3 Steps to Creating Winning Tokenomics for Your Social Token Project
As the creator economy continues to evolve, the Tokenomics of Social Token projects are increasingly important in providing a way for creators to better monetize and manage the ownership of their vision. This article provides a 3-step guide to creating effective Tokenomics for Social Token projects.
With the creator economy booming, we’re seeing more talented individuals sharing content online and gathering tight-knit communities. But there are still two major problems for creators today: Ownership and Collaboration. How can we give back the power to creators, enable these individuals to build their communities and help them collaborate with other creators to achieve their ambitious goals?
The path that seems the most promising for creators is an ‘exit to community’ as opposed to an exit via IPO or M&A activity that we see in the legacy startup sector.
What are Social Tokens?
In recent months, mainstream media have become laser-focused on NFTs and Social Tokens, and the revolution around creator ownership. Platforms like Coinvise, offer creators the power to create their virtual currency, also known as Social Tokens. Social Tokens are virtual currencies that are managed on a blockchain and allow specific advantages in a certain economy. But creating a Social Token is the easy part. What’s much more complicated, is getting your token accepted and valued by a community.
So how will creators convince anyone to work for them in exchange for a virtual currency they just created and what actions can creators take to start a virtual economy with a digital currency that’s accepted by their whole community?
The answer is: creating compelling token economics for their project. Tokenomics (Token + Economics) is all the things that enable and encourage community participants to contribute and engage with a project. When devising a project’s Tokenomics, creators need to consider what to put in place around allocating tokens that incentivizes a community to participate in the project.
Social tokens have proven effective at incentivizing individuals to share their skills with others. Projects that have succeeded in creating thriving communities all have strong Tokenomics. In short, great Tokenomics is a successful community’s superpower.
But setting up Tokenomics is no small task for creators, specifically for those new to the crypto world. How many tokens should a creator allocate to contributors? How much of the supply should be reserved for the community’s treasury? What will be the total initial supply? Many questions come to mind, and it is not always easy to find the right answers.
This article explores what creators can put in place to create strong Tokenomics around their projects, and breaks it down into an easy-to-read step-by-step guide.
Before you start: Defining creators and community
Before deep-diving into Tokenomics, it’s important to clarify certain things. Creators should gather a strong community toward a joint project. This means a project that goes beyond the creator themselves, a project that requires strong collaboration to be achieved.
A singer can gather a large audience, but to turn this audience into a community, they need to have a broader project that requires collaboration. We could think of an album. Fans could become a contributor by creating designs and posters, spreading the word on social media, organizing crowdfunding and so on.
We could also think of a fitness instructor making videos on Youtube, creating the go-to-place for everything related to having a healthy lifestyle. Fans, led by the creator, could create a platform, create challenges, and gather resources to achieve this broader goal. The point is: the project needs to go beyond the creator.
It’s also important to clarify exactly what a creator is. We will consider the creator as anyone pushing ideas, and a vision, through content on the internet. [Jeff Kauffman Jr](https://www.linkedin.com/in/jeffkauffmanjr/](https://twitter.com/jeffkauffmanjr) for example, while maybe not considered as a creator in a traditional sense, has built a thriving community around advertising and marketing in Web3, pushing his ideas and vision through essays and podcasts, gathering a strong community keen to help him achieve his ambitious goals.
Dom Hofmann, the founder of Vine, is also a great example of this new wave of creators. Through his project Loot, Dom has revolutionized the way we think about collaboration around NFTs, and has gathered a community that collaborates to achieve a large goal.
With a common definition of what we’ll call a creator, and some examples of people who are successfully engaging a thriving decentralized community, let’s walk through the three main aspects of Tokenomics: Token Design, Token Distribution and Token Financials.
Step 1: Token Design
What key factors should creators take into account before building their token? Token design is a critical component of creating a thriving community. It’s essential because the token design (aka – all the technical aspects of the token) will serve as a foundation to incentivize a community to participate in the project.
The first question to ask when creating a token should be "What will be the total initial supply?" or, in other words, "How many tokens should I create?"
There isn’t a one-size-fits-all answer to this but there are some fundamental considerations you should take into account to help you come up with an answer. First of all, when creating a token, there are two primary models, with both having their unique pros and cons.
Model 1 – The Fixed Supply Model
With this model you define the exact number of tokens you want beforehand (for example, 10M tokens), have them minted and receive them directly into a wallet. Nothing could be simpler.
Model 2 – The Bonding Curve Model
With this model, tokens are not pre-minted and someone has to buy a token to create it. Theoretically, the token’s price increases along with the supply or distribution of the token. The more tokens have been distributed, the higher the price.
Let’s use an example to illustrate what a bonding curve is. You’ve just launched your token on a bonding curve, and your best friend John wants to buy some. To make it easier, let’s say that your token is on a classic (linear) bonding curve and that the price of the first token is $1. John will pay $1 for the first token, $2 for the second, for the third, $3, and so on. To get the first 10 tokens, John will have to pay $1+$2+$3+$4+$5 and so forth – totaling up to $55.
