Poor tokenomics can undermine great projects (here’s how to enhance them)

This piece reflects the views of Arthur Iinuma, Principal Consultant and Founder of Iinuma.io.

Strong tokenomics won’t salvage flawed projects, yet even the most promising launches can falter due to inadequate token design.

High-profile failures like Terra LUNA and Celsius reveal the risks tied to questionable financial maneuvers—such as algorithmic stablecoins and yield strategies disguised as innovation. Numerous other potentially great projects are also undermined by preventable economic missteps.

Established projects with real technical innovation and meaningful applications, such as Aptos, have lost billions in market capitalization in a matter of hours due to poorly managed token unlock schedules and ineffective communication. It’s essential for crypto developers to prioritize effective token design, enabling successful projects to develop robust economic pillars alongside their technical foundations.

Critical Token Design Flaws

Some of the most significant tokenomics pitfalls I notice in reliable projects include:

Significant Valuation Discrepancies

Although it’s common for projects to offer early investors tokens at lower prices than later rounds, founders must be cautious about creating large price gaps between these early investments and public offerings. This is often easier said than done since savvy investors may hold out for lower prices, threatening to withdraw their investment.

When an investor enters at a considerably lower price than later buyers, it effectively assures them gains even if market prices dip below public buyers’ costs. Consequently, losses for later investors can coincide with profits for early token holders, creating an unequal dynamic within the project’s token economy.

Inadequate Vesting Schedules

Numerous projects inadvertently transform their public buyers into exit liquidity for early backers and insiders. Few things can damage community trust more than seeing early investors dump tokens while the public retains devalued assets.

The timing of token unlocks holds significant importance. Although lengthy lockup periods may appear to support value growth, they frequently result in predictable selling pressure as investors, after prolonged holding, rush to sell. On the other hand, quick unlocks can facilitate swift price discovery and broaden the holder base but also enable large holders to sell off quickly, leading to market downturns and diminishing public trust.

Excessive Founder Selling

At times, the allure of converting newly issued tokens into real profits proves irresistible for the founders of those projects. I’ve seen initiatives transition from intriguing concepts to billion-dollar valuations, resulting in creators becoming multi-millionaires. Even the most self-disciplined may be tempted to liquidate their holdings in exchange for cash.

Consider Mantra, which suddenly plummeted by 92% in just 90 minutes. Despite assurances from the CEO, blockchain experts quickly highlighted significant insider transactions worth at least USD 227 million being moved to exchanges, indicating a potential insider sell-off.

Inflated Listing Valuations

Founders may feel tempted to list their projects at inflated valuations to achieve heightened visibility, attract media attention, and generate buzz. While they can’t be solely blamed, even platforms like Binance have set unusually high listing valuations, exemplified by projects such as Hamster Kombat (HMSTR) debuting at over USD 700 million and Notcoin launching at an astonishing USD 1 billion.

However, inflated listings create considerable instability, and when initial investors are in profit, it often triggers a rush to sell as token holders aim to capitalize before others. A high opening valuation diminishes the chance of public buyers seeing returns on their investments, reducing secondary market interest. When many holders sell and there are few buyers, this can spiral into market collapse.

While projects like Hamster Kombat achieved record engagement and secured placements on leading exchanges, its inflated initial listing led to an 87% drop from its peak, ultimately hitting an all-time low.

Effective Tokenomics Strategies

BTC and ETH remain at the forefront of market capitalization for valid reasons. Beyond their early mover advantage, they embody several essential principles that distinguish enduring token models from mere speculative ventures.

True Scarcity

Bitcoin’s 21 million cap isn’t compelling solely due to its limited supply; it has potency because the market is convinced that this restriction is immutable.

Robust Product Integration

Every project should earnestly ask itself: Can your product function without a token? If the answer is yes, you may be imposing tokenization inappropriately.

Projects like Filecoin exemplify this principle, as their token is crucial for the network’s storage marketplace, making it nearly impossible to dissociate the product from its token. In contrast, projects that attach tokens without thoughtful integration usually witness their token values decline over time.

Sales Restrictions

Projects should implement a structured valuation for each sale round with minimized price disparities and develop a vesting calendar that disallows lower-priced buyers from dumping their tokens on later participants. Creating a tiered vesting structure that limits early sellers while allowing late-stage buyers to minimize risk offers a fair balance of potential rewards for earlier investors alongside price protection for later participants.

Utilizing Audited Claim Contracts

Robust token economics extend beyond mere documentation. Projects should go further by ensuring that their tokens are managed by a third-party audited, immutable smart contract, which affirms transparency and compliance from all involved parties.

Pragmatic Valuation & Supply Oversight

Lower starting valuations can feel like a missed opportunity, but they pave the way for significant appreciation. Projects launched with already inflated valuations provide little potential for new investors, stifling growth and community development.

Keeping a limited total supply aids in better price oversight and responsiveness to market dynamics. It gives tokens more weight, complicating manipulation and making price changes more meaningful.

Proactive Token Oversight

Effective tokenomics is not a one-time setup—it necessitates continuous management. Here are some effective practices:

1. Strategic supply adjustments: Increase the circulating supply only during bullish markets. This avoids adding more tokens to a fragile market.
2. Repurchase initiatives: Execute token buybacks when selling pressure is elevated to stabilize prices and signify a project’s commitment to maintaining high token values.
3. Managed liquidations: Obligate large stakeholders to rely on market makers when liquidating substantial holdings to mitigate drastic price swings from sudden sales.

Long-Term Sustainability

The most successful initiatives regard tokenomics as an extension of product design rather than merely an exercise in financial structuring.

Well-thought-out tokenomics reflect a savvy product and dedicated team. Ultimately, your token stands as your premier marketing instrument—it fosters loyalty and aligns financial interests among users.

Referenced in this article