Thread by @iota_penguin

DeFi Education Session by @banklessconsult

Part 6: Tokenomics 🫰

🧵 for the #IOTA & #Shimmer community! 👇

What is a token?

A thing serving as a visible or tangible representation of a fact, quality, feeling, etc. ➡️ bundle of property rights

Real-life examples:

🔹 Dollar bill
🔹 Coupon
🔹 Highschool diploma

General attributes of a token:

Token type: fungible or non-fungible

Token unit: fractional, whole or singleton, indicating whether a token can be divided into smaller fractions or if there can be a quantity greater than 1

Value type: intrinsic or reference, indicating whether the token itself is a value (e.g. cryptocurrency) or if it references a value elsewhere, like a property title

Representation type: common or unique, indicating whether a token has its own identity and properties

Supply: fixed, capped, variable, gated or infinite, indicating how many token instances a digital asset can have during its lifetime

Template type: single or hybrid, indicating the existence of parent/child relationships or dependencies across tokens

What can you do with #crypto tokens?

🔹 mint
🔹 transfer
🔹 delegate
🔹 vote
🔹 burn
🔹 stake

Why decentralized tokens?

Create immutable incentives with capital to align various actors on an objective.

What can go wrong?

Externalities: Actions taken by one person that can benefit or harm others

How to build systems responsibly?

🔹 Tokenomics is not a game!
🔹 Perform audits
🔹 Research & education
🔹 Setting standards

Supply in 4 questions

🔹 Where is it right now?
🔹 Where will it be?
🔹 When will it get there?
🔹 How will it get there?

Where is it right now?

🔹 Total supply (tokens created - tokens burned)
🔹 Circulating supply (amount of tradeable tokens)
🔹 Token Market Cap (current valuation of a token economy)

Where will it be?

🔹 Max. number of tokens coded to exist in the lifetime of the token economy
🔹 Fully Diluted Valuation (FDV): market capitalization of a token economy if all tokens were issued out

Example:

Token price: $10
Circulating supply: 10,000
Max supply: 50,000

Market cap: $100,000
Fully diluted valuation: $500,000

➡️ Project must grow 5x to fully reach its valuation!

When will it get there?

🔹 Monetary policy (inflationary: adding tokens; deflationary: removing tokens)

Inflation is a great way to acquire capital for growth if the value of the token is growing faster than issuance.

🔹 Burning (permanently removing tokens from the supply)

Burning increases the token price (concentrates the value of the tokens to the token holders)

🔹 Buy-backs (controller of the token buys back its native tokens from the economy)

This has the ability to improve token price without changing its market capitalization

How will it get there?

🔹 Airdrop (single value at a point in time)
🔹 Issuance (continuous to bring short-term value)
🔹 Staking (continuous for long-term value creation)
🔹 Unlock schedules/vesting (continuous for long-term value creation)

What drives demand?

🔹 Financial/economic (expected token price performance & incentives)
🔹 Social/cultural (active network/events/place in community)
🔹 Governance (token holders have power to change economic & social rules!) 👀 💡

Token economies in layers:

1⃣ Markets (environment where participants interact)
2⃣ Mechanisms (rules of the environment)
3⃣ Tokens (medium to achieve objective of system)

1⃣ Markets:

🔹 Incentivize eary adopters (cold start problem)
🔹 Partnerships
🔹 Bonuses
🔹 Provide good information to evaluate all decisions
🔹 Ensure safety of marketplace

2⃣ Mechanisms:

🔹 Governance (How are decisions made?)
🔹 Non-financial incentives (How is voting done?)
🔹 Structure (How do peers transact with each other? What is the connection with off-chain information?)

3⃣ Tokens:

🔹 Token policy (monetary; valuation)
🔹 Financial incentives (e.g. rewards)
🔹 Architecture (distribution structure; algo, math or code)

How to launch a token?

🔹 ICO (Initial Coin Offering)
🔹 IDO (initial DEX Offering)
🔹 Liquidity Bootstrapping (public way to raise funds, market sets initial token price)
🔹 Incentivized Liquidity (allocate tokens that vest over years)

🔹 Liquidity Bonding (offer tokens at a slight discount in exchange for a liquidity position)
🔹 Airdrops (reward early users)

Tool to analyze tokenomics? 👇

Check @DuneAnalytics, offering free crypto analytics by and for the community!

In addition, you must get familiar with token allocation diagrams. Read and understand them before investing in any project!

Value != token price

There are two types of risks:

🔹 Systematic risks (market & political risks)
🔹 Non-systematic risks (business risks)

Always do your own research! ⚠️

Did you learn something new? Great! You better be prepared for the DeFi rise on #Shimmer & #IOTA! 🚀