On Tokenomics

Jan 12, 2023 • 11 Min Read
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Tokenomics (a portmanteau for token and economics) represents the monetary policy of tokens that directly contributes to their price fluctuations. In bull markets, tokenomics were given utmost priority, sometimes constituting full theses for investment decisions. When the euphoria wears off in the bear, however, founders and market participants are left realizing that tokenomics can delay a weak project’s demise, but cannot prevent it altogether.

The reality is that regardless of tokenomic design, projects need product-market fit to survive in the medium to long term. In fact, multiple tokens with strong product-market fit (see: Compound, Aave, Lido) but weak tokenomics have performed well in the past. This outperformance can partially be attributed to narratives forming around verticals at different times, pointing to the nascency of crypto markets. Additionally, these tokens with little to no value accrual often make up for it by touting ‘governance’ features, alluding to the possibility of directing value to the token in the future.

To appreciate the good facets of tokenomics, we first need to be aligned on what tokens represent.

Put simply, tokens are vehicles to transfer value. They are integral to ...

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