5 key elements of good tokenomics

How do you know that a good project is a good project?

Macroeconomist and tech entrepreneur Tascha Che took to Twitter to highlight 5 key elements of tokenomics to look for when buying a specific token.

1. Sustainable spending use cases

One of the first questions to ask when considering buying a token is whether you’re supposed to hold the token as an investment or its purpose is to be spent to pay for services offered by the project.

It’s important to consider if the token price is correlated to demand for the underlying protocol rather than it being correlated with crypto market cycles. Furthermore, most projects won’t want their services becoming excessively expensive - which would be the case if the unit price of the spending token increased rapidly.

Chainlink’s LINK token is a case in point. Although it’s of finite supply and it represents valuable infrastructure, its only utility is to be spent. There are no cash flows or other utility from holding LINK. For this reason, Chainlink plans to roll out a staking mechanism associated with the LINK token later this year.

2. Holders benefit from project growth

Oftentimes token holders can derive benefit from project growth directly or indirectly. Some tokens act as quasi-equities - providing the holder with a share in project revenues. Project profits may be used to buy back tokens. This has an impact on other investors with their existing tokens becoming more valuable.

Holders may benefit indirectly in a case where there is strong spending demand for a token, alongside project growth. In these circumstances, the project can afford to give additional token supply to holders without a major impact on price. It would be a similar situation to a stock split. Otherwise, strong project growth would likely result in an appreciating token price without any additional tokens being allocated.

3. Mechanism/Plan to stabilize token price

In the same way that central banks regulate and stabilize sovereign currencies, Che suggests that a similar approach can be a positive feature when it comes to tokenomics. Projects can choose to allocate a portion of profits to token buybacks in market downturn conditions.

Increasing token supply in an overheated market can also dampen volatility and stabilize the token price. Additional supply can be allocated to existing token holders so that they’re not punished financially.

4. Non-rigid emission schedule

An emission schedule is the rate at which new coins are created and released. Taking Bitcoin as an example, it has a fixed emission schedule that is set out in the programmed-in rules of the cryptocurrency. Che takes the view that a rigid emission schedule and supply cap used to shore up token price is “more a psychological illusion than reality”.  In the short/medium term, she claims that the mechanism does little to counteract demand shifts.

Additionally, a flexible emission schedule allows a project to be responsive to market conditions and to the rate of growth of the project itself. Che suggests that most projects opt for fixed token emission rates but that this provides a fake sense of certainty.

5. Design simplicity

Che encourages people to identify projects with a simplistic token design.

Oftentimes, projects that are unnecessarily complex are likely to be hiding ponzi-nomics rather than genuine tokenomics in support of investor value. Otherwise, Che claims that token design complexity may be an attempt to fix problems eg. profitability and sustainability, that tokenomics can’t fix.

That’s all for our 5 key elements of good tokenomics. Click here for our 5 reasons to be bullish on Polygon (MATIC).

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