How to Check Tokenomics Health - Article 2
Last updated
Last updated
Many concepts in the blockchain industry have profound implications. As we discussed, tokens represent some value within the ecosystem. They can be used to finance a company's operations, pay fees for transactions, and represent a stake in the project. Token holders and stakers can receive various benefits like airdrops, roles in their community, or governance rights.
But with rights, a burden of responsibility is attached to the issuers of tokens.
Bitcoin was created to be a global monetary system. Along the way, its purpose has evolved into a store of value, an inflation hedge, digital gold, or a scam - depending on whom to ask.
The same thing has happened to Ethereum - from being a humble funding mechanism and fee-paying token, it became a multipurpose juggernaut.
The key factor in the token's success is - is it being used? And for a token to be valuable, it has to solve some economic or governmental problems for a community of users. Hence, an issuer is pressured to establish an economic system that uses a token.
Whenever a project is planning to release a token, they have to create an explicit plan of its role in the ecosystem and who will be a beneficiary.
Having a detailed understanding of token use cases should give information to potential users on why they might need it, as well as how much they might need to spend to achieve their goals. Below we explore the evolution of Ribbon.Finance governance token.
https://ribbonfinance.medium.com/ribbonomics-b070e269fbb3
And disclosing all beneficiaries of the token mint is a standard practice in the financial world to prevent price manipulation. Here is the token allocation of a protocol described earlier:
https://docs.ribbon.finance/ribbon-dao/overview-and-rbn-distribution
Not all tokens are created the same way, but for one to be created on Ethereum network, an issuer must develop and deploy a smart contract. This contract should have "mint" and "transfer" functions, which would allow the developer to create and distribute tokens.
Let's continue exploring Ribbon.Finance and use their token as an example of typical mint-and-distribute action.
https://etherscan.io/tx/0x847230516f02021df2ae29d3c668b03b989d8e6097ab43297888073d32c33ba1
In the "Token Transferred" field, we find that tokens have been minted out of "Null Address" and transferred to a multisig, a wallet controlled by multiple parties. Multisigs significantly increase the security of funds and are a common practice in the crypto industry.
The next step of our analysis is to follow the initial transaction and see where coins went after the first transfer.
Our goal is to see the first transactions in this multisig wallet. To do that, go to the last page of the list of transactions. The oldest transfer on the list is a Token Generation Event. But all following transactions represent the distribution of coins between various involved parties - 30m tokens went to the Airdrop Contract, 450m - to the Community Treasury, etc.
We got a little bit familiar with the token allocation process in previous parts, but why do we care so much about it?
If there are 1,000,000 tokens minted, among which only 10% are available on the open market, the price per token will be significantly higher than if 100% of tokens are available. But if circulating supply* would suddenly increase - the price would fall proportionally.
Therefore we need to understand which parties control which amounts of tokens and where they are allowed to dump them on the market.
As we know by now, there are multiple parties who usually receive token allocations. First and most common are the team members. Many programmers, business developers, and executives work for the percent of the total token supply.
In the example below, you will find a token allocation scheme of a JonesDAO, a community-driven project to create sophisticated investment strategies. Hacken does not advise you to invest in any projects, and all examples given are here for educational purposes only.
https://docs.jonesdao.io/jones-dao/jones-token/tokenomics
According to the scheme, we can expect that team members will receive 12% off 10,000,000 JONES tokens, vested for 18 months. And here they are - divided into 5 transactions.
https://arbiscan.io/tokentxns?a=0xc1d9682db60955d64f263025b282acbf8cda55b7&p=2
Another, arguably more important group for our purposes are Investors and Advisors. These people and organizations help to fund and shape operations at the early stages of a project.
In the example of JonesDAO, investors are under the category of Private Sales and received 9.7% of the total allocation. To find it in blockchain explorer, we should look for an approximately similar sum, and here it is:
https://arbiscan.io/tx/0xda84531df6f6d9f73586029a9159354bddcaeaba7893ecf22424d998e280eea6
Another part that falls under the "Investors" category is OlympusDAO, as they helped launch the project. We are looking for a transaction for approximately 330,000 tokens. There are two which may be valid:
https://arbiscan.io/tx/0x00c229059f207fc798ff52ac011b9f8e005c49a35f1104f2e9b52b427b139e5e
https://arbiscan.io/tx/0xa75a8ae07511ca56459decbc08c7a5d380ea1ce3d691b4fbc168113c472a5abd
We know, however, that the recipient of the first transaction is a contract called "Staking Rewards". So it's the second transaction that we need.
Decentralized projects are incentivized to acquire as many token holders as possible. That is why they are creating multiple ways to distribute coins between people. Continuing to explore JonesDAO, we can see that they incorporated three distribution methods: Public Sales, Airdrop, and Platform Rewards.
https://arbiscan.io/address/0x5a81abb52d96241d15d8b2bdcd76034e4119829b
https://arbiscan.io/address/0x5444c71cdd5ed85b6d51a297175bf71914e7944d
Platform Rewards are distributed directly from the token smart contract, and can be identified by the “From” column - these transactions would be sent from the Null Address.
