into the project’s runway.
Public Sale tokens are sold to the general public at launch. In recent years, public sales have been replaced by initiatives like liquidity mining programs and airdrops.
Ecosystem incentives are used for growth initiatives at launch and are usually managed by a smart contract that emits the tokens to the necessary protocols based on user demand. The ecosystem allocation is used to incentivize the network through incentives including:
- Contributor Rewards
- Mining/staking rewards
- Growth initiatives
Token Vesting Schedule
While the token allocations determine who receives how many tokens, the vesting schedule controls when they receive the tokens. The rate at which groups receive tokens will have an impact on the price and satisfaction of investors. We’d also like to note that the token supply doesn’t have to be fixed, and vesting schedules can change — with the permission of the community and stakeholders — to complement the market price and overall health of the asset. Here are some supply terms you should know:
- Inflation rate = The velocity/rate at which more tokens release into the market.
- Cliff = The lock-up period before funds are vested.
Balancing supply and demand is no easy task. Every project is different so there are no set rules, but here are some things you should consider when developing a schedule for each group:
Cliffs and long vesting schedules are great ways to reduce inflation and show your community that you believe in the project’s long-term success. Additionally, projects, where teams receive a high percentage of tokens, tend to have higher market caps because the team is more likely to hold the tokens —causing a positive effect on demand.
Private investors should receive some percentage of the allocation up front for instant liquidity. It’s important for private investors’ schedules to show long-term alignment with the project, but you should consider making their schedule length .75x as long as the core team so investors can recoup their investments quicker. Projects that subject investors to longer vesting schedules overall, gain more trust in the community and can lead to wider adoption.
Public Sale & Ecosystem Incentives
Ecosystem incentives are often controlled by a smart contract that facilitates emissions to the various incentive programs and public sale tokens are provided to exchanges accordingly. You must provide enough liquidity to the ecosystem to overcome the “cold start” phase while paying close attention to dilution, which is the reason schedules for these groups are often adjusted later.
Protocols, like Curve, unlocked 100% of the treasury funds at launch, but depending on the needs of your protocol, you should also consider unlocking a large portion at launch and linearly vesting after. More often than not, your protocol will need operational funds and liquidity at the start.
After setting your token distribution you should observe the market and consider reducing the velocity of tokens if the selling pressure is too high. Overinflating token supply will dilute the value and cause investor morale to decline. Alternatively, you must ensure the token has enough liquidity at the right time so users can swap the tokens with low slippage.
Token Vesting Methods
When it comes to token vesting methods —how you store your tokens before distribution— there are two primary ways:
- EOA —Externally Owned Wallet address
- Multi-sig Wallet
EOAs are self-custody crypto wallets used to store and distribute tokens. Tokens are distributed from EOAs manually or by using a token distribution platform, like Streamflow. Though EOAs can be secured via a ledger, they aren’t decentralized.
Multi-signature (Multi-sig) Wallets offer a decentralized and secure way for teams to distribute funds. Multi-sigs require a set of signatures to access the funds, which spreads the authorization process— and attack vector. Founders can designate core team members or advisors as multi-sig members to designate a board of people eligible to vote on transactions. In practice, the founder would create a proposal to vest funds to a particular group, and the board could vote to initiate the transaction.
Streamflow allows you to vest tokens —locking tokens in a smart contract— from EOAs as well as create Multi-sigs, to vest funds via team approval. Streamflow’s smart contracts are audited, providing more security than manually vesting tokens from an EOA. Projects are opting for more security as the net value retained in vesting contracts was $32.2B, in contrast to the net value retained in EOA methods, which was $6.1B, in 2022.
Tokenomics is an emerging study, and many things are changing FAST. These guidelines should be viewed as initial suggestions to aid your team in designing your project’s tokenomics. The mechanics of every asset is different, so the token distribution should complement the project’s unique attributes. It’s also important to remember that well-designed tokenomics cannot make a bad project good, they can only make a good project greater.
To learn more, visit Streamflow.finance/vesting