In-depth analysis of the basic indicators, basic framework and design mechanism of token economics

I left the key in December last year, and spent several months with a few friends on a decentralized remote flexible employment + human resources network project; trying to follow our understanding of Web3, in the original Web2 format Embed DAO and token economic model in it. However, it is a little regrettable that when I really integrated into this circle, I found that Web3 is far from the stage of business-driven project development, and even realized that the product design and business ideas of my project are simply incompatible with native Web3, so I also After temporarily sealing that project, I returned to the community and continued to build a few relatively more understandable tasks in this circle with my friends. As the phased end of that project, I think it is necessary to record and share the thinking and accumulation of the past six months.

3~4 articles are planned to talk about some common-sense cognitions that Web2 product managers must understand and correct when entering Web3. I will talk about the implementation level of a Web2 product manager theory from " Token Economic Model ", " NFT, IXO and Liquidity ", " DAO ", and " Uniswap/Curve/CultDAO/STEPN Research " specific to the project How to design Web3. This is the first and most important article - what are we talking about when we discuss the design of the "token economic model"?

I also hope that this article can provide a simple and clear thinking framework for all students who are interested in the design and research of token economic models.

OK, let's start.

01. What is a token economic model?

Although the concept of the token economic model seems very trendy, similar application scenarios are very common in the past. It has many mature cases in traditional fields such as finance, games, and business, and it is essentially at both ends of supply and demand. Build bridges to allow funds to be transferred more efficiently between multiple terminals. For example: the flow of concert tickets in the scalper market, the "securitization" business model of short-selling moon cakes, the phenomenon of MMORPG Dajin studios, etc. The possible differences between these and the token economic model we are about to talk about are: 1) whether it is decentralized to a certain degree; 2) whether it is completely trustworthy (protocol layer, transparent and visible); 3) whether it can motivate more different role participation.

In the world of Web3, when we discuss the token economic model, I have concluded that there is a high probability that there will be the following basic features:

• A clear and focused off track. It is nothing more than a public chain, or the ecology of various DeFi, GameFi, and SocialFi, and even includes that there is no consensus yet, but in the future, traditional Internet businesses will definitely go to the chain and transform into the Web3 ecology.
• In a certain business ecology, there are stakeholders with different roles. In theory, these roles should compete with each other, entangle and play with each other, and the purpose is to compete for the maximization of their own interests.
• Everyone in it should be the beneficiary, and the distribution of benefits should be carried out in a trustless and low-friction environment as much as possible, avoiding centralized organizations.

When a project seems to need some of the above elements, even if it has not been verified and feasible in the metaverse of Web3 at the moment, it can try to introduce the token economic model into the business for practical exploration in the long run—in essence, the token economic model It is necessary to design a set of game rules for token distribution and circulation , and strive to encourage tokens to flow to those who contribute high value to the core business. This set of game rules is written in the smart contract, which is clear and cannot be tampered with.

A well-designed token economic model should be able to maintain a stable supply and demand relationship in the initial and long-term of the project, and under the action of smart contracts, tokens will naturally be rewarded to those who can promote the ecological entry into the A user node of a positive feedback loop, a process the industry likes to call capturing protocol value in an efficient way.

02. Basic indicators in the token economic model

Next, we need to make a unified definition of the key financial indicators that are often discussed in the token economic model. Even when newcomers are new to this topic, everyone can discuss some issues in a similar context. This high probability will be the problem that needs to be faced in the first step in the numerical planning and implementation stage of designing the token economic model.

First, a few pointers on volume:

• Maximum supply (Max Supply) : Written in the smart contract, it is agreed that the total amount of all tokens that the agreement will eventually release
• Total Supply : the total amount of tokens that have been released, including tokens in circulation and tokens that are being locked (strictly speaking, the number of tokens that have been destroyed needs to be subtracted)
• Circulation : the total amount of tokens that can be freely traded in the current market
• Locked amount : the total amount of tokens locked in the contract that cannot be traded temporarily

Second, a few metrics about value:

• Fully diluted market value (FDV, Fully Diluted Valuation) : maximum supply × current price
• Market Cap : circulation × current price;
• Total Locked Value (TVL, Total Value Locked) : locked amount × current price

For different projects, CoinMarketCap has given a more detailed arrangement in the introduction of the head project. Of course, for more complete information disclosure, you need to consult the white paper of the project party, especially the objects of token distribution and the time schedule of token issuance Wait, these are also the most important parts of the token economic model design, which will be mentioned later.

Combining this picture, we can clearly understand that the current total supply of Bitcoin is 19 million, and the maximum supply is 21 million, corresponding to the market value of Bitcoin of 574.7 billion U.S. dollars and FDV of 633.9 billion U.S. dollars. With these basic data, we can compare the market value and FDV by the way, combined with the time schedule for the release of the remaining issued tokens, to intuitively feel the future inflation of the tokens. Here we still take the Bitcoin at this point in time in May 2022 as an example. At this moment, there are less than 2 million Bitcoins that have not yet been issued. It takes 120 years to release completely linearly. Obviously, there is almost no inflationary pressure on Bitcoin.

