Tokenomics encompass a few key things outside of release schedules and distributions namely (and in no particular order):
- Initial Market cap
- FDV (Fully Diluted Valuation)
- Prices of previous funding rounds
- Value flow
KNOW YOUR TIMEFRAME
FDV vs Initial Market Cap
Depending on market conditions and your confidence in a project you need to decide on the length of time you are looking at for your investment to play out. Often in ICOs or public sale rounds we see a number of different options where the unlock % at token generation event (TGE) is larger and the vesting period shorter if you pay a higher price. In any case depending on YOUR unlock schedule you will need to assess based on either FDV, Initial market cap or a hybrid model.
If you are looking short term and have an unlock at TGE then Initial Market Cap is crucial. The thing here is that there needs to be pent up demand, people who wanted to get into the public sale and couldn't or a large number of people who only found out about the project after the sale. Ideally a small Initial Market Cap and a large amount of pent up demand are what give rise to large gains on listing (although these prices are rarely sustained as the unlocking of more tokens occurs (private sale, seed sale, team, ecosystem etc.)
If your investment horizon is long term then initial market cap is of less importance (and no importance if you have no unlock at TGE) and you want to focus more on fully diluted valuation and what the circulating supply will be when YOUR tokens unlock. A good idea here is to compare to REALISTIC competitors market caps and make an assessment what your project can achieve in relation to that.
Tokenomics is an incentive game and is always more favourable to certain participants. What we often look at and see as bad tokenomics are usually from a public investor perspective. But when it comes to private investors, seed investors or indeed teams, they will in fact be favourable to them. What is universally terrible however is when we see a release schedule that floods the market very suddenly like what we saw in FLOW or indeed to a lesser extent in GLMR. The supply shock tanks price and in fact creates great shorting opportunities for tokens listed on major exchanges.
Flow we see a 4.5x in supply month 12 which inevitably resulted in the following….
What do good Tokenomics look like from a retail perspective?
What ideally I like to see is:
- Previous funding rounds not excessively cheaper especially if they are recent eg. a seed round 2 months ago at 10% of the price is not acceptable.
- However we do want to see an increase in valuation as this means the project has been delivering and accruing value as they progress through funding rounds.
- Cliffs for team and early investors, like to see a minimum of 6 months (preferably a year or 18 months) cliff for team and vesting over 4 or 5 years (ideally longer) to ensure continued motivation to move things forward (if they have faith in what they are building then they will believe the tokens will increase in value over time)
- A steady influx of supply with no sudden jumps or supply shocks.
- The earlier the investment round the longer the cliff and vesting should be.
- Small to no lock for public sale participants but a minimum of 20% or so at TGE with a large percentage of the tokens vested before the major unlocks of earlier sales rounds and team
In relation to the token distribution around 20% max seems like the amount that teams get and obviously less tokens in the hands of private and seed investors at lower prices are a good thing - when it comes to maintaining good price action post listing. Large amounts of tokens in the hands of a small number of institutions or private investors also prevents true decentralisation. Really you would only want to see 20% or so I think in the hands of seed and private investors with a 5% minimum for a public sale (although very small percentages sold to public in addition to favourable vesting can create that pent up demand that causes a pump on listing for those who manage to get in as well).
Ecosystem Tokens and Valuation
In regards to ecosystem tokens I was collaborating with an angel investor - who is also the founder of a top 150 project. They made a great point regarding these how ecosystem tokens are used. The idea is, reward or ecosystem development tokens should be used to bring value to the network and actually they don't use them (or at least discounts them significantly) when it comes to assessing FDV. If you for example use these tokens for effective marketing or incentivising participants for desirable behaviours that increase the value of the network then the value they bring should far outweigh the increase in supply when it comes to network value and thus price action. This is of course dependent on the effectiveness of how each project chooses to distribute them.
The issue of Influencer Rounds and Transparency
I do feel the system of having KOL (Key opinion leader or Influencer) investment rounds is broken. Normally this will be the last sale pre public and is used to on-board influencers in exchange for private sale allocations (almost always unpaid, it just gives access to buy). This puts influencers in a spot where they are invested in a project but don't need to say they are strictly speaking as they haven't been paid (to be clear we ALWAYS make it clear when we are invested in something we are talking about). But as it is most don’t and its very hard for them to be objective in their analysis when they are essentially working for allocations to make a living and need to keep both the projects and VCs who connect them to the projects happy with their analysis.
Theory vs Practice
I think what is easy to forget is that in theory designing good tokenomics is easy. In practice projects deal with VCs who are negotiating for better deals relative to those in other tranches, exchanges who want absurd amounts of tokens to list and KOLs who all want to maximise their allocation.
Overall lack of transparency
What we see when it comes to previous funding rounds is almost never accurate. Different VCs get different deals at different prices, some get equity, some negotiate better vesting for themselves. But when we look at the release schedule and previous funding rounds it's all made to look uniform so as not to confuse or worse piss anyone off. We have had deals where improved vesting has been negotiated ourselves and we are only small fish here, when it comes to the big boys you can guarantee they are negotiating hard. There is also the issues of where the tokens are being kept. We have heard extreme examples of projects keeping tokens on a hardware device like a ledger and just sending them out manually when time time comes each month for vesting. There are many issues with this including security - not to mention having access to tokens that they say they havent access too.
If you got some value from reading this and want some more thoughts on Tokenomics including things like:
- Liquidity tokens
- Value flow
- Series Funding
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