Token design is a crucial part of any crypto-related project. Without proper design, the project is doomed to failure. What should be considered when creating crypto token economics and how to do it well?
2 + 2 = 4 and token + economics = tokenomics, it is just that easy. Tokenomics describes all the aspects of token usage in a project, from its role, minting mechanisms and supply to distribution methods and token burn schedules.
The better thought-out the tokenomics is, the more successful the project will be. This is why this part of crypto project development should not be neglected in any way. Tokenomics is also the key aspect that will be carefully considered and analyzed by potential investors and stakeholders before they make any financial decisions regarding your project.
Read on to find out what tokens can be implemented on your future platform, what exactly makes good tokenomics, and what steps you need to take to develop it.
Designing token economics: what are the key types of token?
There are four main types of crypto token: utility tokens, governance tokens, security tokens, and non-fungible tokens. Each of these is built on top of a blockchain, holds a certain value, and serves different purposes in the crypto project. Let’s dive in and see when each of them should be implemented.
Utility tokens are created for specific blockchain projects and used in exchange for various benefits within the platform.
This token type has the biggest number of possible use cases. First of all, you can introduce native tokens so that users can buy them to access certain services or goods.
Utility tokens are also used in staking and liquidity mining. In token staking, users can buy tokens and stake (freeze) them for a specific period of time. For the platform itself, it is a form of support and investment. For the user, it is a chance to earn interest, usually in the form of extra coins or tokens. As for liquidity mining, users lend their crypto tokens to the platform’s liquidity pools and earn project tokens as a reward at a later date.
Utility tokens often become part of the platform’s loyalty program. Let’s say you have an eCommerce platform that offers online shopping for a popular supermarket. When users purchase certain products or participate in special campaigns, they can earn points in the form of tokens. Later, they can exchange them for discounts at the supermarket.
Last but not least, utility tokens can be used for payments. Some platforms allow their users to buy goods with popular cryptocurrencies, but it is also possible to enable them to buy goods with the platform’s token.
Security tokens act as digitally-issued financial securities and are regulated by the government. They are created on a blockchain and represent a stake in an asset or enterprise. Security tokens are also treated like investment contracts and are capable of passing The Howey Test.
Since security tokens are regulated by law, they are considered a stable investment. That is why many companies choose to launch Security Token Offerings (STOs) to attract investors to their projects. The project team will need to decide which assets will be tokenized, for example, real estate, venture funds, or precious metals, choose an STO platform or create one, and launch a campaign.
The security tokens purchased represent actual investment product ownership, and this information will be securely recorded and stored on the blockchain.
Check out Resorts STO — a blockchain-powered platform for tokenizing recreational assets and running security token offering campaigns
Governance tokens are tokens that give users the right to propose ideas on platform development and vote for or against other proposals.
The suggestions can be about platform improvements, transaction fees, token release and burn schedules, or even more serious issues such as migrating to another blockchain platform.
Non-fungible tokens, or NFTs, are not only about digital works of art. In reality, they can be introduced to a variety of projects in real estate, gaming, sports, fashion, education, eCommerce, and government.
What makes this type of token stand out is that each NFT-backed asset has unique characteristics. Therefore, each token has a different value and cannot be interchanged like, say, two bitcoins. Basically, an NFT is a digital certificate of authenticity that says that the user owns a one-of-a-kind asset.
If you decide to make NFTs part of your project, this will mean that you will offer your users unique items, either digital or physically existing, that they can buy, collect or sell. They can do this on your platform, or you could give them the ability to take it out of your marketplace and sell it freely on other platforms.
What are good tokenomics? Key factors to consider
There are three major aspects to consider when creating token economics: it should be clear to users how to utilize their tokens, token holders should be motivated to use their tokens instead of hoarding them, and finally, there should be specific token emission schedules.
Let’s take a closer look at each of these factors:
- It is clear how to use the tokens
Do tokens represent an investment or can they be utilized to buy items on your platform? When buying or earning tokens, users need to be aware of what exactly they will receive and what they can do with it later.
- Users are encouraged to use their tokens, i.e. spend their money
NFTs are the tokens that have collectibles tied to them. This means that NFT holders can collect tokens instead of selling them right away, since the collectible can rise in value later and be sold at a better price.
As for other tokens, they are created to access specific services and goods. Make your products irresistible for your customers and they will continue to buy them with your platform’s tokens.
- Token issuance schedules are defined
Token emission schedules can be flexible or fixed. Both of these approaches have their pros and cons. If the schedule is flexible, you can respond to market changes in a timely manner and prevent rapid price fluctuations. A fixed schedule sounds like something more stable for users, but this approach may result in drastic changes in price and, consequently, token supply.