Therefore, the best way to learn the token economic model is to read the white paper of the leading project party, and then do phased trend verification based on current market feedback. In the process of reading the white paper of the project’s token economic model, the first thing to pay attention to is the above-mentioned indicators. Correspondingly, when we design the token economic model, we also need to ask ourselves about our project:

1. What is the supply and purpose of tokens in the future?
2. What is the current token supply and what are its uses?
3. In the future, how long will it take to generate all the agreed tokens?
4. Now and in the future, what are the distribution, circulation and consumption methods of tokens at both ends of supply and demand?

Of course, it doesn't matter if you don't know it now, don't be too nervous, there are too many mature and panacea-like paradigms that can be applied, just keep reading.

03. The basic framework of common token economic models

1. Output is a deflationary model

The output of Bitcoin is a classic of the deflationary token model. In this economic model, the maximum supply of tokens that can be issued is set, and the tokens that are agreed to be periodically output are gradually reduced. As the demand continues to increase, the number of tokens produced will not increase, or even decrease.

Common means to achieve token crunch:

1. Burn after buyback: Platforms or token creators buy tokens from the market and send them to blackhole addresses with purpose.
2. Destroyed during transactions: Every time a transfer is made on the chain, a certain percentage of tokens will be directly sent to the black hole address of the destruction address.

The essence of destruction is to make some tokens permanently unable to enter the market circulation. This behavior maintains a stable token value and encourages people to hold tokens to a certain extent. It can even be called a magic weapon for controlling the market. There are also some burning actions that are really helpless, such as users losing, transferring funds incorrectly, or forgetting their wallet private keys, so that the tokens cannot be recovered. Therefore, almost any token model with a limited supply can be simply regarded as a basic token model whose output is deflationary.

Representatives currently on the market that adopt a deflationary model for token output include: Bitcoin (BTC), Stepns (GMT), and Ethereum (ETH) after the deployment of the EIP-1559 proposal.

Advantages : It completely eliminates the threat of inflation caused by the spam issuance of tokens. It is relatively easy to design, but in the early stage, it is necessary to think clearly about the release of the total amount in the future and how to further motivate the rewards of different roles in the ecology.

Disadvantages : Because the number of tokens generated is limited and gradually decreasing, many people may choose to hoard tokens and wait for the tokens to appreciate instead of spending them in the market. If there is not enough liquidity in the market, the value of the token itself will also decrease, eventually leading to the collapse of the entire ecology

2. Output is an inflation model

In the economic model where the token output is inflation, as time goes by, the issued tokens will be controlled at an annual inflation rate within a preset reasonable range, and will be minted continuously. The stage depends on the total amount of tokens. There is no upper limit to the amount; the driving force behind this economic model comes from the pledge and mining demand of tokens.

Common means to achieve token inflation:

1. Written in the contract, periodically (block/year/month/day) is fixed or a certain amount of tokens are dynamically issued based on specific network conditions
2. Based on the judgment of the market situation, the team or DAO members initiate a proposal, and artificially increase the issuance after the community consensus

Representatives currently on the market that use an inflationary economic model for token output include: Polkadot (DOT), Ethereum (ETH) at the POW stage, Dogecoin (DOGE), Flow (Flow), etc.

Advantages : As long as a stable and reasonable inflation rate is maintained, this economic model is closer to the issuance of traditional financial currencies. The social practice based on "legal currency" over the years has been proved to be sufficient to maintain the operation of a complex ecology.

Disadvantages : The advantages of the inflationary economic model are also its disadvantages. It is precisely because the economic model is close to the real world that, in addition to the opaque issuance, the current fiat currency financial system encounters many other problems with a high probability.

3. Dual Token Model

As the name implies, the dual-token model is to design two kinds of tokens in one ecosystem, they are: value tokens used to settle, capture and store protocol value, and equity tokens used for governance or representing rights and interests. These two types of tokens can be designed to interlock with each other; in most cases, holders are allowed to convert a certain amount of value tokens into equity tokens through contracts, and how equity tokens affect value tokens in reverse is different. There are different implementation methods for the protocol; this is also an area that I personally find interesting in the token economic model. I plan to sort out the white papers of the leading projects in future articles to study and compare them one by one.

At present, well-known projects on the market that use dual-token economic model coins include: MakerDAO (MKR+DAI), Cosmos (Atom+Photon), Curve (CRV+veCRV) and so on.