Now, let’s say your Mom also wants to buy 10 tokens. The price of your Mom’s token’s won’t start at $1 – but at $11 (as John has already purchased the first 10 tokens). Every new buyer pushed the price up by increasing the supply. On the other hand, when someone sells a token, it will be burnt (destroyed), decreasing the supply, and lowering the token price.
Three types of bonding curves: Linear, Sigmoid, and Negative Exponential Curve. Source Coinvise.
There are many advantages to creating a token on a bonding curve. It guarantees liquidity, allows a limitless supply, reduces the volatility of the token, and reduces the risk of hacks.
Nonetheless, it’s more common to see communities minting their token on a fixed supply. Unless you’re an expert and know what you’re doing, we recommend creating a token on a fixed supply. Indeed, it allows better usability, lowers entry barriers, gives community leaders full power over the distribution of the native token, and doesn’t require a strong community ready to pay from day one.
Now that you’re aware of the two models, and considering you want to create a token on a fixed supply, you can start thinking of the total supply you want to create. The standard rule of thumb is to create a supply of 10M, but again, some successful communities have thrived with less or more supply. Metafactory, for example, has a total supply of only 420, 000 tokens, while the Bankless DAO has a 1 billion initial supply.
What’s more important when considering creating a token is to think about the relative amount of tokens (i.e. what percentage of the total supply are we talking about). For example, let’s say you decide to create 100,000 tokens worth $100,000 dollars. It means that if someone buys 1000 tokens, they will have to pay $1000.
If you decide to create 1M tokens that are still worth 100,000 dollars then if someone pays $1000, they will get 10,000 tokens. In both cases, the person ends up holding the same relative amount of tokens: 1% of all tokens. More than the total supply, while extremely important, you also have to think about the relative amount of tokens. Instead of thinking about the number of tokens you should put in the treasury, it’s better to think in percentages.
When creating a token on Coinvise, we suggest you make a supply of 10M tokens, following the industry standard. You’ll also have to think about a name and a symbol for your token. It can be anything, but, usually, community leaders use the name of their community or in some cases, their own name. For the symbol, it can be anything between one and seven characters. The name and the symbol are occasionally the same, as with NEAR and OKB for example, but they’re usually different. Here are some examples: Ethereum($ETH), Forefront ($FF), Bitcoin ($BTC), Alex Masmej token ($ALEX).
Token design is the first step in creating a token, and it’s not a small task. It’s important to think about it thoroughly, depending on your use cases, as it will be difficult to increase the total supply later if you realize it was not enough.
Step 2: Token Distribution
With the token created and sent to a secured wallet, community leaders will have to think about distributing it to contributors. So how should a creator distribute the token to incentivize more people to help the project grow?
Once a creator has gathered a small and tight community (can be as few as ~20 people) and created a token, the second step is to think about how to reward these early believers. Thinking about how to incentivize them to continue building, and motivate some more people to join the community. It’s always a big step when introducing a token in a community, and it’s essential to do it right. To accomplish this goal, first decide on what percentage of the supply should go into the treasury, to the stakeholders, as a retroactive airdrop, as a vested treasury and so on.
$FF distribution by Forefront – the token has been minted on a 10M fixed supply. Source Coinvise.
There are several areas in your community where you can distribute your token. You could choose, for example, to allocate a part of the supply to send to members of other communities that are related to your project. Doing airdrops can be an interesting way to attract potential contributors. You could also allocate part of the supply to the core team to motivate them to build a great community – or keep some tokens in the treasury to allocate them to community members that help the project grow. You have to think thoroughly about the percentage of the total supply you want to assign to the treasury. There is recommended amount for the treasury’s percentage. Some communities have 15% of their supply allocated to their treasury, some 20%, and others 45%. The treasury will help you fund initiatives within the community.
There are two main ways to allocate tokens to community members when creating a decentralized community: Firstly – bounties. There are fundamental differences between bounty hunters and core contributors and it’s essential to distribute the tokens accordingly. Setting up bounties will serve for one-off missions. It can be extremely useful to attract more people to your community. Bounty hunters will usually participate very flexibly on an ad-hoc basis. They’re ready to rent their time in exchange for tokens but won’t be involved in the vision and the day-to-day operations. Make sure to have well-designed incentives if you want your community to be active.
The second way to distribute tokens is to develop guilds, or working groups, in charge of specific missions within the community. By creating these working groups, community leaders will allocate funds to specific teams and organize the community more thoughtfully. Community members in those working groups are core contributors and staff. They will take care of more complex missions, help run the day-to-day operations, and be committed in the long term.
In any case, bounty hunters and core contributors will be incentivized to work thanks to the social token, and having enough treasury in reserve to reward all the active community members is extremely important.
While the monetary value of the token can play a role in why people are contributing, there are many other rights and perks that can be assigned to token holders. Indeed, before you start distributing the token, you should reflect on the rights you want to give to token holders. In specific communities, owning a token could bestow rights that relate to product usage, a governance action, a given contribution, voting, or direct access to a product or market. For example, GlobalCoinResearch’s members holding the $GCR token have governance rights, can pool liquidity (stake), earn more tokens in doing so, have access to exclusive content, access to deals and events etc.