7 steps for designing tokenomics in your crypto project
Now it’s time to figure out what steps you need to take in order to start turning your ideas into an interesting and profitable project. Here is our tokenomics guide: let’s check it out!
Step 1. Do your research to understand token mechanics
You need to make sure that you and your team understand how tokens and tokenomics work. This starts from which blockchain platform you choose for your project and what language will be used to write smart contracts, and goes right through to how tokens are minted, bought and distributed.
When looking at blockchains, it is important to consider factors such as consensus algorithms, transaction speeds, and environmental footprint. When creating your crypto tokenomics, take these aspects into account. These days, the most popular blockchains are Ethereum, Flow, Solana, Binance Smart Chain, Cardano, Polygon, and Tezos. Also, don’t forget about other new yet very promising platforms like Aptos and Sui.
In addition to this, it is always a good idea to search for good tokenomics examples. For instance, see how tokenomics works on Polkadot and Ethereum and draw your own conclusions. Finding examples of poorly designed models so as not to repeat those mistakes would be useful, too.
Polkadot vs Ethereum: how do they differ? Find the answer in this article
Step 2. Define what types of token you will implement in your project
Interestingly, it is impossible to predict what types of token will be used in every project. For example, there are projects that don’t even have native tokens, such as OpenSea, the largest NFT marketplace. When users buy NFTs there, they use cryptocurrencies instead of specially created tokens.
If you want to launch your own token, you may need to implement utility tokens to let users access your goods and services or make payments.
If your platform is planning to launch a DAO, you will need to introduce governance tokens to allow users to vote and propose their own ideas.
If your platform is about tokenizing assets and turning them into NFTs, or you’re launching a metaverse platform or a crypto play-to-earn game, then you will obviously need to develop non-fungible tokens.
Security tokens, in their turn, are usually offered to investors who are making a contribution to your project. By buying security tokens, they will be investing in assets or company shares.
All in all, the type of token you choose will depend on your project’s characteristics and your business goals.
Step 3. Carefully think through your token design and document it
This step includes all the technical aspects regarding token design. With a proper design, your project will start building a community around it from day one.
Here you will need to come up with a name and symbol for the token, decide on the total token supply, and figure out how to attract early adopters to your platform. Try to lower entry barriers for your first users, provide good usability and make it simple yet highly secure to buy, earn, and store tokens.
Step 4. Choose an economic model
Deflationary or inflationary? That is the question.
These are the two major types of economic model you will have to choose from. The deflationary model implies that there will be a limited number of tokens created. Because a token can be burned or simply lost by their owners (if they forget their private keys), the supply will always decrease, while the cost, on the contrary, will increase. It is quite logical that the rarer the token is, the more valuable it becomes.
With the inflationary model, the number of tokens is unlimited and can grow over time. The minting of new tokens usually occurs through staking or mining. As for the price, it doesn’t depend on the number of tokens as much as in the deflationary model.
Step 5. Make sure that your token economics model is beneficial for users
It goes without saying that the users should have the motivation not only to join the project and buy a few tokens early on, but also to stay there and continue to invest their time and money in it.
Thus, your team will need to create solid, reliable, and attractive ways for users to benefit from their interaction with your crypto platform. These can be loyalty programs, staking pools, liquidity mining and other approaches.
Learn more about Echo DeFi and its native ECHO token developed by PixelPlex
Step 6. Evaluate potential flaws and risks
Together with your team, you will need to analyze every aspect of your project’s token economy and see if there are any small (or big?) flaws that can be fixed or improved.
Look at your project through your users’ and investors’ eyes and ask yourself, “Would I join this project if I were a potential investor? Would I be interested in buying their tokens and using their services?” If you hesitate, there may still be room for improvement and it is important to understand where it is.
Step 7. Make plans for the future
Even before releasing your platform, think about how your crypto tokenomics will evolve in the future. Work out the details of how your model can further add value to investors and still bring you financial benefits.
Designing crypto tokenomics is a challenging task as it requires a vast knowledge of blockchain technology, the different types of token, their minting processes, and distribution models. It is also a big plus to understand how project economics work in general.
The good news is that you can find such professionals right here, at PixelPlex. Our blockchain consultants can help you develop smooth like butter tokenomics for your crypto project, or give their opinions on the tokenomics model designed by your team.
As our consultants have been involved in so many blockchain-related projects, they truly know the tokenomics design process from A to Z. You can take a look at how our team advised LaneAxis, a SaaS transportation company, on how to implement blockchain and design token economics in a shipper-to-carrier direct freight network.
Don’t hesitate to contact us so that we can start working on your solution today!