Advantages : Since the two tokens are intertwined and entangled with each other, if the value tokens may collapse in the market, equity tokens can be used to regulate and form a buffer zone. In addition, the dual-token economic model can effectively reduce the psychological barriers for holders of the single-token economic model to pledge tokens; more TVL means reducing market circulation and increasing the value of tokens.

Disadvantages : The design is more complicated, and the cost of understanding and learning is higher for designers, ordinary investors or ecological consumers.

Various types of economic models are well represented, but the "forward" value has yet to be tested by time. Therefore, as far as the choice of model is concerned, in my opinion, it seems that there is no distinction between strong and weak. It depends entirely on the use cases, incentives and other economic factors of the token to find a model that is suitable for your own business ecology. The economic model is the key.

4. Hybrid Token Model

In addition to the above-mentioned several common economic models, it is also a trend to make multi-dimensional combinations like Lego-forming a "hybrid token economic model", which is generally believed to be more ecologically robust, to a certain extent They inherit and strengthen the advantages of the previous three token economic models, and weaken the defects.

For example, Solana (SOL) adopts an inflationary token economic model; its annual inflation rate starts at 8% and gradually decreases to 1.5%. However, a percentage of each transaction fee on Solana will be destroyed, which can reach 1.5% or higher every year, and finally let the token achieve deflation again.

Another example is Curve (CRV), the initial total supply (Total Supply) is 1 billion, and it will gradually increase to the maximum supply (Max Supply) of 3.03 billion. In order to avoid excessive inflation, the DAO behind Curve will implement CRV back Buy and burn actions to help token deflation. In addition, Curve adopts a dual-token economic model and introduces the governance token veCRV on the basis of the value token CRV; in terms of design ideas, they deeply bind the allocation of all scarce resources on the platform with governance rights , and the acquisition of the governance token veCRV must lock the CRV, and a large number of long-term CRV locks have increased the price of the token in the market.

04. Ways to become a protocol user and earn benefits

In almost all Web2 projects, such as Uber, Fiverr, and Airbnb, there are a large number of "peripheral stakeholders". By selling their privacy and labor, relevant parties have contributed to Silicon Valley and Wall Street the huge income and market value they created, but they have not enjoyed any dividends brought about by the rapid development of centralized institutions, and even act like stunned youths. Each transaction pays a service fee ranging from 10 to 20% to the platform, is restricted by various user terms, or faces centralized decision makers when disputes arise.

In Web3, trying to solve such problems fundamentally, people become users of the protocol and gain benefits in the process. How to achieve such a goal without trust is an urgent problem to be solved in the token economic model. You need to design a set of sophisticated token reversal and distribution mechanisms between supply and demand and the agreement, so that Tokens eventually flow naturally to users who can really help the positive feedback loop of the protocol. This is probably the Web2 product manager who faced the entire Web3 world and found an interesting place that matches his own capability stack. The ways in which these Web3 projects on the market allow users to gain benefits can be roughly divided into the following four latitudes:

1. Earn rewards for being airdropped early

Airdrop usually occurs in the early stage of the project, and can be regarded as a simple marketing and customer acquisition method. The logic behind it is very simple, and the free pie is usually distributed according to the traces left by users on the chain ( Tokens), or he has used the protocol, or he has been a high-value user on other protocols, or he has supported protocol Grants on donation platforms like Gitcoin and JuiceBox, etc.

An interesting story, Opensea's centralized operational thinking has been criticized for not being enough for Web3. Its CFO revealed the Opensea listing plan in public at the end of last year, which caused an uproar in the community. Immediately afterwards, Opendao launched an airdrop of SOS tokens to all Opensea trading users. Token social movement, trying to force Opensea to give up fantasy and fully integrate into the world of Web3; Although so far, SOS has almost no value, it is only Meme currency, but the later LooksRare and X2Y2 platforms have followed and upgraded Opendao's operating strategy , completed the early cold start of the platform, and took away a considerable part of Opensea's users and value by the way.

Airdrops seem to be a very good means of quickly building consensus, but they are not trustworthy. The essence of this strategy is to make an affirmative assumption on the inertia of users' past historical behavior. It will play a role in fueling the flames. It is a pity that this part of the group cannot make any promises for the future. Moreover, the facts have also proved that most of the airdrops will soon usher in a large-scale sell-off. Improper execution of the airdrop is also fatal to the agreement itself .

2. Receive rewards based on business

More and more X to Earn concepts have become a popular trend at present, which is essentially a core way for the business side to encourage users to participate in the business and build an ecology together. When the user stays in the ecology longer, interacts more frequently, and contributes more data, he will have the opportunity to obtain a percentage of the fixed reward pool in the protocol according to an algorithm rule. For example, Stepn, the representative of Move to earn, and Axie Infinity of Play to earn; there are also decentralized financial projects (MakerDAO, Compound, UniSwap, etc.) The rules of the game of Farming/Staking/Liquidity Mining (to earn) that are strongly related to the business allow users who help the ecological prosperity and sustainable development to share part of the benefits brought by business growth.

