👨🏻‍💻工作:Web3 产品经理 🏙️城市:香港 🧩性格:INFP 最近在做 GameFi,能赚钱的游戏

"Reading Notes" - What are we really talking about when we discuss the design of "token economy models"?


Token economic models (fn), essentially build bridges between supply and demand, allowing funds to flow more efficiently between multiple parties.

Basic characteristics:

  1. Clear track
  2. Multiple stakeholders, game theory
  3. Everyone is a beneficiary, avoiding autocracy

Essentially, a token economic model requires designing a set of game rules for token distribution and circulation, striving to direct token incentives to those who contribute high value to the core business. These game rules are written in smart contracts (fn), and are clear and tamper-proof.

Basic indicators#

First, several indicators related to quantity:

  • Maximum supply (fn) (Max Supply): written in smart contracts, the total amount of tokens that will eventually be released according to the protocol
  • Total supply (fn) (Total Supply): the total amount of tokens already released, including tokens in circulation and tokens locked in storage (strictly speaking, it should also deduct the number of tokens already destroyed)
  • Circulating supply (fn): the total amount of tokens freely tradable in the current market
  • Locked supply (fn): the total amount of tokens locked in the contract and temporarily unable to be traded

Second, several indicators related to value:

  • Fully diluted valuation (FDV): maximum supply × current price
  • Market cap (fn): circulating supply × current price
  • Total value locked (TVL): locked supply × current price

Basic framework of common token economic models#

1. Deflationary model#

The deflationary model, represented by BTC (fn), sets a maximum supply and has periodic output.

Common means to achieve token deflation:

  1. Buyback and burn: the platform or token creator buys tokens from the market and purposefully sends them to a burn address.
  2. Burn through transactions: a certain percentage of tokens are directly sent to a burn address with each on-chain transfer.

Representative tokens that adopt a deflationary model for token output in the market include Bitcoin (BTC (fn)) and Ethereum (ETH (fn)) after the deployment of EIP-1559 (fn) proposal.

Advantages: Prevents inflation threats caused by excessive issuance, relatively simple design, but requires setting the total supply and how to incentivize different roles in the early stage.

Disadvantages: Limited tokens may lead to hoarding and waiting for appreciation rather than consumption. If liquidity is low, the value will decrease, indirectly leading to a collapse.

2. Inflationary model#

The inflationary model has no total supply limit and continuously mints tokens. The underlying driving force of this economic model comes from staking (fn) and mining (fn) demand.

Common means to achieve token inflation:

  1. Fixed or dynamically increasing token issuance based on specific network conditions, written in the contract periodically (per block/year/month/day).
  2. Proposal initiated by the team or DAO (fn) members based on market conditions, with community consensus, to artificially increase token supply.

Representative tokens that adopt an inflationary economic model for token output in the market include Polkadot (DOT (fn)), Ethereum during the POW stage (ETH (fn)), Dogecoin (DOGE), and Flow (Flow).

Advantages: If a reasonable inflation rate is maintained, it will be closer to traditional currency issuance, providing a wealth of social practice experience from "fiat" currencies (fn).

Disadvantages: Similar to real-world economic models, besides the issue of transparency in issuance, other problems encountered by fiat currencies may also arise.

3. Dual token model (fn)#

In this model, two types of tokens are designed in the ecosystem:

  1. Value tokens for settlement, capturing, and storing value
  2. Equity tokens for governance and rights

Generally, value tokens can be exchanged for equity tokens through contracts, and equity tokens can influence the value tokens.

Representative projects that adopt a dual token economic model in the market include MakerDAO (MKR+DAI), Cosmos (Atom+Photon), and Curve (CRV+veCRV).

Advantages: The two tokens are interdependent. If the value token collapses, it can be regulated using the equity token. Increasing TVL increases token price.

Disadvantages: Complex design, difficult understanding of roles in the ecosystem.

4. Hybrid token model#

In addition to the above common economic models, a trend is emerging to combine multiple dimensions, forming a "hybrid token economic model." It is widely believed that such an ecosystem has better robustness, inheriting and strengthening the advantages of the previous three token economic models, while weakening their shortcomings.

For example, Solana (SOL) adopts an inflationary token economic model. Its annual inflation rate starts at 8% and gradually decreases to 1.5%. However, a percentage of transaction fees on Solana will be burned, reaching approximately 1.5% or even higher per year, ultimately achieving deflation.

