Key Learnings from Past Generations Tokens
-- Danny Pantuso, Venture Investor, Decasonic & Paul Hsu, Founder and CEO, Decasonic
Designing a durable web3 token is both a challenging and crucial task. Tokens play a crucial role in aligning incentives, growing total network value, and fostering a dedicated ecosystem. Over the long term, they form the backbone of the network and justify the shift towards decentralization. The real challenges lie in creating a token model that balances the short-term vision with long-term network value propositions, viability, and stability. This can be especially challenging while a project is still uncovering product-market fit.
The landscape of token design is cluttered with too many misapplied templates. My thesis is that the secret to durable token design lies in customizing the best features to suit your ecosystem's particular needs and wants. There's no universal solution for crafting a token, but a wealth of best-in-class features exists, showcasing the range of ideas at your disposal for designing a token for your particular ecosystem.
As my colleague, Lauren, first highlighted in May 2023, the narrative behind the token is often the first critical component of how a web3 token communicates the vision and promise of a token network. But long term, it’s what we term the ‘token market fit’ – the utility of token for long term holders and daily users of your network – that ultimately reflects the value of the token. There is a lot to learn from previous token launches on the best strategies for building durable Token Market Fit.
As a starting point, consider these twelve principles from successful token launches (and many more) in building durability in your tokens:
The Original Tokens
1. Bitcoin ($BTC) The original token and decentralized ledger, with a long-term narrative that matches its long-term design
Key Learning: If token narratives matter first, then start with the long-term vision, technical principles, and ecosystem values that align with durability.
Any token design should start with a reflection on Bitcoin – the protocol is a simple ledger yet incredibly powerful. Its underlying blockchain technology (now common to any chain) ensures transparency, security, and immutability. As a result, tokens bought or sold on this ledger can serve as a digital store of value, an institutional asset diversifier, a seizure-resistant asset, a potential emerging market currency, and more. It’s highly durable because its simple use case of a universal ledger is easily understood and highly extensible.
Bitcoin's technology as a simple, yet incredibly powerful ledger underscores its durable narrative. Bitcoin's enduring relevance and resilience can be attributed to its foundational narrative that prioritizes long-term utility, security, and decentralization. This approach serves as a critical lesson for any token design, emphasizing the importance of aligning with a vision that not only addresses immediate needs but also anticipates future notions of currency and asset ownership.
2. Stablecoins, US Dollar Coin ($USDC) The distilled value of better on-chain transactions
Key Learning: Unlock the technology’s potential by solving large pain points today with 10-100x better value propositions. USDC highlights the utility of cheaper, faster, immutable transactions made possible on chain.
USDC combines the benefits of digital currency—such as speed, security, and borderless transactions – to an asset that, unlike Bitcoin, has a fixed price. They are uniquely durable in that they abstract away supply and demand pricing to deliver a fixed value. Consequently, stablecoins facilitate smoother and more predictable transactions, making them ideal for everyday payments, and remittances, and as a safe haven for investors during periods of high volatility in the crypto market. USDC serves as an excellent reminder of the beauty of on-chain transactions compared to traditional rails.
In essence, USDC's technology and its application reinforce the narrative of stablecoins as durable, practical financial instruments. They not only showcase the advanced capabilities of on-chain transactions but also highlight how these technologies can be tailored to solve real-world problems. This approach of blending innovation with practicality underpins the lasting value proposition of stablecoins; it bridges the gap between the innovative potential of blockchain and the practical requirements of financial transactions in the real world.
3. Ethereum ($ETH) Innovations in consensus, fees, and transaction priority
Key Learning: There are many models for consensus and fee structures that can enable greater dexterity for your protocol and token.
Ethereum's transition to a Proof of Stake (PoS) consensus mechanism demonstrated the potential for diverse consensus models, enhancing transaction throughput while preserving security. This strategic shift led to a stronger product-market fit with validators, thanks to the protocol's ability to adjust transaction fees in response to network congestion. The implementation of protocol fees, serving both as a burn mechanism and an efficiency boost, contributed to the enduring value of Ethereum. The lesson here is the wide array of fee models, consensus systems, and validator networks available, allowing for more tailored and durable solutions for each protocol’s use case.
Utility Tokens
4. Uniswap ($UNI) Uniswap's $UNI token serves as a “governance” token, enabling its holders to actively participate in the ecosystem's governance by voting on proposals.
Key Learning: Governance mechanisms can be a key utility of tokens and help adapt the token design as market conditions evolve over the long term. Innovation requires humility and nothing is perfect, nor set in stone, from the initial launch.