What needs to be emphasized is that, based on business rewards, I try to interpret the "business and rewards" at two levels: first, the user himself participates in the interaction of the core business as an individual , so he gets the rewards allocated from the treasury Corresponding rewards with a fixed share; second, users participate in the interaction of the core business, but enjoy part of the fees paid by other people to participate in the interaction and contributed to the community. The explanation might be a mouthful, but it's worth thinking about the advantages of such a design.

To give a simple example: as a decentralized NFT exchange, X2Y2 has its own token economic model, which stipulates that as long as buyers and sellers complete the NFT transaction (part of it) on the X2Y2 platform every day, all participants in the transaction Everyone will be able to share 624,902 X2Y2 tokens from the contract according to certain rules. In addition, the contract will collect service fees from successful sellers, but will feed back to other roles in the X2Y2 ecosystem, such as pledgers (the second part), in another way.

Compared with the "rewards for staking" and the possibly ostentatious "rewards through governance" that will be mentioned later. I have always felt that "getting rewards based on business" is a link that is selectively ignored in the design of the token economic model in all fields except the DeFi track. Of course, this situation is also caused by the objective factors of the entire Web3 industry. Just as I said at the beginning of the first pit I went through when I started to build Web3, it is still far from the stage of business-driven project development. Despite this, a basic consensus has been formed that the token economic model that can create a positive feedback loop must be closely related to the core business itself, so that the protocol can become more robust.

In addition, strictly speaking, it is not accurate to exclude the DeFi track, but it is just that the core business of DeFi is roughly equivalent to trading pairs and liquidity. If we look at this issue from this perspective, it can be said that it is an absolute truth that the share of token rewards based on business releases in the entire economy determines the robustness of the token economic model.

3. Get rewards through staking

As mentioned just now, in DeFi projects such as MakerDAO, Compound, and UniSwap, which require a large amount of capital reserves and liquidity, users are encouraged to staking first and then receive income rewards. The invention of this game rule is completely attributed to the self-generated business Designed with development in mind. It is precisely because of the great success of staking in the DeFi field that many Web3 projects that have issued tokens but are not fully finance-driven, such as Attrace, X2Y2, Axis Infinity, Opendao, etc., are also trying to introduce staking in their own ecosystems The mechanism, because it can indeed relieve the pressure brought about by the sell-off in the secondary market in a certain sense, and it will help to improve the currency price to a certain extent.

Although staking has become one of the most important mechanisms in the Crypto world, the staking behavior still exposes many problems, especially for those Web3 projects that are not finance-driven. The main problem is that the high APY of the currency standard is out of The actual value of the business, leading to a large influx of users, most of them are investors or speculators, rather than real consumers and target users in the ecology. To some extent, this hinders the outreach of Web3 from being accepted by more Web2 users.

4. Earn rewards through governance

Participating in governance to get rewards, in my opinion, can be regarded as a model that combines "rewards through staking" and "rewards based on business". This way of getting rewards is especially representative in the dual-token economic model. Its core idea is: users are no longer encouraged to obtain benefits through simple pledges, but to obtain the governance rights of the community in the name of pledges; governance rights are really related to the ultimate benefits of themselves and the stakeholders behind them. Although the so-called governance of most projects is almost empty, it at least shows that most project parties have fully realized that the real and frequent interaction between users and the protocol should bring higher benefits.

Regarding governance rewards, Curve is a very representative case:

The value token of the Curve platform is CRV, and CRV holders can lock CRV into Curve DAO to obtain veCRV tokens for voting and governance. Only users who hold veCRV can get part of the handling fee generated by the Curve liquidity pool, and can participate in voting to decide which liquidity pool can release more CRV rewards in the future - pools with higher APY will naturally attract more More LP funds come to pledge, more LP funds mean better depth, lower slippage exchange, and ultimately positively motivate investors, agreement parties and Curve, etc., to achieve a win-win situation.

To sum up the above, the ideal situation for a user to be in the agreement and obtain benefits, for the ecology, he should be a content producer and consumer, a co-builder and maintainer of the agreement, and reduce the proportion of financial investors in it. It is conducive to the evolution of the ecology in the correct direction we expect, and realizes a positive feedback loop. Therefore, I personally think that in the future, the method of obtaining token rewards completely through pledge will gradually withdraw from the stage of history, either by giving a very low APY, or by leveraging the deep integration with DAO governance, Curve’s veToken model will most likely be overtaken. More and more project parties have learned from it, but it still has limitations.

The source of tokens for all the above reward methods:

Regardless of whether it is airdrops, business-based, rewards through staking, or rewards for participating in governance, all tokens used for distribution are composed of the following sources:

• It can be: periodic casting and periodic release from the agreement according to the agreed rules
• Or: the handling fee generated by the user in the business interaction, etc., will be issued periodically according to the agreed rules
• Or: the team and DAO members initiate a proposal, and after the community consensus, it will be withdrawn from the treasury and released
• etc.

