Demand-Side Tokenomics by Nate @EatSleepCrypto

am I good to go all right awesome great all right all right hey everyone thanks for coming I'm going to be speaking about demand side tokenomics it's a school of thought within tokenomics and I'm going to be talking about how to use demand side tokenomics to make your protocol useful valuable and secure and the token as well my name is Nate I've been writing at eat sleep crypto since 2017 on token valuation and tokenomics so the first thing I want to start off with is this meme right here I'm going to give you guys a second to take it in just to um get the gist of what we're going for this is basically 90 of projects that I see when when they talk about tokenomics they're talking about these things and so I want to start by explaining what tokenomics is so in short tokenomics describe how a token's use affect its price and tokenomics is made up of two words token and economics where economics is made up of supply and demand and so it's surprising to me but something that I want to point out in the highlight of my talk is that demand is actually uh much more important than Supply in your tokenomics and so people are focused on Supply allocation and distribution a lot of the time so that looks like what their emissions curve is or how many tokens go to investors versus to the community and how they're getting those tokens there these are important considerations but they're actually secondary the the primary thing that you should be focused on when you're designing a protocol and building a token is the demand for that token to be used in the protocol which is going to drive the price by creating necessary demand for your token on the markets and you can't just rely on speculation for that kind of demand it has to come from the utility of the token in the protocol and that's what I'll be talking about today so demand side tokenomics is made up of three principles these are the principles of tokenomics and if you meet these principles your token will necessarily be valuable your protocol will be valuable and it will be secure and able to sustain itself for the long term those are utility which is the value created by your protocol for users value capture which is the the amount of value that you're able to its analogous to profit in a business so it's the amount of value you're able to accrue the token to the Token or distribute out to holders and economic security which is distinct from technical security and I'll get into that in a bit but good tokenomics follow these three principles without fail so the first principle is utility and the the first point of that that I want to make is that you should be solving large problems and these problems like you want a large total addressable market so the the number of users that you're able to serve and the amount the degree to which you're able to serve them should be a primary focus when you're looking at this principle of utility and maximizing that for your tokenomics and to do that the best thing the best thing to consider and keep in mind when you're designing your utility is using blockchain's unique properties and so you know blockchains as we all know have distinct properties that are completely different than the um that enable completely different applications than the kinds of things we see in web 2 or in traditional Finance you want to use those properties so as an example permissionlessness is a is a quality of a blockchain that you're not going to find or a smart contract that you're not going to find in web 2 in tradfi uh credible neutrality another one so um and censorship resistance so if if you have these kinds of properties then you can know that your token and your protocol or your at least your protocol is going to have some utility unique utility to users and that creates a unique value proposition so another point is when you're designing for utility you want to identify the reasons that your users want to use your protocol and that's going to help you find synchronicities in groups of users that might also be able to be included in your protocol to give it additional utility and additional value capture as we'll talk about in a moment but one example that I want to talk about that does this really well was the original maker Dow design so maker essentially matched up degen's demand for leverage with more conservative investors demand for stable coins and in this graph over here on the right those two groups are represented by borrowers and die holders the other three groups are what I call mercenary users they're like just there for the money they're purely there because they're trying to get yields and they also serve an important purpose in the protocol and so breaking down the motivations of your users is going to help you design for utility and maker is one example of a protocol that does this well the second principle of tokenomics is value capture so the the first principle is concerned with value creation this is value capture so it's the amount of value that you're able to accrue to your token and either distribute that out or um accredit to the token and have the token price go up and you do this through the Strategic conclusion of tokenomic mechanisms which are ways your token is used in the protocol to give it fundamental demand and capture this value and so those ways are going to Loosely correspond to three asset classes from traditional Finance those are currencies Commodities and equities so your token could be currency like commodity like or Equity like that's going to be like a medium of exchange or utility token or a token that's paying dividends of sub kind and they're not mutually exclusive in fact the best tokens have properties of all three of these asset classes and work similarly so digging a little bit more into tokenomic mechanisms I want to use synthetics protocol as an example so synthetics is a synthetic derivatives platform the token snx is used to collateralize synthetic assets which makes the demand for snx tokens proportional to the demand for the collateralized assets that are that are on chain in a way that um you know that are available to users in in a way that's exclusive to the synthetics protocol so there is some essential demand for snx tokens and that collateralization is an example of a demand side mechanism because you're magnifying the demand for your token based on the use the utility in your protocol or your token utility the utility of your token inside of that um similarly a