Hypermode Methodology – Framework for Tokonomics Design - Design & Manage Web3 Projects

Hypermode Methodology – Framework for Tokenomics Design

Salahuddin Khawaja

Published: August 10, 2022

At Hypermode, we have developed a framework for creative and practical use cases for crypto tokens.

Steps to design Tokenomics for a blockchain or Web3 project:

Token-to-Market-Fit Analysis

The most important factor to consider when launching the crypto token is to identify the token-to-market fit. Actual need for a token in the market! Need that drives the demand and supply factors. “token-to-market fit is the new product-to-market fit for businesses in Web3, William Mougayar” Sooner or later, all businesses in blockchain need to launch their crypto tokens. Following are the important questions which need to be asked when analyzing the need for launching crypto tokens:

How launching a crypto token will improve or supplement your business processes?
What will be the use-case for your business’s crypto token?
Will the token enable users to perform a value-adding action on the blockchain or your application?
Will the token enable owners to participate in governance activities?
Will the token be used to provide a monetary reward to the users?
What core activities of your business will be tied to the token?
Does your business enable economic transactions on the network/application?
Is the token required to execute a smart contract?
What purpose do you want to achieve with the launch of your crypto token?

If the above list of questions seems too technical to answer, we can simplify it and help you in identifying the token-to-market fit for your blockchain business.

Analysis of Market, Mechanism and Token Design

After a token-to-market-fit analysis has been performed, the next step is to use a framework that would focus on a detailed analysis of three important pillars as identified by Lisa JY Tan, founder of Economics Design. The following table shows the three pillars along with different variables:

Market Design

Mechanism Design

Token Design

Market Size

Governance

Token Policy

Network
Efficiency

Non-financial
Incentives

Financial
Incentives

Safety

Structure

Architecture

Once a detailed analysis has been performed for each of the above variables, a business is in a better position to launch crypto token for its blockchain project. There are several specific factors that fall within either of the above variables.

Market Design

pillar focuses on the analysis of market such as its size, the existing solutions, safety and network efficiency benchmarks.

Mechanism Design pillar

focuses on the rules and structure related to the business.

The third pillar – Token Design is the most relevant to Tokenomics and focuses on the following key areas of a token design strategy:

The above four factors within the token design pillar are particularly important for a business that is designing the Tokenomics for its project.

Token Utility focuses mainly on the use-cases we’ve discussed above.
Monetary Policy identifies the total supply of the token and how it is designed, i.e., inflationary (unlimited supply) or deflationary (limited supply)
Unlock Schedule helps the project team develop a token-unlock strategy by introducing unlock conditions, vesting periods and periodic unlocks. This helps the overall Tokenomics and performance of a token in terms of its liquidity and market price.
Distribution of tokens is the allocation of total supply to different groups identified above. Let’s double click into Token Distribution!

We have studied the following ten successful blockchain projects and found out the average allocations to different groups:

Ape Coin (BAYC)

Axie Infinity

Avalanche

Sandbox

Flow

Decentraland

Solana

Fantom

Perpetual Finance

Genopets

Typically, Web3 projects distribute/allocate their token supply into following categories:

Treasury: This represents the percentage of tokens reserved for future use by the project. Tokens held in treasury can be used for many purposes such as development, governance proposals, investments by the team and so on. The purpose of allocating a percentage of tokens for treasury reserves is that the team should be able to support future developments and business growth.
Team & Advisors: The team and advisors who help in the launch of project deserve an allocation for certain reasons. The percentage held by this group acts as an equity stake in the project. These are the rewards achieved by the team and advisors who have helped in establishing the business and making it possible.
Ecosystem: Any business needs to grow its ecosystem through incentivizing its users and other stakeholders. This group represents the percentage of tokens allocated to be used for growth and incentivization within the ecosystem. Many blockchain businesses airdrop their tokens to early adopters and users of their applications, tokens from ecosystem allocation are used for this purpose. Also, people are rewarded with staking rewards from this allocation (in the form of project tokens) when they stake their tokens.
Private Sale: Businesses reach out to Venture Capital firms, Angel Investors and Seed Investors to raise fund for their projects. Within the blockchain industry, tokens are privately sold to these investors at pre-launch prices which makes it attractive for investors as well as the team.
Public Sale: This allocation represents the percentage of tokens allocated for raising capital through public sale of tokens. It involves ICO, IDO, Whitelist and Auction sales.
Other: Many blockchain projects allocate some percentage of their token supply for purposes other than the above list. Some projects offer grants to teams working on their preferred areas while others contribute a portion of their tokens to charity. Tokens from this group are used for these purposes.

We analyzed 10 successful Web3 projects – below is the average distribution:

Of the 10, lets look at 3:

Moreover, a research conducted by Pantera Capital shows that the typical distribution of tokens by blockchain projects in 2021 looked like below:

From this study it is clearly evident that there is no one-size-fits-all framework for Tokenomics design and every project comes up with its distribution strategy as per the respective objectives. Get in touch with us to understand these variables and come up with a useful Tokenomics design for your blockchain project.

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Hypermode Methodology – Framework for Tokenomics Design

Salahuddin Khawaja

Published: August 10, 2022

Token-to-Market-Fit Analysis

If the above list of questions seems too technical to answer, we can simplify it and help you in identifying the token-to-market fit for your blockchain business. Analysis of Market, Mechanism and Token Design

Market Design

Mechanism Design

Token Design

Market Size

Governance

Token Policy

Network Efficiency

Non-financial Incentives

Financial Incentives

Safety

Structure

Architecture

Market Design

Mechanism Design pillar

Ape Coin (BAYC)

Axie Infinity

Avalanche

Sandbox

Flow

Decentraland

Solana

Fantom

Perpetual Finance

Genopets

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If the above list of questions seems too technical to answer, we can simplify it and help you in identifying the token-to-market fit for your blockchain business.

Analysis of Market, Mechanism and Token Design

Network
Efficiency

Non-financial
Incentives

Financial
Incentives