05. Token supply and distribution objects

As the designer of the token economic model, it has already been clarified which basic model the release of tokens will roughly follow, inflation? Deflation? Dual tokens? Or other more interesting basic forms combined. Then you have basically determined the general purpose of the token, and you need to always remind yourself that the ultimate goal of token economic model design is to create the correct flow and profit path between supply and demand, and the design can provide positive feedback for all stakeholders Mechanisms.

Then, in the process of implementing the allocation, there are still some basic rules and common sense, such as the supply of tokens and distribution objects, and some rules are close to a certain consensus.

The picture above shows LooksRare showing its investors and users a list of future token supply and distribution rules, which is a typical panacea design idea. In general, supply and distribution objects can be roughly divided into the following types of roles:

1. Core team/early project initiators, etc.

The division rules of this part are usually directly constrained by the agreement, which is used to motivate the core team to obtain a linearly released fund pool of benefits.

In order to show the entire community that the project is launched fairly and the team is serious about work, there is absolutely no possibility of short-term selling pressure or running away. The project party will design and write the minting and distribution of these tokens in the contract in advance. Even if the tokens of the project have been issued, no one can directly obtain access to the tokens from the agreement. "Code is law" ensures that the rules of the game are followed in an orderly manner from beginning to end. The size of this part of the pool usually accounts for 10% to 20% of the maximum token supply.

The difference from traditional entrepreneurial projects on the issue of team ownership is that in the Web2 era, the founding team will sell 15%~25% of the shares in the angel round very cautiously in order to ensure absolute control over the project and facilitate the subsequent entry of more capital. shares to early investors. But in Web3, in order to demonstrate sufficient decentralization and distribution, the team (including early investors) only accounts for a small part of it, and the vast majority of the maximum supply will be committed to the entire community and DAO. Otherwise, when community members find out that the control of the project is actually in the hands of a small group of people, and they are likely to end up as leeks under the control of the dealer, consensus will be difficult to form, and the project will easily enter a state of death spiral.

2. Early strategic investors/strategic sales/consultants, etc.

Prior to the public offering, investors gain equity by purchasing an equity-equivalent number of tokens. In order to achieve this purpose, the project party needs to mint a certain amount of tokens from the agreement in advance, and then directly award them to investors, or lock them into other contracts. For the latter, contracts usually have security features such as time locks and multi-signatures. It is clear that at a certain point in the future, the corresponding number of tokens can only be obtained after simultaneous confirmation by multiple parties to protect the interests of investors and avoid pressure from selling. This part will account for 10%~15% of the maximum supply in design planning, or less.

For any Web2 start-up team, the seed round valuation of 20 million US dollars is probably a very scary thing, but it is very common in Web3. This does not mean that many people in the Crypto circle are stupid, but a A unique culture, consensus. Usually, 10% of the token share of USD 2 million in the early stage of the Web3 project is not only held by a few Funds, but there may be a dozen or more Token Funds or individuals participating in the investment together, and the subscription fee for each is also It's about 100,000 to 300,000 US dollars. On the one hand, this follows the distributed game rules of the Crypto industry; on the other hand, it is also closely related to the status quo of this industry "opening the world and opening chaos". Cast a net to catch big fish. Fortunately, the charm of this circle is that it is a more flexible and rapid exit route than equity investment. There are many cases with a 100-fold return in one year or even less.

3. The treasury/foundation affiliated to the DAO, etc.

The treasury and the foundation are essentially fund pools for collecting and distributing tokens. The tokens in them may be minted and locked in the contract in advance, and released periodically through multi-signature plans; It is formed by the aggregation of service fees paid by other users interacting on the chain. Whether it is "Treasury" or "Foundation", there is no strict difference in my opinion. In order to be more recognizable and targeted, some project parties will make more detailed divisions according to their own understanding and use them for different businesses. Scenes. These are not important, you can completely regard it as the personal preference of the project party. Important are some consensus parts:

One: Tokens are increasingly flowing in a direction that is beneficial to the community. Whether it is airdrops, market operations, or rewards based on business, choice of pledge, or participation in governance, in principle, DAO is the most important driving force behind it. one.

Second: No matter what kind of token economic model is designed, the portion of tokens allocated to the community and DAO will generally account for more than **50%~70%**, which fully reflects the difference between Web3 and Web1 and Web2 ——Users are the ones who really control and determine the value of the agreement, not the first person or team to create the agreement.

