January 19, 2023

MR PRO | Is This Web3’s Greatest Tokenomic Design?


Designing a successful token isn’t easy.

In fact, most tokens in web3 end up doing more harm than good for a business over the long run.

Axie Infinity, STEPN, and Luna are just a few examples of the consequences of poor tokenomics.

Now, it goes without saying that in order for a token to succeed it should retain or appreciate in value over time. If a token can achieve this, it can be one of the greatest acquisition and retention tools of all time. 🚀

But if the token depreciates in value, well, it can also be the worst…

It’s for this reason that tokenomic design is so important. So too is aligning incentives of your token holders with the business.

Whether you’re building in this space and utilizing a token, you’re partnering with an entity that utilizes a token or you’re simply investing across web3, understanding tokenomics is vital.

But it’s also important to note that the best tokenomics will not matter if the product or business behind the token doesn’t provide real sustainable value to its customers and users. 🤷

Tokens are a tool to amplify your business, they aren’t the business itself.

In today’s on-chain report, we are going to uncover the tokenomics of a technology that has both found incredible product-market fit as well as created what I believe to be the greatest tokenomic design for any fungible asset in web3 so far.

That technology is the Ethereum Blockchain and its native asset ETH.

Below we will explore: 

  • The relationship between the Ethereum Blockchain and ETH 🧑‍🤝‍🧑

  • The fascinating design of ETH’s tokenomics 🪙

  • How Ethereum has used its token to align incentives across multiple participants within its ecosystem 📈

This isn’t meant to be a bull case for ETH (though it may be that too), but instead a means of inspiration and understanding for how a token should function within an ecosystem and community. 

But first, a quick refresher on the foundations of tokenomics.

What Is Tokenomics? 

Tokenomics is a combination of two words “token” and “economics,” and refers to the supply & demand characteristics of a digital asset. It takes into account things like issuance, attributes, distribution, supply, demand, and other characteristics.

Now, the economics of an asset is nothing new. We can evaluate the economics of any asset in the world, not just crypto.

The one many of us are familiar with and use the most is fiat currency. Rather than “tokenomics” however, we use the term “monetary policy”.

What policy is that?

In the fiat system that we use today, there are a few boomers in Washington that take a look at some spreadsheets and charts about how our economy is doing on a monthly basis. 

Based on those numbers they either create a bunch of fiat out of thin air to stimulate economic activity (this is called quantitative easing or, in crypto terms, money printer go brrrrr).

But taking this action also reduces the value of our hard-earned money due to inflation and an increased money supply.

Or, they decide to stop creating new money to slow economic activity (quantitative tightening) with the goal of having most of us buy fewer things and ultimately lose our jobs…

This action lowers the value of everything we own while increasing the costs of everything we currently borrow (raising interest rates). 

WTF kind of crazy circus world are we living in? 💀

But that’s the “tokenomic design” we are all used to. It does a terrible job at aligning incentives with participants across the ecosystem nor does it appreciate in value, a direct contrast to the tokenomic design of ETH which we will look at below.

Of course, there are many other assets we could look at in the physical world too, like gold for example.

Gold's “tokenomic design” is simple. It's naturally hard to find and mine, not to mention expensive, so it inflates at about 1-2 %/year, making it relatively scarce versus fiat.

You can think of these assets and their “tokenomic design” as an analog version of what web3 has enabled.

The main difference is that tokens are programmable and their policy can be set and verified by code, rather than set and trusted by a human.

Understanding Web3s Best Tokenenomic Design: ETH

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