As the last piece of advice on token distribution, it is essential, specifically at the beginning, to consider any person to whom you give a token to be similar to a venture capitalist. With a very centralized community at the beginning (usually the creator of the token and/or a small core team), each person that will receive the token could potentially have governance power and can have a big influence over the future decisions of the community and the project.
In most new communities, the only way to earn a token is to put some work into the community and be involved in it. Later on, however, community leaders should start opening up access to the community and allow anyone to buy tokens. This process is called “pooling liquidity” and comes with the concerns of price stability.
Step 3: Token Financials
The token’s price and its volatility are vital components of Tokenomics. As in every project, the financial aspect is a critical component of a social token. How can creators manage the stability of their token so people are still motivated to collaborate? A token that gains value (both social and financial value) will attract top talent and incentivize community members to become contributors.
So what gives value to a token? At its creation, a social token created on a fixed supply has no inherent value, as no one has put money in it yet. You could have a million of a $NAME token you’ve just created that you couldn’t buy any item in real life. That’s why, at some point, communities are looking to add liquidity, allowing anyone to buy the token in exchange for other cryptocurrencies that already have a monetary value. By allowing anyone to buy and sell the token, the coin potentially gains economic value, and community leaders can use this money to make the community grow.
Concretely, pooling liquidity means creating a pool where people can make their token and another one (bond) available for anyone wanting to buy it. When the liquidity pool is created, users can add the exact value of two tokens (ex. $500 of your token and $500 of collateral, aka any other token) in a pool and earn trading fees proportional to their share of the total liquidity.
Put simply, these liquidity providers facilitate trading by being willing to buy or sell a particular asset at any given time, thereby providing liquidity and enabling traders to trade without waiting for another buyer or seller to show up. The price is determined by an Automated Market Maker directly on the decentralized exchange you’re creating the pool on – for example Uniswap.
Managing Token Price Stability
With a highly volatile token, contributors won’t risk their time for a token that could plummet in price any day. Likewise, a token that can double in value overnight will attract only speculators, members that are only there for quick profits and not likely to work to make the community grow and evolve.
How To Control Token Volatility
Vest A Portion Of Supply
Vesting a token means locking a certain amount of tokens over a certain period as a commitment to hold the token. When tokens are vested, the owner of those tokens can’t withdraw them directly and has to wait until the vesting period ends. It’s made possible thanks to blockchain mechanisms, and specifically smart contracts, that make it easy to lock a certain amount of funds until contract conditions are met. In our case, when the vesting period has been completed, the smart contract, enforced on a blockchain, will allow the holders to withdraw their tokens.
Bond With A Stablecoin
It is also possible to bond the token with a stablecoin in a liquidity pool to ensure price stability.
Indeed, when creating a liquidity pool, while it’s not the only factor that makes the price fluctuate, the token you’re bonding your token to can have an impact on your token price. When bonding your token with volatile collateral, if the price of this token drops, it will likely impact the price of your token.
Create A Liquidity Mining Program
Liquidity mining is the same basic concept as having a bank savings account and making interest payments. When putting your money into a savings account at a bank, you agree that bankers will play with your money in exchange for a specific interest rate. When pooling liquidity on a decentralized exchange, you agree to automatically buy or sell a particular asset at any given time to help the project grow in exchange for a reward.
Forefront Liquidity Mining Campaign Landing Page
It is a powerful way of incentivizing users to hold on to their crypto holdings, as, in return for doing so, these users will receive staking rewards. Creating Liquidity Mining Programs, and therefore having more liquidity, will increase transaction depth. Transaction depth is the degree of market price stability.
The greater the depth, the less significant the impact of individual transactions on the price. On the other hand, with low liquidity, a single person can drop or boost the price of your token by buying or selling a significant amount. Through Liquidity Mining Programs, community leaders ensure to have enough liquidity to grow their project and start a gradual path to community ownership. Liquidity Mining Programs have shown their efficiency to align incentives and create a positive-sum game.
Conclusion
All of the elements above will play a major role in the way people collaborate in a decentralized community. As a creator, it’s important to think thoroughly about the Token Design, Token Distribution, and Token Financials to ensure the long-term success of the community. Here we’ve presented multiple examples of concrete actions community leaders can take to incentivize a community to participate in the project, and that’s what we call Tokenomics.
As you look around now you will probably notice that thriving projects often have active communities and great Tokenomics. They have good mechanisms for encouraging people to join the community, actively participate and create value. For more examples of great Tokenomics in action, we recommend you join the Forefront Discord, GlobalCoinResearch Discord, and Jump Discord and notice how active their contributors are.
Try it yourself
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About the author
Eliot Couvat is a French writer passionate about Social Tokens, Web3 & the Creator economy. He is the author of the groundbreaking new book ‘The Social Token Revolution: The next big thing in crypto is here, and it will revolutionize how people work together.’
Mr Couvat works as a Head of Community & Growth at Coinvise, a thriving platform that allows anyone to create social tokens, where he helps hundreds of Web3 Creators & Communities build Open Economies. You can find him on Twitter @CDTEliot.
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