Unlike the previous supply and distribution of tokens that flow to a certain type of fixed group (team members and investors), the tokens in the treasury will be distributed more around certain affairs, use cases or goals, although the ultimate beneficiaries are still It is a group of different roles in the agreement, but the assignment will be more flexible. Specifically, the tokens in the treasury should have three flows:

a) Expenses to create initial liquidity

I think there are two important links in creating initial liquidity, namely: discovering and setting prices and providing sufficient liquidity , which reserves about **2%~10%** token share. This is the token economic model or more precisely, it is another interesting and challenging part of the cold start phase of the project. I will not talk about it here for the time being. Let’s dig a hole first, and I will discuss it in the follow-up "NFT, IXO and liquidity" Described in more detail in the article. You can roughly understand the most likely destination of these 2%~10% tokens: some of them will be used for public sales, guided auctions, etc., to initially capture users’ judgments on the value of the agreement in the community; the other part will follow the fundraising The incoming funds together form a trading pair that contributes liquidity, and then invest in decentralized exchanges such as Uniswap and Balancer.

b) Expenses for IDO/airdrop/operation, etc.

Whether it is Web2 or Web3, traffic and attention will always be scarce resources. Web2’s acquisition of customers is mainly through a large number of advertisements, while Web3 adopts a new paradigm—new organizational form, new distributed technology, and new viral marketing concept to communicate with the market and users in advance. MEME, AMA, airdrops, and even FOMO sentiment have all become means of spreading and building consensus. As a result, all efforts are ultimately converted into the purchasing power of tokens and NFTs.

Of course, the detonation of this new paradigm is not inexplicable. It needs a fuse. The project party has to take out a part of the tokens for targeted publicity and marketing in the community. Usually, this proportion is **10%~ 15%** varies.

c) Expenses for various rewards (based on business, choosing to pledge, or participating in governance)

This part will become the most important expenditure of the treasury, and it is also the cornerstone that can really help the protocol capture users and value. After the rise of the concept of DAO, more than **50%~60%** tokens are usually reserved in this pool. Regarding the method of participation and how to get rewards, please refer to "How to Become a Protocol User and Get Benefits" A relatively complete introduction has been made in the chapter, and will not be repeated here.

The above are all from the perspective of the project side, the way and method of designing token distribution for the core team, investors and different roles in the ecology. From the perspective of individual investors and researchers, the design of this part of the project policy is also quite worthy of research and consideration:

First of all, if a large number of tokens are locked, we need to pay attention to its release schedule, that is, the part of the time lock. When the token is released, it will most likely affect the price and market value of the token. Secondly, you also need to be concerned about how many tokens have been minted in advance and how many people are in their hands. If compared with the maximum supply, this part of tokens is too concentrated and large, which means that the price of tokens is easily controlled by a small amount. Manipulated by a handful of people.

06. Consumption and application of tokens

Earlier we talked about the way of "becoming a protocol user and earning income" - "obtaining rewards through pledge". A clear application scenario for the short-term consumption of tokens is simple and crude. Yes, this has almost become a model for designing token consumption scenarios for all Web3 projects.

It’s not that it’s wrong, but I think that although Web3 has a high probability of being entangled with various “Fi”, in principle, it should be necessary to design more diverse consumption scenarios in other subdivisions except DeFi. Further reduce the financial investment attributes of the project, otherwise, except for DeFi, other Xxx-Fi will lose the true meaning of existence in many Web3 tracks. For specific design principles, there are indeed some commonalities behind well-known projects such as Stepn and Curve, which can be temporarily recorded as a certain methodology at this stage:

1. Concealed and diversified

Especially for the behavior of old users to Earn, which may have a little Ponzi attribute, it is necessary to design various hidden and diverse consumption scenarios to reduce and delay the optimal APY promised by the project party. In fact, there is no need to explain more about multivariate. What should be paid more attention to is its concealed design. A more commonly used strategy, such as introducing the concept of value savings NFT, and then burning and destroying existing savings products to obtain more savings with higher attributes Products and seemingly higher APY returns, but the hidden payment actually requires users to have a longer learning curve and payback cycle, etc. The purpose is, on the one hand, to alleviate the strong perception of users' continuous investment in capital; on the other hand, to conceal and diversify to give the project party the time and space to strive for the balance of supply and demand in macro-control.

2. Increase game and randomness

Design game strategies to increase the uncertainty of the outcome of the "game". Not only can the game between users and the system be opened, but also the consumption scenarios of mutual games or transactions can be designed between users. Even if the decision-making may have negative returns, it can make it easier for investors to understand and accept the right and wrong. Games and randomness essentially divert attention from the actual source of conflict.

3. MEME, Honor and Emotion

Everyone knows that the emotional composition of investors has an impact on investment decisions that is often more important than IQ or knowledge. A potentially excellent investor must be rational and restrained. But this is not the user characteristic that the project side likes to see. Of course, the pure investor attribute may not be the user group that Web3 ultimately needs. Therefore, we will inevitably need to upgrade DeFi’s simple pledge gameplay to the pursuit of social, honor, collection, showing off and other spiritual and emotional levels, and transform it into consumption or entertainment behaviors in disguise. Strengthen investment and purchasing power. The key is that such consumption or entertainment behavior will not bring pressure to balance the capital pool on the project side.

