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DeFi, a once thriving bastion of financial innovation, is now experiencing tumultuous times. Based on Bankless TimeAn alarming 10% of the market is filled with fake tokens, which partly explains the current climate. doubt and distrust. Most tokens fail to deliver on their promises, leading investors to question the legitimacy and effectiveness of the entire ecosystem.
Compounding this sentiment is that the current bear market has cast a dark cloud over the entire cryptocurrency community; as a result, DeFi’s once stellar reputation has suffered worsenedraising concerns about its long-term survival.
Now, at a crossroads, DeFi is faced with an existential question – can it weather this storm and ensure its long-term survival? Some experts argue that this turmoil is only temporary, and that the entire cryptocurrency community has entered into what they call “distribution phase” — a period of intense competition between bullish and bearish forces. This phase serves as a litmus test, separating a strong project from a sustainable project tokenomics of those who do not have a solid foundation.
Against this background, the importance of success tokenomics cannot be underestimated as a foundation for long-term resilience and sustainability.
To investigate this issue, we invited Matty, Token Economics Lead at Status.imone of the earliest projects to launch on Ethereum, and Logos, an initiative that builds trust-minimizing and corruption-resistant infrastructure key to creating a network state.
With his expertise in the field, Matty has written a comprehensive guide “Tokenomics for Builders”, which is open source, freely accessible to everyone, and aims to uncover the secrets behind successful token launches and empower individuals to navigate the intricacies of the space. By sharing his knowledge, Matty does just that embedconfidence in the future of DeFi, but also encouraging collective belief in its transformative potential.
We recently turned to Matty to explain some key questions that will help us understand the current state of affairs tokenomics and the future path for the industry.
1. Hi! Thank you for joining us. Let’s start with the first question: which best practices will help craft success tokenomics?
Good question – builders often ask ‘what the best tokenomics‘, which misses the point of designing the incentive – optimization function. For example L1 must optimize between scalability, security, and decentralization. Stablecoins must optimize between price stability, capital efficiency, and decentralization. Builders need to create sacrifice and optimize.
The best way to do this is to follow a deliberate design process to think about, model, and test incentive mechanisms, value capture, and other aspects for your context, rather than simply copying and pasting from other situations.
2. Looking back at history tokenomics, what do you consider to be your most important achievement? When do you believe the turning point is – the moment when tokenomics really starting to shape the future of this industry – happening?
I think it was the big collapse that was the milestone. The collapse of UST and Luna. Death swirls around Steemit, Axie Infinity, Olympus DAO and others. Each time a new group of builders and investors learn a painful but important lesson.
According to me tokenomics started to shape the industry properly from the beginningand is often a bad word for speculation fueled with a pump-and-dump mechanism that is almost similar to a Ponzi scheme. I am excited about the industry maturing and demanding more sustainable and more tightly designed token models and incentive structures.
3. In the realm of token economics, what methods have been tried and tested to create value beyond simple redistribution? How can projects leverage this method to unlock the full potential of their tokens?
Value creation is key to the success of any product, whether blockchain or not. I think too many creators mistake tokens for a viable product replacement – but they’re not. Products can create value a number ways: save people time, increase privacy, save money, give them social signals or status, entertain them, etc. The key is to solve the problem first.
If users use your product because it solves a key problem, then it exists a number a way to get some of that value and add that value to the token. Tokenomics for Builders has a whole chapter on value capture – it’s a broad topic.
4. Considering factors such as utility, governance, and community engagement, what method would you personally recommend for token creation? Please explain further.
Also a good question – when it comes to governance, builders often make the mistake of equating user governance with user ownership or decentralization. But like any other project Liquidity point out, these are not the same thing, and introducing tradable governance tokens always poses the risk of new exploits and attack vectors.
This approach of user ownership, but minimized governance, with economic utility really interests me for a protocol that optimizes censorship resistance. But that approach doesn’t work for everyone – it depends on the use case and the goal.
5. Among the mistakes newcomers make tokenomicsWhich do you think is the worst – and what advice would you give to avoid them?
One of the biggest mistakes is naively assuming that your tokens will act as a medium of exchange or store of value. I think many people draw the wrong conclusion from Bitcoin that just owning the token is valuable. History has proven that this is not the case, and stablecoins are the preferred medium of exchange.
Other common mistakes include rushing to launch a token too early, not testing the design rigorously before launch, and thinking only about supply (allocation and emission pie charts) rather than utility, value accrual, and incentive mechanisms.
6. Fraud has been a persistent problem in the industry. What are some proven ways to spot fraud in token offerings before it’s too late, and how can investors protect themselves from fraudulent projects?
I wouldn’t say there are proven ways – even supposedly regulated entities can be, and turn out to be, fraudsters. But as a general rulesome big red flags are if The project’s greatest utility is price speculation, it has high betting returns paid by minting tokens, or if it depends on the token price or market capitalization always rising.
For example, UST basically relies on the price of LUNA never falling too quickly. OHM relies on people never selling, market caps growing forever, and marketing exorbitant staking APYs funded by token minting. High APY means high inflation, all else being equal.
7. Launching your own token is a path that inevitably presents legal challenges and obstacles. Based on your experience, what are the main obstacles in the legal field – and what needs to be overcome For successfully navigate the token launch process?
The only thing people always mention is securities laws, but they do exist actually a lots of other concerns too. Money transmitter, banking and broker-dealer licensing rules, tax and accounting reporting, corporate structure settings – and much more.
This doesn’t mean that it’s impossible to launch a token the right way, but builders should take it seriously and always talk to a legal professional before launching a token, and even before discussing the possibility of a token launch publicly. I’m not a lawyer, but this guide adheres to many useful resources and standard practices of lawyers.
8. How tokenomics contribute to stimulating innovation in the economy as a whole — and what is its role in driving technological progress and innovative business models?
For me the most important thing superpower Owned tokens enable former proprietary products and networks. User ownership is a model we have only seen in limited efforts outside of blockchain – e.g AirBnB wants to give a share to the host, but faces various obstacles to do so. Transparent chain of ownership, program capabilitiesand efficient token transfer capabilities to unlock previously impossible or expensive options.
Instead of the “winner takes all” dynamic that currently dominates technology, tokens can democratize this with users ownership
9. Looking ahead, what do you envision for the future of DeFi, and how do you see it evolving in the coming years?
I see several different segments emerging with varying degrees of decentralization. One is an on-chain use case with KYC and a centralized off-chain point of failure (real world assets), integrated with Fi Trad and leveraging blockchain to gain efficiencies.
Then you would have a segment of privacy preserving zero-knowledge DeFi – protocols that can prove compliance while maintaining a level of privacy that satisfies most people. Finally, you’ll have completely private and censorship-resistant use cases for people who value privacy above all else, although sadly these will likely remain on the fringes.
In conclusion, tokenomics is the most important thing during the turbulent phase that DeFi is currently experiencing. Matty emphasized that it is important to remember that tokens are not a substitute for viable products, and that value creation is rooted in solving real-world problems and offering real benefits to users.
With tokens in particular, those the most promising use cases prioritize user ownership, minimize governance, and provide economic utility. Navigating various legal hurdles and considerations beyond securities law is an important part of launching a token – which is also important for recognizing red flags in fraudulent projects.
As the industry matures, the focus is on fine craftsmanship tokenomics This is what lays the foundation for the resilience and sustainability of a project in the long term. DeFi will likely see the emergence of different segments with varying degrees of decentralization, such as on-chain use cases integrated with traditional finance. It seems clear that in one way or another, tokenomics will remain key to the future of DeFi and crypto as a whole.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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