Tokenomics 101

Recent NFT projects on Solana have run into problems with Stake and Tokenomics. We asked our tokenomics expert (a talented sociologist) to write this long thread. It will cover the following things.

The reason for introducing Stake and Token in a project is simple: Stake with some incentive can effectively reduce the list rate of the project and make the users hold longer, while Token is a flexible incentive mechanism.

The point is flexibility: projects such as Pengu Love can offer incentives without tokens, but such incentives cannot be combined with a variety of other mechanisms or systems. Instead, token-based incentives can be used throughout the project’s systems. Flexibility is the biggest advantage of Stake + Token model.

There are many types of incentive for systems, but there are two main models: one that emphasizes economic effects (so-called ‘passive income’), and one that emphasizes internal utilities (breeding, mutation, customization, etc.). The two incentive models can be combined with each other. But both have problems that need attention.

“A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors.” So, if your entire economic system is characterized primarily by an ever-lengthening return cycle (e.g., 10 tokens gained per day; and if you buy a multiplier with 10000 tokens, you can earn 100 per day.), then this is a Ponzi system. Such a system can gain a high level of attention in the short term, but is much more risky. Unless it is carefully designed, it is unsustainable.

Almost all of the most successful Tokenomics emphasize internal utility. Examples include CyberKongz, Sup Ducks, etc. Similar models have been used on Solana such as Dragonz, Taiyo, etc. These types of models can all be seen as a simple ‘game’. You don’t ask to earn money in the game, instead, you invest continuously. This guarantees the value of the tokens.

These models are characterized by the fact that the token itself is a proof of ‘long term holding’. The rewards of long-term holding are not primarily financial but other aspects: e.g. minting NFTs, customization and personalization of NFTs, etc. Such a system is more stable, but its drawback is that the whole model might have some difficulty standing out in a highly competitive market.

In fact, most NFT projects (even those with internal functionality at their core) are characterized by Ponzi. But Ponzi is not necessarily unsustainable. The key lies in three things: first, controlling the cycle (speed of return); second, making inflation as smooth and manageable as possible; and third, finding an exit from Ponzi or providing real value to the system as a whole.

State pension insurance, for example, is a classic Ponzi that has worked for decades in some countries and seems to continue to work. But it goes without saying that, unlike most NFT projects, the state pension insurance does provide some real value and has a relatively manageable cyclical cycle throughout the system. To summarize, any Ponzi system needs to re-found value for itself.

Most NFT projects do not have a long-term plan and have given up on exhaustive design of Tokenomics. In this case, the economic system of projects using model one (Ponzinomics) will quickly collapse; projects using model two (internal utilities) are simply writing blank checks.

Solana’s high performance and low gas provides very much room for NFT projects to do all sorts of interesting functions with tokens at the center. I wish we would see less of pure Ponzi economics. What we need is long term planning, genius creativity and long term execution. Stake and Token, on the other hand, are the infrastructure and best partners for all of these systems.

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