4. Limit rent-seeking and win

In fact, all the strategies and methods mentioned above can be regarded as providing design ideas for this goal. In principle, for any asset or behavior that can continue to generate interest, it must introduce return decay or a fixed effective life cycle to limit it. In the process, it is also necessary to cooperate with the design of token consumption scenarios to maintain a stable interest rate. The advantage of this design is that on the one hand, it accepts and recognizes the inevitability of investors in the agreement, on the other hand, it also fundamentally avoids any type of role, a user enters a state of rent-seeking and lying down, and the continuous lack of fairness will inevitably make the project Going into a death spiral prematurely. It's kind of a balance.

07. All for DAO, design token economic model for DAO

When it comes to the token economic model, I think the importance of DAO must not be ignored. To put it in a small way, DAO is the link to create belonging, build consensus, and establish common interests in the community; in a big way, DAO is to determine how the token economic model serves token holders and continue to create profits for them rights agency.

First of all, I need to emphasize that I agree with this organizational form, which will completely change the existing production and labor relations at the bottom. DAO will most likely continue to exist as an important organizational paradigm of Web3; but at the same time, it will also It must be stated that the several DAO organizations I have served and observed are actually facing some embarrassing situations, which are exactly the opposite of the DAOism advocated by the self-media.

1. DAO, a certain degree of decentralization and autonomous organization

Although the politics is not correct, DAO still relies on a small group of elite helmsmen to control the overall situation behind the scenes. At no time can we rely on DAO to promote the evolution of the protocol itself. Bribery among members, inefficient collaboration, Problems such as lack of absolute sense of responsibility are always inevitable. This is determined by human nature. At present, it seems that only a certain degree of centralization can make the advancement and iteration of the project more efficient.

The Uniswap team once took a step back from the plan to allow the community to self-organize and evolve. As a result, the development of the protocol stagnated for a while, which gave Sushi and many other forked projects an opportunity to take advantage of it. Including many project parties with deep routines, in order to cater to a certain ideology in the community, most of the decentralization, DAO governance, etc. promoted in the white paper are not true, or only symbolically allow members to initiate some irrelevant Proposals and voting; if you believe in complete decentralization, you are naive.

Not only the DAO, but also the evangelists in the entire Web3 world and even the builders of the underlying mechanisms like V God and Gavin Wood. I even suspect that the greatest tacit understanding and consensus among them is to pretend to be clear about the extreme "decentralization" issue. confused. Therefore, when many Web2 people start to try Web3, based on their experience in the past ten years, when they publicly talk about their understanding of a product, ecology, application scenarios, top-level design, and platform, they will immediately attract a group of people who call themselves native Crypto. Ridicule, this universal ridicule even once made Web2 practitioners who plan to join Web3 start to question whether they have been abandoned by the times? At the beginning, I accepted their views with the same cautious and guilty attitude, but after I immersed myself in several projects, I actually became more determined that the accumulation and cognition of Web2 are also applicable in the Web3 era. Change, and finally merge.

2. The real significance of DAO in the development of blockchain

If all transactions can occur in the silicon-based world, then all interactions on the chain can be strictly and efficiently executed based on the contract "code is law". But the fact is not entirely the case. On the other side of the silicon-based world, human emotions, will, and assets in the carbon-based world cannot be directly run through the program code anyway, especially in a decentralized environment. It will never be possible to "automatically" calibrate the authenticity of information before going to the chain without human intervention. Therefore, in the entire world view of the blockchain, a bridge needs to be designed to link these two parallel universes, and certain checkpoints need to be set up in the middle of the bridge to verify the process of transferring value from the carbon-based world to the silicon-based world.

The checkpoint must not exist as a centralized role, otherwise the world view of the entire blockchain will collapse; but it cannot be without the participation of carbon-based organisms based on the individual subjective initiative, otherwise this link will not be able to run through at all. In the end, the governance mechanism of DAO everyone for me and everyone for everyone was created and became this bridge (many so-called oracle projects actually use the mechanism and ideas of DAO). Most importantly, the bridge The construction seems to fully cater to the various fundamentalist spirits of "distributed", "decentralized", and "autonomous". This "bridge", or this organization, needs to find a way to supervise the results of off-chain events and ensure the effectiveness of governance and on-chain processes. The agreement will eventually distribute governance tokens to DAO members with outstanding work performance , allowing them to own greater influence.

This is one of the real values that I think DAO exists - when the blockchain cannot give a clear arbitration conclusion through technology, throw all the uncertainty to the DAO organization, a set of seemingly democratic decentralization The advanced digital proposal and voting process eliminates all the intractable diseases that are difficult to be consistent in this process.