Last but not least, a group of addresses where tokens may go after they've been minted - to places where regular people can easily accumulate tokens. These are both centralized and decentralized exchanges, as well as bridges.
JonesDAO did not explicitly transfer coins to the infrastructure, but here is an example from our previous case study, Ribbon.Finance:
In this transaction, they transferred 1% of the token supply to Uniswap, the largest decentralized exchange.
In the previous chapter, we touched on a number of definitions that might puzzle some people.
What is an Airdrop? It is a method of sending tokens to the early participants in the protocol and is done to reward those who use protocols before they become big.
https://optimistic.etherscan.io/address/0xfedfaf1a10335448b7fa0268f56d2b44dbd357de#tokentxns
Community rewards or liquidity mining is a way to incentivize people to put their funds in a protocol and earn additional rewards. Sometimes tokens are given to another protocol to establish a collaboration and involve people from several communities. An example of that can be found on Aave, where you receive an Optimism Governance Token atop of the regular rewards. These programs are temporary in nature.
A typical way to allocate coins after the mint is to move them to a multisig that belongs to the team members or community treasury and then distribute it across investors, advisors, marketing, foundation, airdrop participants, and all the necessary smart contracts.
It is also common practice for teams and investors to lock up tokens for a period of time to show confidence in the project, as well as protect the public from token dumps.
One way to lock up tokens is to have a vesting schedule - an algorithm that unlocks coins as time progresses. There are multiple ways to do vesting - from linear unlocks, where funds are released regularly each day/week/month/year, to continuous streaming of funds.
Since we now know how to interact with smart contracts through blockchain explorers, let's read a vesting schedule on Ribbon.Finance treasury:
https://etherscan.io/address/0x42c1357aaa3243ea30c713cdfed115d09f10a71d#code
https://etherscan.io/address/0x42c1357aaa3243ea30c713cdfed115d09f10a71d#readContract
Here we are interested in the starting and ending date of vesting, which can be read through the "start_time" and "end_time" methods. Note that the time you get from these methods has to be converted from UNIX to a human-readable format. You can do that through services like
https://wtools.io/convert-unix-time-to-date-time
Another interesting method in this contract is the "Cliff Period". If you click on it, you'll see that the cliff period of this vesting schedule is 0, meaning that the release of funds started from the "start_time".
https://etherscan.io/address/0x42c1357aaa3243ea30c713cdfed115d09f10a71d#readContract
However, if it is larger than 0, it would mean that there is a period in the beginning when funds are not released. For example, if a vesting schedule is planned for 2 years with a cliff of 1 year, coins will start to be accessible only after 12 months.
If you want to do your own research, it is of utmost importance to be able to find whitepapers that crypto companies provide. Not only do you become familiar with all risks and benefits of using this protocol through reading the whitepaper, but you also become acquainted with the token economy or tokenomics of a project.
We've already established the importance of token allocation and will now focus on where to search for tokenomics descriptions.
First and foremost, our primary source of information about the token is the official website of a project. If you want to be sure that you are in the right place, use CoinGecko or similar aggregation tools to search for official web pages.
You will most likely find tokenomics under the "Token," "Whitepaper," or "Docs" parts of their website.
https://docs.looksrare.org/about/looks-tokenomics
Many projects are using Gitbook as a way to create and maintain their documentation.
https://gmxio.gitbook.io/gmx/tokenomics
In the link above an exchange called GMX used Gitbook structure to construct the detailed documentation of their project. In there you can find all the necessary contract addresses, their staking proposal, token supply and much more.
Another great resource to find information about tokenomics is GitHub. It might be tricky for someone unfamiliar with code to navigate there, but we will do our best to help you search for original sources.
GitHub is a portal for developers to release and maintain their code. It also helps develop documentation for the code; therefore, some teams are moving their tokenomics design to this portal.
Here is an example of a crypto company having their token description on GitHub:
https://github.com/BarnBridge/BarnBridge-Whitepaper
To find it, you might want to search for it through Google or by clicking the GitHub link on the official page.
5.5 Inconsistencies between what’s written and what’s on a blockchain
By now, we've learned how to search for information provided by the team and what has actually happened on a blockchain. The reason why we make an emphasis on these two aspects is that companies do not always follow exactly what they say.
There might be multiple reasons for inconsistencies: it's hard to build an ecosystem; it's a living and breathing organism and can be subject to change. The purpose of token existence might change along the way. It's not always a malevolent reason that makes projects deviate from the plan.
But the crypto industry is full of shady behavior, and knowing how to get to the truth will bring you several steps ahead of other users!