In the broader scope of token economics, governance tokens like $UNI represent a shift from centralized decision-making to a community-driven approach. These tokens embody community ownership, allowing stakeholders to have a real say in the changes in the token design and evolution in its value propositions. The strength of such tokens lies in their ability to provide holders with input into the product's direction.
5. Augur ($AUGR) Augur's $AUGR token serves as the incentive mechanism for a public prediction market where users can trade tokens on the outcome of events, enabling transparent, secure, and fair forecasting and speculation on a wide range of topics.
Key Learning: AUGR's token design exemplifies how deeply integrating a token's utility within an ecosystem can create a resilient and self-sustaining economic model.
AUGR's token design stands out for its innovative approach to facilitating a decentralized prediction market. By integrating the token directly into the core functionality of the platform, AUGR ensures that its value is intrinsically linked to the network's utility and adoption. This design not only incentivizes user participation and accurate market forecasting but also supports a self-sustaining ecosystem through transaction fees, governance, and reward mechanisms. The durability of AUGR's token comes from this deep integration, where the token's utility and demand grow organically with the platform's success, making it resilient to market fluctuations and ensuring long-term relevance and stability.
6. Helium ($HNT) The Helium Network provides a decentralized wireless infrastructure, enabling devices to connect to the Internet over long distances using low-power radio waves, powered by blockchain technology and incentivized by the HNT token.
Key Learning: Achieving token-market fit is an iterative journey, not a single-step achievement, evolving in tandem with your project's vision and goals.
Helium's network iterations over time illustrate the flexibility of the HNT token's role, adapting to meet the evolving needs of its decentralized wireless infrastructure. Initially designed to reward participants for building and securing network coverage, the utility of the HNT token has expanded to include governance, transaction fees, and data credits for new types of device connectivity.
This evolution underscores that achieving token-market fit is an ongoing process, not a static goal. As Helium's vision and technology landscape evolve, so do the function and value of its token, demonstrating the necessity for continuous adaptation and innovation in token design to align with a project's growth and changing objectives.
7. ChainLink ($LINK) ChainLink's LINK token design demonstrates durability through its essential role in incentivizing a decentralized Oracle network, ensuring secure and reliable data feeds for complex smart contracts across various blockchains.
Key Learning: Chainlink’s token connects the world to on-chain transparency and immutability. By coordinating incentives on a decentralized oracle network, ChainLink demonstrates how to tie your token to the ‘real world’ and align incentives on and off-chain.
ChainLink's token design is uniquely characterized by its role in facilitating secure and reliable data feeds between smart contracts and external data sources through its decentralized Oracle network. The utility of the LINK token is fundamental to the network's operations, as it is used to compensate node operators for retrieving, validating, and delivering data, as well as for staking to ensure data integrity.
This critical role in the ecosystem ensures that the demand for LINK is directly tied to the network's usage and the broader adoption of smart contracts requiring external data. The durability of ChainLink's token design lies in its essential contribution to the functionality of the decentralized finance (DeFi) ecosystem and beyond, guaranteeing its value remains robust as the need for trusted data within blockchain applications continues to grow.
Consumer Tokens
8. Photo Finish ($CROWN) The token powering a web3 horse racing game
Key Learning: Integrating a natural deflation mechanism into the game incentivizes continual re-engagement and sustains user interest.
In Photo Finish, players dive into the world of virtual horse racing, breeding, and trading. The game's core lies in its genetics-based breeding system, using NFTs to represent unique horse genetics. This system allows players to explore the intricacies of horse breeding, from establishing stables to participating in races for monetary rewards.
A key differentiator for Photo Finish is its innovative approach to controlling NFT supply through an aging mechanism for horses. Unlike its predecessor, Zed Run, Photo Finish incorporates a system where horses age, underperform over time, and eventually pass away. This approach is critical in preventing an oversupply of NFTs, a common issue in many digital economies. As horses age and their performance declines, players are encouraged to reinvest in new horses, creating a dynamic and self-sustaining economy. This aging mechanism not only adds a layer of realism to the game but also ensures a continuously engaging experience for players, making legendary horses a rare and valuable asset within the game's ecosystem.
9. StepN ($STEP) A compelling case study in the to-earn model, incentivizing user actions in dApps
Key Learning: Tokens can be a highly effective tool for sustained platform value by directly linking rewards to user activity and engagement
StepN's token exhibits durability as a pioneering example of the "move-to-earn" model, intertwining the token's utility with user engagement and physical activity. By rewarding users with its token for walking, running, or jogging, StepN creates a direct link between the token's value and the health and fitness incentives it promotes. This innovative approach not only drives continuous user participation but also fosters a loyal community invested in the platform's success. The durability of StepN's token arises from this unique ecosystem where the token's demand is fueled by the sustained appeal of earning rewards through physical activity, positioning it as a resilient model in the x-to-earn space.
