By following the money, we’d understand why something is happening, whether it’s a price or political movement.

In my many years of economics studies, I’ve never forgotten one of the lessons of an undergraduate professor. He spoke of the economic theories and complex models we’d be learning about.

Putting those aside, he told us that, to truly understand why something is happening, we needed to simply follow the money. In doing so, we’d understand why something is happening, whether it’s a price or political movement.

I take that “follow the money” ethos into tokenomics. When I take a look at token distribution models, and allocation models, I look first to see who will benefit and how the project will grow. Are there enough non-founding parties who could be positively impacted by this project?

Because that would only help to make it a success. If the answer is yes, there is potential it will be a successful project. If it is not a clear yes, I look at the potential pitfalls, and what can be done to address and, if possible, avoid them. 

Tokenomics is among the most challenging of exercises. But, with some tokenomics models, you don’t have to do complex technical and mathematical analysis. You can just look at the design, and see that the founders will be the beneficiaries for the next twenty years, and nobody else.

Why should this project grow and why does anyone else care? They won’t and they don’t. Therefore, it is important to look at models and long-term outcomes in regards to who will benefit. 

You have a few options when you start a crypto project. You can have a company attached to it with shareholders, such as founders and investors, and you capture value for them and consumers.

Once you overlay the token model, things become twice as complex, for with a company that incorporates tokens, you now have two groups of stakeholders. You have your shareholders and token holders. You need to think about both groups, whilst capturing value in a fair manner. 

And then there is the foundation, non-profit model, whereby you don’t have shareholders on the company side, just token holders. The tokenomics then become simplified and similar to traditional business, where you try to capture all economic value created in your tokens.

And lastly, there is the vaporware model. A project simply issues tokens on Ethereum (ETH) with no regard for how to capture value nor accountability.

It shocks me to this day that people invest in ghost decentralized finance (DeFi) projects. They don’t know who is behind it nor what the proper value creation mechanisms are. It could be a pyramid scheme, scam, or rug pull, yet people still put money in those instances.  I assume they are too apathetic to do research and consider the consequences of the project not working out. 

The tokenomics of a project must align with the project’s goals. Do you want high velocity so as to grow fast? That could entail a great many fluctuations. Once a token is on the secondary market, it is hard to control those prices.

Many times, even with solid tokenomics models, the industry has a hard time knowing what will happen when a new coin is listed somewhere. These days, anyone can create a liquidity pool with a token, as long as they own the token.

When I am right or wrong about a project, to be sure, it is usually not out of deep analysis of the financial modeling. It’s more of a gut feeling. I talk to the founders or do research on the project to see if I can follow the money.

In some instances, you can’t. Nor can you tell where the value is being captured. If I can’t figure it out, there will be other people who can’t figure it out. If that happens, the project will likely face growth issues.

Tokenomics remains a new and exciting field, and so therefore there is no single correct model to accomplish a goal. We are still learning about how, if we align incentives in a certain way, the experiment will unravel.

The post When It Comes to Tokenomics, Follow the Money appeared first on BeInCrypto.

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