New Year Reflection on Tokenomics

HNY! Here's a quick stream of consciousness reflection on how token economies work.

The biggest challenge with token economies is managing buy and sell pressure. I learned this when watching social token projects launch and rise incredibly before falling on their face due to liquidity mining or pump and dump schemes. When working through the design of these networks, the levers feel relatively infinite (they are) and relatively manipulatable (also true). Ultimately the thing that is also true is that these levers are (albeit obscurely) transparent, so any action created on behalf of a token economy on-chain can be seen in etherscan, or on any other blockchain’s respective explorer tech.

The way people manage buy and sell pressure is via either 1. Economic mechanisms, or 2. Cultural mechanisms. Economic mechanisms can be thought of as Maker DAO’s scheme of Collateralized Debt Positions to create DAI, or Olympus Pro’s liquidity bonds in exchange for discounted Ohm. Both of these require people to add to their system in order to grow based on predetermined mechanics that can be modified or changed by whatever governance system stands. 

Cultural mechanisms, on the other hand, rely somewhat on obscurity and hype to create positive market forces. This can be seen in ecosystems like Bright Moment’s Cryptocitizens, Dom’s random experiments (ie. Loot), or Pak’s famous art developments. In general, cultural mechanisms lean more on NFT token standards (typically ERC721) and economic mechanisms leverage fungible token standards (typically ERC20’s). 

As tech develops both of these standards will continue evolving together, complimenting each other, looking like each other… soon NFTs will leverage robust economic mechanisms developed within the Defi ecosystem to create even more useful opportunities for holders of these tokens. As utility increases, which will happen with composability, the value generation also increases (as does the risk to some degree). 

All this to say, I put out a tweet yesterday to ask whether people like inflationary, deflationary, or static token economics. Ultimately the opinion was spread evenly, distributed higher at the edges (equally significant preference for inflationary and deflationary). I think the question is a bit misleading, because unless you are making another Bitcoin or Ethereum, your protocol is not “immutable” but it’s success is checked by the design and development combining the cultural and economic mechanisms that push forward the buy and sell pressure.

OFC, anything successful also comes from a great deal of luck. Mr. Market still exists in Web3, no matter how perfectly engineered the incentive design.