10. Friend.tech: Traders can jump-start social networks and cold-start problems.
Key Learning: Tokenizing utility (like access to influencers, products, or content) can be a highly effective way of rewarding early adopters, so long as it’s balanced with sustainable and long-term incentive structures
Friend.tech's tokenomics revolves around the concept of "keys," offering exclusive access to influencer groups and enabling unique interactions within the platform. This model allows users to earn tokens through content creation, engagement, and feedback, which at the launch of the platform fostered a vibrant cycle of online interaction and community building.
However, Friend.tech is also an example of where too great a heavy emphasis on speculation can collapse a product. The speculative nature of the platform initially drove a significant price increase in the token, benefiting influencers but also limiting the expansion of their fan communities. A large proportion of token holders owned small amounts, leading to a skewed distribution of token ownership. Friend.tech's experience serves as a reminder that while speculation can drive initial interest and activity, a successful tokenomics model requires a thoughtful balance of incentives to ensure long-term engagement and value for all participants in the ecosystem.
11. Blur ($BLUR) An NFT marketplace with a token airdrop that propelled it to market dominance
Key Learning: Knowing your key ecosystem participants and targeting them via strategically executed token airdrops can effectively disrupt competitors and motivate users to navigate the switching costs associated with transitioning to new networks.
Blur, an NFT marketplace, skillfully utilized airdrops to incentivize trader participation prior to its token launch. Through a series of airdrops that rewarded trading, listing, and bidding activities, Blur effectively engaged its target user base - high-volume, high-frequency NFT traders. The introduction of a points system and the distribution of 'care packages' for each airdrop created a sense of excitement and anticipation among users. This strategy wasn't just about immediate rewards; it also aimed to foster deeper user involvement and loyalty through ongoing reward seasons.
Such innovative airdrop strategies have proven highly effective for Blur, enabling it to capture a considerable market share in the competitive NFT space. This approach has been instrumental in distinguishing Blur from established players like OpenSea. By capturing approximately 70–75% of the NFT volume on Ethereum, as opposed to OpenSea’s 15–20%, Blur demonstrates how well-planned and engaging airdrop campaigns can be a game-changer in attracting and retaining users. Despite the ongoing challenge of diminishing margins in the market over the long term, this success narrative underscores the effectiveness of airdrops and quests as potent strategies for any platform aiming to disrupt an incumbent.
12. Audius ($AUDIO) $AUDIO also plays a critical role in aligning the interests of different stakeholders in the Audius community, including artists and listeners.
Key Learning: Decentralizing ownership and co-creation greatly enhances user engagement and value perception, more than free access ever could.
For artists, the token is a reward mechanism – they earn $AUDIO by uploading popular tracks, incentivizing high-quality content creation. Likewise, users can earn tokens by engaging with the platform, such as through curating popular playlists or developing APIs. This approach not only fosters active participation but also ensures that contributions to the platform are duly recognized and rewarded.
The dual functionality of $AUDIO tokens in the Audius ecosystem underscores a nuanced differentiation between user engagement and trader engagement. For users, including both artists and listeners, $AUDIO acts as an intrinsic motivation tool, rewarding content creation, curation, and platform interaction. This mechanism directly ties the value of contributions to tangible rewards, thereby enhancing user engagement through a sense of ownership and contribution to the community's growth. On the other hand, traders and investors are engaged through the speculative and governance aspects of the token, where its market value and role in platform decisions come into play. This bifurcation ensures that while users are incentivized to contribute quality content and interact with the ecosystem, traders are engaged in the economic and governance dynamics, creating a comprehensive ecosystem that values both content engagement and financial investment.
Building a Token for the Long Haul? Reach out
Decasonic remains committed to the role of tokens in the web3 ecosystem and is excited to work with the best founders to help realize the potential of this new incentive layer. If you’re building a token ecosystem for the long haul, especially for consumer-facing applications, we’d love to chat.
We’re here to help you bring your vision to life.
The content of this material is strictly for informational and educational purposes and is not meant to constitute investment advice or a recommendation or a solicitation to buy or sell any asset or to make any financial decision. Nothing in these blog posts should be considered legal or tax advice. You should consult with your own professional advisor before making any financial decision. Decasonic offers no warranties on any content in the material posted in these blog posts, including that it is accurate, complete, or correct. The opinions expressed in these posts are those of the authors and do not necessarily reflect the views of Decasonic. Decasonic is not liable for any errors or omissions in the content of this newsletter or for any actions taken based on the information provided herein.