Before You Tokenise Your Project
Key considerations for designing healthy tokenomics
The applications for blockchain technology are truly limitless, but ask a random person and they’ll probably only cite cryptocurrencies as its main purpose. After all, most projects launching on-chain today have their own token.
Tokens can give businesses an incredible edge, allowing them to monetize new income streams, share profits with stakeholders, and even democratize business decisions. It also helps that cryptocurrency markets have seen phenomenal growth in the last few years, making many people exceptionally wealthy.
Today, launching a token is easier than ever — but ensuring your token succeeds is an entirely different beast. Managing the competing interests of investors, team members, public users and the ecosystem itself is a delicate balancing act, but do it right, and you can have an incredibly successful product on your hands.
In this article, we go over some key considerations you need to have when designing your project’s token to launch.
For investors, this article is for you too — the points we mention here are some of the things you should be looking for when analyzing a project.
🚀The first and most important question: Do you need a token?
Before you pull out the calculator and begin punching numbers into spreadsheets, there’s one extremely important question you need to ask yourself.
Do I really need a token? You might be surprised how often the answer is ‘no’.
Launching a token should not be taken lightly — you have a responsibility not just to a handful of private backers, but instead to potentially thousands of investors. In traditional businesses, it’s a lot easier to pivot if something isn’t working. With crypto, once your token is out there, there’s little you can do to change it.
Look at what a token would do in your business model and ask yourself if it would still work without a token attached. If the answer is ‘yes’, you should consider your alternatives.
Remember, a publicly-traded token is not necessary for a project to build on the blockchain. In fact, requiring people to buy your token to interact with your product can even turn prospective users away.
Even though you might feel like you’re missing out on an opportunity, deciding against a token can actually help your project succeed in the long run. This is not to say you shouldn’t try. If you’ve decided that a token can play an important role in innovating your business, it’s time to get thinking about the ‘how’.
Utility is what gives your token its fundamental value — without utility, your token is purely speculative, at the whim of market cycles and sentiments.
Some important questions to ask:
· What can users do with my token?
· How much is that service worth?
· What would the alternative be to using my token?
At the end of the day, your token is only worth as much as the value it offers holders. An NFT, for example, might give your users access to a particular service. In an efficient market, the value of that NFT would be equivalent to the value of this service.
The more utility your token has, the more likely you are to find different users willing to purchase it.
🚀Vesting periods and allocations
Once you’ve decided what your token will do, you need to determine who gets how many and when. This is a delicate task that involves balancing competing needs and interests.
The time your token is locked up for is known as ‘vesting’. A token is ‘vested’ when it is released to the market (aka unlocked). Tokens that are still locked are ‘unvested’.
Vesting periods are one of the most important considerations when designing your token, and one that people often get wrong.
If you sell your token to early investors at a discount, you generally want to vest their allocations for a longer period. For example, if your seed investors purchased your token for $1 and your public price is $4, you don’t want your seed investors to be able to sell as soon as your token goes live.
If you’ve purchased a token for $1 and the market price is at $4 at launch, you can sell your tokens and be in profit until the token hits $1 — meaning the price can fall by 75% before you start losing money.
Vesting periods force your backers to wait before selling, giving you more time to find a wider base of holders at the public price (or higher). When your seed backers have their tokens vested and want to sell, they’ll be selling into a more liquid market better able to absorb the sell pressure.
Having all of your unlocks coincide can create a massive wall of sell pressure which can drag your token’s price down. At the end of the day, people are investing for profit — you need to expect that they will sell at least some of their tokens when they get the chance. Most VCs also have internal risk mitigation rules that stipulate that they must sell part of their allocations at certain intervals. Even if they believe in your long-term vision, expect them to sell something as soon as they can and plan accordingly.
Vesting isn’t just important for investors though. Your internal allocations for things like marketing, development, and liquidity mining rewards are also important to release slowly. The main purpose of vesting is to ensure that your circulating supply doesn’t increase drastically in a short period, leading to token inflation and price drops.
There are complicated dynamics that govern the price of crypto tokens. They’re not quite shares, and not quite currencies, but rather something in between. Market sentiment, supply/demand dynamics, investor interests and product/market fit all influence token performance. These aren’t easy factors to contend with.
Public companies have entire departments that deal with share offerings, and central banks can have thousands — if not tens of thousands — of extremely well-qualified people managing fiscal policy. Your token will launch on a smaller scale, but the same forces that the best financial minds in the world deal with throughout their careers still apply to you.
The best way to ensure your token has utility, proper vesting and reaches the wallets of the right people is to get help from experts. At Adaverse, our team includes veteran investors and financial analysts who can help you to future-proof your token strategy. We help you create strong tokenomics able to stand the test of time (and markets) and put you in touch with the right people to see your project succeed.