Another example is Curve (CRV). Initially, the total supply was 1 billion tokens, gradually increasing to a maximum supply of 3.03 billion tokens. To avoid excessive inflation, the DAO behind Curve will repurchase and burn CRV tokens to help achieve deflation. Curve also adopts a dual token economic model, introducing governance token veCRV based on the value token CRV. In terms of design, they deeply integrate the allocation of all scarce resources on the platform with governance rights. Obtaining the governance token veCRV requires locking CRV tokens for a large and long period, which increases the token price in the market.

Ways to become a protocol user and earn rewards#

1. Early rewards through airdrops (fn)#

Airdrops generally occur in the early stages of a project and can be seen as a simple marketing and user acquisition method. The logic behind it is simple: users receive free tokens based on their history on the blockchain.

2. Rewards based on business participation#

  • Individual users participate in core business interactions and receive a fixed share of rewards allocated from the treasury.
  • Users participate in core business interactions but enjoy a portion of the fees spent by others participating in interactions and contributing to the community.

3. Rewards through staking#

DeFi (fn)

4. Rewards through governance#

Curve (CRV) is a representative case:

The value token of the Curve platform is CRV, and CRV holders can lock their CRV tokens in the Curve DAO to obtain governance token veCRV, which allows them to participate in voting and governance. Only users holding veCRV can receive a portion of the fees generated by Curve's liquidity pools and participate in voting to decide which liquidity pools can release more CRV rewards in the future. Pools with higher APY will naturally attract more LP funds to stake, resulting in better depth and lower slippage in exchanges, ultimately providing positive incentives for investors, protocol participants, and Curve, achieving a win-win situation.

Token supply and distribution targets#

  1. Core team/early project initiators: This portion of the pool usually accounts for 10% to 20% of the maximum token supply.
  2. Early strategic investors/strategic sales/advisors: This portion, in the design plan, accounts for 10% to 15% or even less of the maximum token supply.
  3. DAO treasury/foundation: Generally accounts for 50% to 70% or more.

Use of the treasury#

a) Expenditure on creating initial liquidity

Discovering and setting prices and providing sufficient liquidity reserve approximately 2% to 10% of the token allocation.

b) Expenditure on IDO/airdrops/operations

This kind of explosion in the new paradigm does not happen out of nowhere. It requires a fuse, and the project needs to allocate a portion of the tokens for targeted promotion and marketing within the community. Typically, this proportion ranges from 10% to 15%.

c) Expenditure on various rewards (based on business, staking, or governance participation)

Token consumption and applications#

  1. Concealed and diversified
  2. Increase game theory and randomness
  3. MEME, honor, and emotion
  4. Restrict rent-seeking and freeloading

Everything for DAO, designing token economic models for DAO#

1. DAO, to a certain extent, is a decentralized and autonomous organization

Although politically incorrect, the progress of DAO still relies on a small group of elite helmsmen controlling the overall situation behind the scenes. At any time, one cannot rely on DAO to drive the evolution of the protocol itself. Problems such as bribery, inefficient collaboration among members, and lack of absolute responsibility are inevitable. This is determined by human nature. Currently, only a certain degree of centralization can make project advancement and iteration efficient.

2. The true significance of DAO in blockchain development

This is one of the true values of DAO—when the blockchain cannot provide clear arbitration conclusions through technology, throw all uncertainties to the DAO organization. A seemingly democratic and decentralized digital proposal and voting process eliminate all the difficult problems in this process.

3. Designing the core of Web3: DAO × token economic model

DAO is the true dominant force that changes the rules of the existing Internet and achieves Web3. Everything is for DAO, and designing sophisticated token economic models for DAO is the right path. How to achieve this goal and ensure a smooth transition from Web2 to Web3, while returning to the real needs of users in this process.

As a product designer, you can focus on the following aspects:

1. Do not shy away from discussing topics such as "centralization," "platform," "ecosystem," "top-level design," and "user needs" that may seem outdated.

2. First, establish a DAO and incorporate your target users and peripheral stakeholders into this system, not only as an organizational structure but also as a business-level structure.

3. The depth of user participation in core business and the interaction depth between wallets, contracts, and users should be integrated as much as possible.

4. First, provide guidance for the flow of tokens in core business processes, so that the protocol can clearly understand the specific flow of tokens in the next step. Second, avoid directly serving token liquidity and target rent-seeking groups. The relationship between them and "creating liquidity" should be accidental, indirect, or even conflicting.

5. From the perspective of business models alone, the design of token economic models tends to lean towards DAO and governance mining, and the protocol may have the possibility of long-term appreciation.

Ownership of this post data is guaranteed by blockchain and smart contracts to the creator alone.