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Think you know about Tokenomics?

Keep reading to learn the OATH Foundation's point of view, and how we might use this knowledge to shape the future of ecosystem governance and incentives.
/OATHFoundation/status/1704175082250326384/photo/1

Firstly, what are Tokenomics?

Tokenomics generally refer to an economic framework that protocols  can use to manage supply and demand of their token and align incentives  between stakeholders. As central banks can use inflation to modulate the  behavior of citizens, token administrators use inflation to program  behaviors in their ecosystem participants.

And how can we evaluate tokenomics?

Expressing something as complex as tokenomics mathematically is like  catching a greased pig. Think of the below equation as a simple mental  model more than a formal tool for analysis.

With this in mind, let’s establish a simple differential equation to help our evaluation:
/OATHFoundation/status/1704175082250326384/photo/2

Where:
> dV/dt = Change in token value (yield) over time.
> V = Token Value (initial value based on price at market creation).
> R = Speculative demand.
> b = Tokens removed from liquid supply.
> i = Tokens added to liquid supply.
> s = Total supply.

Tokenomics work by modifying different aspects of this  equation. Performing buybacks, burning tokens, or getting users to stake  assets increases the b variable and reduces the s variable, resulting in a fundamental shift in value as well as  increasing the magnitude of that shift overall. This growth can increase  the R variable as traders attempt to price in future growth based on each fundamental change.

As  inflation decreases and more tokens are removed from the liquid supply,  it’s easy to see how protocols can unlock exponential growth  opportunities:
/OATHFoundation/status/1704175082250326384/photo/3

Where C is the fair value of a token based on fundamental markers with no speculative premium.

So, in plain English, effective tokenomics will increase the  value of a token by increasing the amount of tokens removed from the  market (b), decreasing the amount of tokens added to the market (i), and surfacing the data and intelligence required for speculators to understand the value of these changes (R). Effective tokenomics will also ensure any tokens added to the market (i) are encouraging behaviors that will result in an increase in token burn (b) and speculative demand (R).

A  keen observer will note that the opposite is also true. Aggressive  tokenomics strategies that feature locking, options, and heavy inflation  can be viewed as a means of creating leverage. As locks expire, options  are exercised, and yields diminish, the economic effects of these  mechanisms will have a similar yet opposite impact on an ecosystem’s  value.

Why do teams use Tokenomics?

Tokenomics have a number of compelling use-cases, as exercising  influence over the supply of a digital currency allows protocols to  shift risk upstream, create leverage, and punch way above their weight  class. If well-planned, these shifts can unlock massive opportunities  for growth.

One of these use-cases is user onboarding,  which is best accomplished through things like airdrops, referrals, and  other one-off incentives. User retention and sybil resistance are the  two strongest considerations, and can be achieved through nuanced reward  weighting, good infosec practices, and vesting.

Another strong use-case for tokenomics is reducing concentration risk.  Money managers rarely want to be providing a large share of a  protocol’s liquidity, as it would put them on the hook for anything that  goes wrong and increase the likelihood of insolvency.

Finally, tokenomics strategies can allow protocols to generate income to finance developments, diversify their treasury, or fund incentives.  We see this being done through bonding, distribution of option tokens,  and treasury management.

A beautiful marriage of each of the above use-cases should result in deepening liquidity,  which inherently reduces concentration risk, allows a protocol to  onboard larger customers, and scales protocol revenues up. If managed  properly, increases in serviceable market associated with deepened  liquidity can even help diffuse the risks associated with tokenomics  strategies.

Tokenomics in Practice

Ideally, tokenomics allow protocols to better serve users. In many  cases, this means deepening liquidity to facilitate new stages of growth  and creating new methods for ecosystem participants to generate income.

It’s  always good to remember that any tokens taken off the market  temporarily will find their way back, so scaling up yields, emitting  deferred assets, and promoting lockups will create a pocket of risk that  will eventually need to be diffused.

Additionally, this article  is only half of the equation. Analyzing risks associated with tokenomics  may start with math, but it ends with compliance. Different types of  token incentive mechanisms carry different regulatory weight, and we will explore these concepts in a future post!

If you're interested in a list of different tokenomics strategies, check out the original article at https://t.co/zmSPVdIbhj for more!

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Ever wonder where Ethos Reserve's tokenomics are heading.

Think you know about Tokenomics?

Keep reading to learn the OATH Foundation's point of view, and how we might use this knowledge to shape the future of ecosystem governance and incentives.

Firstly, what are Tokenomics?

Tokenomics generally refer to an economic framework that…

Think you know about Tokenomics.

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