Tokenomics are essential for wealth creation

The blockchain space has ushered in a new type of technology that is here to ‘rattle the cages’ of powerful incumbents. This technology is going to lower the barrier to entry to those without access to sufficient financial services. In my opinion, the long term effect of lowering this barrier to entry, is the destruction of a lot of concentrated wealth. Some projects will even destroy the possibility of financial gain within certain markets, developing projects as a public good. Therefore, economic rent seekers that sit at the edge of the economy are going to get innovated into extinction.

However, what’s a project look like that doesn’t destroy wealth and can actually appreciate as a result of their incredible product/service?

(p.s I am not talking about speculation fuelled price appreciation)

In my opinion it’s a simple formula

Any given project can create X value and decides to capture Y% of X.

In terms of wealth creation, if a project doesn’t have an efficient mechanism to capture value, it doesn’t really matter how much value they create.

So there’s two sides to the coin👇

Value created

• This is the product. The product is the only thing that can just create value out of thin air.

Capturing said value

• In the digital asset space, tokenomics is the only way a project can capture value. In my opinion, founders need to spend a lot of time thinking about tokenomics

Product on one side, Tokenomics on the other.

Bad Tokenomics

Any project that is B2B focused with a payment token is an absolute joke. People that live on hopium, think these businesses want nothing more than to put a highly volatile, illiquid alt coin on their balance sheet. However, ‘when the chickens eventually come home to roost’ these projects are going to be left behind. No corporation, business or institution wants that kind of volatility on their balance sheet. It’s hard enough to get businesses to buy bitcoin, let alone an alt coin that moves 20% a day. This ruins business’s ability to budget properly and ‘carve out’ a set of predictable expenses.

Example, VectorSpace $VXV

VectorSpace monetises companies developing A.I technology by supplying them with the appropriate data sets. This is cool and all, but how do they capture value and funnel it to $VXV. Their plan is to make VXV a payment token. So even if the product can capture HUGE corporations, the only way value accrues to VXV is through them wanted to purchase the services with it. However, VectorSpace also offers businesses the option to pay in USDC. Now if you think these corporations will pick VXV over USDC you are crazy. The companies VectorSpace is targeting are multi-billion dollar corporations that are willing to spend 100s of millions to access the right data. How can one of these corporations buy $100 million in VXV when the entire market cap is $450 million. There’s no liquidity.

VXV would probably pump really hard leading everyone to take profits and the business left with $50 million in VXV.

Does that sound appealing?

These traditional businesses need to budget far into the future. How can a business budget when a big portion of their balance sheet fluctuates day by day. It doesn’t make any sense. VXV is a collectable.

Great tokenomics

A project’s tokenomics should be structured so the end consumer never has to interact with volatile cryptos. Customers do not appreciate having to add risk to their balance sheet just to use your product. In order to acquire customers you must make their life easier, not harder. As I mentioned earlier, businesses will never expose their balance sheet to assets that can drop 90% over night. The best tokenomics are ones that make the consumer feel like they are interacting with a traditional business. It’s a great sign If a project can create a mechanism that accrues value to the token without customers even knowing they have one.

Example, Covalent CQT

Covalent CQT is not used as a payment token. Firstly, developers deposit a stablecoin into a wallet, in order to pay for the queries solved by the Covalent Network. A smart contract automatically triggers a micro-transaction for every one of these solved queries. Within the same smart contract, these stablecoins are used to purchase CQT from the open market to pay validators for securing the network. This means the developers using the Covalent Network never have to expose themselves to the volatility of CQT.

Yet value still accrues to the token!

This mechanism efficiently captures the value created by the network, without blowing up customers balance sheets. Therefore, businesses can now use the Covalent Network while reliably knowing future expenses.

Vesting Schedules

There is a lot of unwarranted anxiety around the difference between project’s ‘Circulating Token Supply’ and ‘Fully Diluted Token Supply’. In my opinion, it’s a good thing for a large percentage of tokens to be vested.

Let me explain

When a project has all their tokens unvested, they have typically stopped expanding internally. For most of these projects, all that is left is scaling the community/customers.

However, when a project has a lot more technical development left, it is typically good that the project treasury has a large amount of funds.

Why?

Without adequate financial backing, a project can no longer develop market leading products. Without market leading products, projects can very easily get innovated out of the market.

So the company treasury is actually a means for hiring the internal team to build a product that can accrue value to the token. Without any funding, the technological advancements within a project slow down or completely disappear.

It’s obvious when teams care about dumping tokens on the market for a quick $. They will typically have a very short vesting schedule or a ‘vesting schedule’ that isn’t governed by smart contracts (p.s check that they have been audited). However, when you have vesting schedules over 3–5 years, it’s a great sign that the team/investors are in it for the long run. For example, if the CEO has tokens locked for another 3 years, you can bet your first born that he will use every dollar and take every opportunity to make those tokens more valuable. This ignites a desperation within the team to use current funds on building market leading products, which is a great sign for current token holders. Because if they don’t, the tokens 3 years from now will be worth nothing!