staking snx locks up Supply that's a supply side mechanism it's not a demand side mechanism because the demand is not fundamentally the synthetics protocol the demand we would hope is not fundamentally for yields yields you can find in a lot of different places but the essential utility of synthetics and what drives its token value is the collateralization mechanism so staking is a supply side mechanism um and to I want to underscore that because to make that mistake you if you make that mistake of thinking yields are the fundamental product of your protocol your head's going to be in the wrong place you're going to design things that are not sustainable and lead to collapse and so the third principle deals with that that's Economic Security and so this is distinct from technical Security in that technical security is like a lack of bugs in the code and it means the code can't be used you know maliciously Economic Security is a lack of bugs in this system design or in the incentives and The Game Theory and a few examples of this because this is probably a newer concept to a lot of people Mev is an example of a system that's not explicitly designed to do what it does it's it's being taken advantage of and that can that can hurt users in the long run so that's Mev is is an economic security vulnerability in a sense Oracle manipulation like we saw with the prices of assets on Ave and mango markets last year is another example of an economic security exploit where the the code was followed to a t but the the economics and The Game Theory and the design was manipulated to hurt a group of users and the third example is death spirals as we saw with the price of Terra of Luna last year so that's an example of an exploit an externality is like a um an unintended consequence so borrowing this term from economics and unintended consequence to a group of users um that uh that were not um intentionally like paying for that consequence or not responsible for that consequence so an externality to the Token price um would be like Step n where they had a large amount of Supply they were using to incentivize users to participate in the protocol but they weren't matching that demand or that Supply with any demand so that's an example of an externality that you can end up with if you're not considering Economic Security as you're designing your protocol so it also includes Game Theory the um sets of incentives that you're using to get users to take certain actions and I put this word coopetition up there because I came across it as I was uh preparing for this talk coopetition is the macro alignment of incentives with micro incentives um where micro incentives might be between users who are competing for various things so a perfect example of that is like mining miners are all securing the protocol but individually they're trying to maximize their own profit and so the um a big point that I want to talk about here is that there are trade-offs between each of these three principles and you have to consider this when you're designing and the um so an example there is a trade-off between utility and value capture just like there's a trade-off between the value to Consumers of a product or or a service and the profit of a business and you have to balance these two things um another another example value capture has a trade-off with economic security if you capture too much value by making your asset say a collateral the base collateral token for another token in your protocol that has a lot of demand like Tara did then you risk collapse through an economic security vulnerability because you went too far on the value capture and not far enough in the economic security so I have a few logos up here on the left that's Tara Luna they were you know what I just described they had utility and value capture but they didn't have Economic Security they hadn't they hadn't maximized uh the aggregate of these three on the bottom you've got uniswap which is very useful and ha is secure but doesn't capture very much value at all and it's really difficult for uniswap to capture value now because they've baked in their utility and value capture in their non-upgradable contracts side note I definitely recommend not having upgradeable contracts but that makes it all the more important to design utility and value capture in from the beginning you can't just capture value later and that third on the right there is I exec they're a Marketplace for distributed computing and I'm betting you probably haven't heard of them because they address a very small target market and so that they didn't maximize the utility of their protocol or maybe they maximized their protocols utility but they're working in a space that's not that valuable it's not that big of a total addressable market and so they're somewhat lacking in utility even though they have value capture and economic security and you have to have all three of these things to make sure your token is as valuable as possible is is fundamentally valuable and um you can do that by maximizing the aggregate of those three so the takeaways that I want to leave you with here are it's extremely important to focus on demand before you decrease Supply any supply side mechanisms or any reductions in Supply are only going to magnify the value of your token if there's some value to magnify like it that and that value can't just come from speculation you have to have some real reason for um for users to buy your token and that's going to give you sustained demand over time so that's going to bring the price of your token up and it's going to keep it afloat and bear markets it's going to keep you funded I mean there are all these second order effects of the um of focusing on demand first and so that's that's what I want to relay to you today and um the goal of Designing tokenomics should be to maximize the aggregate of these three principles because as I mentioned there are trade-offs between utility value capture and Economic Security and you can do that through the demand side tokenomics framework so that is my talk and uh if you are interested in learning more about this or would like help with your tokenomics and designing things I consult for decentralized protocols and I would love to help you think through some of the trade-offs of these things and how to maximize your token value and token price you can find me around the conference the rest of East Denver and I'm looking forward to talking with with a bunch of you thank you so much [Applause]