Seven Steps to Define Tokenomics of a Blockchain Project

"blokk" presents a step by step guide to define the token economics of a blockchain project. From understanding the context to the creation of a good roadmap.
Michael Schranz
Michael Schranz
March 31st, 2023

Step 1: Understand the context of Tokenomics as well as your target audience 

blokk. embraces the idea and methodology of design thinking. During the last decade of custom software development projects we learned, that it is absolutely important to know the context and understand the user's needs before starting with concept work. We often use the chinese saying: “If you want to be fast, go slowly”. This is also the case when defining the tokenomics of a blockchain project. If you move too fast without the necessary knowhow, time to revise and iterate, you will most probably get in trouble later on. It will take much more time to solve the problem later on than if you do your research on the topic, the options and basic factors to understand token mechanics before you start.

So, the first step is to really understand tokenomics, to understand the target market and target audience. Without this knowhow you most probably fail to define the right token models and especially you won't be able to create the right incentives and long term values needed to implement a sustainable and successful tokenomics model. Of course, blokk is here to help if you wish to get external help for this important first and also for the following steps. But even if you engage with us or with any other agency specialized in the field of blockchain it is very advisable to make your own research and never stop asking you and your partners the right questions. 

Step 2: Define types of tokens

Depending on the type, goal, industry, roadmap, location and nature of your project you will need a different type or several different types of tokens. If you want to give users access to your services and goods, and / or make payments for those services, you can do this by implementing utility tokens. An example for this would be the INDU token, which we created for Indu4.0. The INDU token can be used as a payment method for the services offered by Indu4.0 AG on their B2B platform or to purchase trade show booths and admissions in the metaverse offered by them.  

Example Use Cases for different types of tokens

  • To launch your own token, you may need to implement utility tokens to let users access your goods and services or make payments.

  • To launch a DAO, you need to introduce governance tokens to allow users to vote and propose their own ideas.

  • If your platform is about tokenizing assets and turning them into NFTs, or you’re launching a metaverse platform, then you will obviously need to develop non-fungible tokens (NFTs).

  • To investors and the core dev team who are making a contribution to your project, security tokens are usually offered. By buying or receiving security tokens, they will be investing in digital assets or company shares.

Obviously, the type of tokens you choose to create depends on your project’s characteristics and your business goals. More details about the different types of tokens are described in the previous blogpost about tokenomics model creation: Tokenomics 2/2: Game Theory, Examples and Token Types

Step 3: Design and document your tokens

In this step it is important to cover all technical aspects of the token design. Only with a very good and clean token design your project will be attractive to the community and only when this is the case it can be successful from the start. Only with a good token design it will be possible for your DAO to reach a large community and the necessary awareness in the market. 

The token design includes the naming and the corporate design (branding) for the planned DAO token. 

In this phase you have to think carefully about how to achieve the necessary attention in the market and thereby reach the first participants (early adopters). 

Token design also includes the determination of the total quantity (supply) of tokens. An important success factor here is that the barriers to entry for potential users are as low as possible. In addition, good user experience, security, and the availability to collect and store the DAO tokens are important success factors and therefore important topics in this step.

Step 4: Examine and choose the economic model

Usually, there is a deflationary or inflationary model, but there are also approaches that aim for both 😉 The question of which model is optimal for your project is the focus of this step.

In the deflationary model, the number of tokens created is usually limited to a predefined maximum of tokens. The idea behind it is that due to the burning of tokens for transactions or other services or the loss of tokens in the event of loss of one's private key and the simultaneous increase in costs, the value of a token is constantly increasing. The greater the demand and the rarer a token, the more valuable it becomes.

In contrast, the inflationary model does not limit the number of tokens. New tokens can also be created in the future, which of course will have an impact on the value of a token per se. The more tokens, the less you usually have to pay for them. But of course, this is just the supply side. If the demand side grows just as fast, then the price will not drop accordingly. In most cases, increasing the amount of total available tokens is done through mining or staking.

Step 5: Create added value for end users

Only those who offer real added value in the context of the end user will be perceived as a valuable and meaningful brand or organization and have a good chance of being successful. This applies to a classic company, a product, an NGO as well as it does to blockchain and crypto projects.

It is important to know the needs of the end user in order to then be able to derive relevant added value for the target group. Added value can be conveyed in the form of functions, problem solutions or moments of happiness.

It is important that this added value is extended and does not only produce an initial hype, that is over quickly and therefore reduces the relevance. Good ideas are therefore needed to "tie" users to the project for a longer period of time and to ensure that they invest their time and money in the project over a long period of time. If this cannot be achieved, then there is no sustainable economic model.

Specifically, there is a need for solid, preserved, attractive and long-term interesting interaction options (added value) for the end user.In many cases, these are loyalty programs, liquidity management (e.g. at Uniswap), staking pools or exclusive benefits, products and services.

This step usually decides to a large extent whether a project will be successful in the long term or not.

Step 6: Critical review and evaluation of potential risks and possible flaws in the construct

Nobody is perfect and it is absolutely normal that things are overlooked or mistakes occur in a creative process. What would be a fatal mistake, however, is simply starting after the first 5 steps without a thorough examination of all factors.

In many cases, the Tokenomics models are of course shared with the entire community before they go live and the community is asked to examine all aspects and point out errors or possible risks. Of course, this does not mean that you don't have to do your homework as well and analyze all aspects of the token economy of the project in detail. Determine different scenarios and determine whether there are major or minor defects, errors or risks, which need to be improved before going live.

In addition to checking technical issues, it is of course also important to validate your own hypotheses in relation to the added value for end users. For this purpose, we recommend doing user research (qualitative and quantitative research with end users) to check whether your own assumptions about the defined added value are actually correct. Involving end users in the development process of such models is not only recommended but, in my opinion, an important success factor. User research can be used to test the attractiveness, incentive models and desired added value for end users before the actual go-live and, thanks to their feedback, things can be optimized.

Step 7: Developing a good roadmap for the future

It is important to have a good plan for the future before the introduction of a new product. This does not mean that you have to work out a detailed 10-year plan before going live. However, it is certainly advisable to think about the next development steps, future planned new added value and opportunities for the community, marketing measures, cooperation, adjustments to the model due to milestones that have been reached, etc.

In the description of your tokenomics model, you should also integrate details that go into how this model will continue to generate added value for the community and investors in the future and how it will be attractive in the long term.

All aspects related to the tokenomics model are usually published before the start of a project as part of a "white paper". Of course, we recommend developing the content and key data of this white paper as a part of all the steps described here and continuously verifying it with the target groups and improving it based on their feedback.


Tokenomics - common mistakes

Many things can determine the success or failure of a tokenomics project. The following three mistakes are probably the most common but there are of course many more things that can go wrong and will have a crucial impact on the success of your project:

  • Launching without a clear token benefit (especially long term value for participants)

  • Launching with too small of an offer

  • Issuing an offer that is too large

Closing remarks of the Tokenomics blog series

We hope that this small series about tokenomics gives you a good and exciting insight into the topic. We are very happy about feedback and inputs for improving or expanding the articles. If we can provide you with advice or active support in developing the tokenomics for a new blockchain project, then we look forward to hearing from you.