Objectively speaking, it is difficult for me to evaluate whether this mechanism is an innovation of simplicity and complexity or a selective escape; but DAO is indeed the only way to use Crypto's original ideas to discuss and solve the above-mentioned complex problems.

3. Design the core of Web3: DAO × Token Economic Model

The design methodology of Web3 products, I have always believed that, in the final analysis, it is the design of "DAO" and "token economic model", and may be expanded to SBT (Soulbound Token) and equity NFT in the near future Exploration of application scenario design. I have a strong hunch that the arrival of the next Web3 bull market will most likely be closely related to the key nodes in the development of DAO and Soulbound.

Compared with the utopian next-generation Internet outlined in the minds of idealists, almost all projects that can be called Web3 in the current market focus on DeFi and liquidity. If the balance can move towards DAO, in fact That is to say, the direction of governance mining is tilted. I believe that the protocol can better capture value.

So, although the entire article is about the token economic model, I finally found that DAO is the real leading force that changes the existing Internet game rules and achieves Web3. Everything is for DAO, and designing an exquisite token economic model for DAO is the right way. How to achieve this goal, ensure a smooth transition from Web2 to Web3, and return to real user needs in the process, as a product designer, you can focus on the following aspects:

1. Don’t shy away from talking about seemingly 2.0 topics such as "centralization", "platform", "ecology", "top-level design", and "user needs" . Don't forget the advantages and original intentions of our group of Internet OGs in order to forcefully integrate into the native Web3 circle. The key is the empty cup mentality and the reconstruction of the underlying thinking mode. In the end, Web3 will definitely return to the basic business logic of meeting user needs and accumulating user value.

2. Work out of the business structure of the existing company (as to whether it is compliant under the existing legal framework is another topic). First establish a DAO, and incorporate your target users and peripheral stakeholders into this system, not only the organizational structure, but also the business-level structure. As a project party, it is no longer to organize personnel around legal labor contracts and user terms, but to constrain all roles by designing effective digital proposals, digital voting, smart contracts and governance rules in the token economic model to ensure During the process, all members of the DAO, such as the core team, target users, and peripheral stakeholders, can become a community of interests in the ecology. The interest here simply refers to "money, currency". In fact, it does not need too many other derivative meanings.

3. The depth of DAO target users participating in the core business and the depth of interaction between wallets and contracts, the design of the three needs to be integrated as much as possible . Ideally, contract logic is business logic. The higher the degree of overlap between the two, the more intelligent and reliable the protocol will be executed in the direction we designed with less human intervention. The deeper integration of the two means that the content of technical-level projects is higher.

4. It appears that protocol governance is systematically underestimated. In the future, there will inevitably be a large number of off-chain behaviors in Web2/Web3 business. For the part that has not been able to reach a consensus, the agreement does not need to be done by itself. You can try to hand it over to DAO to deal with it in another way. For the proposals, voting content and results of members who are closer to the core circle of DAO - two things need to be considered in the design: First, try to guide the core business process as much as possible, so that the agreement can clarify the next step of the token Second, avoid directly providing services for the liquidity of tokens and target rent-seeking groups. The relationship between them and "creating liquidity" needs to be close to accidental, indirect or even conflicting. This behavior is to help Web3 squeeze out excess (financial property) moisture.

5. In the entire token economic model, it is an essential link to design governance mining around business rather than liquidity. This is the main purpose of tilting the balance towards DAO. Especially when Web3 begins to aim to absorb the scale of Web2 users and user needs to the greatest extent, at that time, a large amount of interactive data to be confirmed will be generated off-chain, which requires more people with lofty ideals to jointly maintain consensus. To this end, the protocol needs to commit to increasing rewards for governance roles, ensuring that users participating in governance can obtain higher ROI than investors who simply pledge financially. This unnaturally reminds me of my old company, Shanda founder Chen Tianqiao said: "The essence of the business model is to pay the highest salary to the best talents, and the best talents create the greatest value." Therefore, purely from the perspective of the business model, the design of the token economic model is tilted in the direction of DAO and governance mining, and the agreement will inevitably have the possibility of medium and long-term appreciation.

*Thank you for reading this far. In fact, this is a popular science and fishing article. I hope that during the bear market, I will have the opportunity to meet more BuidLers who are interested in the three directions of token economic model design, DAO and SBT . Regardless of whether you are a native Crypto person or a Web2 OG, if you vaguely feel that what you want to do or are doing is inseparable from it, and you are sure that using a certain degree of decentralization and autonomy can better solve specific problems Demand, even compared with traditional methods, brings advantages similar to crushing or reducing to blows. Welcome to add me as a friend to communicate with each other. My WeChat and Twitter have the same name: **daodao***