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Retail investors have exhibited a preference for tokens with larger supply distribution. This has contributed to the outperformance of memecoins compared to major traditional finance and blockchain index benchmarks.
To establish a healthy token economy, we posit that there are four key design objectives:
Fair Distribution Of Token Supply
Sustainable Supply Emissions
Distinct Demand For The Token
Active and Decentralized Governance
Supply distribution provides a breakdown of the various groups of token holders, offering insights into how their interest might align with the protocol. The goal of the founder is to (a) find the most aligned group of stakeholders and (b) utilize ecosystem tokens diligently.
Supply emissions refers to the emission schedule of the various token holders and the inflation schedule. Founders have to consider how vested supply enters circulation such that it does not overshadow protocol growth.
Token demand can be intrinsic or speculative. The goal of the team is to optimize for intrinsic token demand as it is more sustainable, as compared to speculative demand. Founders should first (a) consider the type of token they are launching, and (b) figure out if they are able to use tools, such as staking and token buy backs, to create short-term demand which hopefully translates to long-term protocol growth (and future intrinsic demand for the token).
Active governance becomes increasingly important as a protocol scales, when changes to tokenomics might be necessary to better match the needs of the protocol. Founders should think about how to increase governance participation, as traditional models often produce inequitable outcomes for the average voter which can lead to lower participation and centralization risks.
Key takeaways from the case studies on Jupiter and Solana:
Rewarding active governance participants can increase participation and create token demand from future governance participants
Airdrops can be designed carefully to reward long-term users, and as an incentive to drive usage towards new product features
Buybacks can be seen as a sign of protocol strength, and can only be done by building a great product
Decentralization of token supply takes time, and building a great product is one way to attract new groups of token holders
A sign of network maturity is when the community proposes changes to the protocol to better align interests between token holders and the protocol
Other considerations beyond tokenomics that may have a bearing to a token’s performance:
Valuation on launch
Transparency over team vestings / sales
The future of governance tokens
Product is integral to long-term token performance
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