Many people are always asking; if [Insert a Metaverse Project Here e.g. AxieInfinity] has (or still has) a future. So, I decided to write an easy framework that I always use to analyze and predict the future of a metaverse.
You should learn this because:
- It can help you predict the future of a metaverse project.
- The success of a metaverse project is dependent on its token’s value.
- A metaverse project cannot create trust and build a sustainable ecosystem without it.
Only market movers (whales) know about this because they use it to play with everyone’s minds.
However, imagine what it would be like if you could predict the future of a metaverse project. I know the feeling. Unfortunately, you cannot move the market as they do. But you can avoid bad actors.
And that’s how important tokenomics is.
What is Tokenomics?
Short Version: Token + Economics
Long Version: It evaluates the value of a token. And it includes:
- Distribution
- Functionalities
- Ability to incentivize positive behavior
- Ability to capture a portion of the value created
So what am I talking about?
I am talking about a problem in the blockchain. There is too much jargon. So let me explain what tokenomics is in the simplest way that I know by using my analysis framework.
THE PROBLEM IS: “Buy Low Sell High” Mindset
Did you buy $DOGE and $SHIB when their “trade price” was LOW?
How about Axie Infinity’s $SLP, $AXS, and $RON? Did you buy when they were in their lowest positions?
What’s the reason why Sky Mavis has raised a total funding amount of $311M from 28 investors including Animoca Brands, a16z, and Binance?
In web3:
- Metaverse projects ask for funding from VCs.
- VCs analyze and fund a project that they think will have future value.
- Whales, investors, and “long position” traders who have knowledge in web3 will then look at that same project if it is still undervalued.
Investing in a metaverse project when they are undervalued is a key component of value investing. I follow Warren Buffett’s value investing strategy. And I believe in the future of blockchain.
Now, let’s go back to the BUY-LOW-SELL-HIGH theory.
FORMULA: You BUY if a project is undervalued (LOW). You SELL (or ignore if you didn’t buy) if it is overvalued (HIGH).
Do you get it?
So how do you know that the tokenomics of a metaverse project is undervalued?
- Token Capabilities / Burning Mechanism
- Token Allocations / Initial Distribution
- Token Distribution Model / Minting Process
- Value Accrual and Distribution Mechanisms / Sustainability
- Token Liquidity
- Extrinsic Productivity Use Cases
First of all, you need to know the metaverse project’s token capabilities.
For example, $SLP vs $VIS. What are their primary use cases? Do they allow token holders to participate in governance using them? Or will they serve any other purposes?
The token’s burning mechanism is what makes trade prices go up.
Next, you need to know if the initial token allocation is fair and balanced.
When Axie Infinity started its journey, how many percentages of $AXS were allocated in the token sale, DAO, the company, founders, and bounty programs? Are the tokens widely distributed to the private community, public sale, ecosystem, and liquidity pool rewards? Or was it concentrated on private whitelisting?
After the initial distributions, was there a vesting schedule and lock-ups to align with the long-term vision?
Fast forward to 2021.
Can you still remember what happened to Axie Infinity last July 2021?
- In Jan 2021, breeders started burning tokens through breeding.
- Then in Feb 2021, everyone saw a spike in the $SLP and $AXS prices.
- People who have profited from breeding bred more.
But there’s one big problem, Economics 101. There were only a few NFT holders (low demand). And there is a high NFT supply.
So, the price of $SLP was pulled down by 20x.
How did they solve that?
By May 2021, breeders prepared and burned more tokens again to onboard new gamers. Then a play-to-earn documentary was released 2 weeks after. It tells a story of how NFT gaming will solve an economic problem.
It went viral in an instant.
New gamers started joining as they saw how people improved their lives just by playing a game.
Going back to the Law of Supply and Demand. There was a high demand. But it was solved through breeding.
Let’s be honest, in July 2021, they forgot the law of gravity: “What goes up must come down.”
How is the July 2021 story of Axie Infinity related to Tokenomics?
Axie Classic only has 1 burning mechanism. Because of the high demand, breeding expenses are hurting the breeders. I know that because I was a breeder.
The more expenses, the higher the NFT cost, and the higher the barrier of entry.
But one thing’s for sure, breeders stopped burning tokens.
After that, was there a continuous token issuance? Do you think it helped improve the coordination and alignment of incentives? Does the continuous minting of $SLP incentivize positive-sum behavior?
Here’s another way to think about it:
Do the stopping of the burning mechanism and continuous minting process benefit all token holders?
Before we go any further, did you know that there are 5 types of crypto tokens residing on the blockchain?
- Platform tokens
- Security tokens
- Transactional tokens
- Utility tokens
- Governance tokens
So what’s the point?
A metaverse project having multiple types of tokens can have an effective value accrual and distribution mechanism. Can it help improve the utility of a token? Can it make the protocol sustainable? Yes and yes.
BE WARNED: Once you’ve found an interesting metaverse, always check the whitepaper if they have mechanisms to distribute some of the value created to the token holders.
Also, if there is sufficient liquidity available on most exchanges.
Liquidity helps you in developing your exit strategy. Just having a great burning mechanism, token allocations, distribution model, and sustainability doesn't matter. An illiquid market can put you in a position that is difficult to exit.
And you’re set!
Actually, not yet.
The following information is where so many go wrong when it comes to extrinsic productivity use cases.
Besides sustainability, having many productivity use cases in other DeFi exchanges can increase the odds of being successful in the future. It doesn’t really matter if the total number of users in the ecosystem drops. As long as there are user activities in it.
Here are some productive use cases to consider:
- As collateral
- For lending or borrowing
- Liquidity pool
- Yield farming
If you can analyze these 6 tokenomics frameworks, you are absolutely on your way to predicting the future of your favorite metaverse.
TL;DR
- Token Capabilities / Burning Mechanism
- Token Allocations / Initial Distribution
- Token Distribution Model / Minting Process
- Value Accrual and Distribution Mechanisms / Sustainability
- Token Liquidity
- Extrinsic Productivity Use Cases
I’d love to know your thoughts.