Tokenomics deep-dive part 1: Supply
Supply-side tokenomics — Token distributions, allocations, and vesting schedules
If you’re a web 3 founder looking to release a token, you should heavily consider the layout of your tokenomics. Tokenomics is the study of the supply and demand of tokens. Moreover, tokenomics is concerned with the asset mechanics and its implications on adoption and future market prices.
Designing sound tokenomics will set your project up for future growth while satisfying early investors and the community alike. On the other hand, bad tokenomics will fail to incentivize use, and the token’s market price will suffer.
We’ve reviewed the tokenomics of various web-3 projects and identified the major areas of study to be:
- Value accrual
- Human behavior & game theory
In this article, we’ll discuss the supply side of tokenomics — who gets to receive tokens, how many they receive, and when they receive them.
Best practices for token allocations
It’s important to allocate tokens to the right groups to compensate stakeholders and incentivize adoption and long-term holding. Though there are some unique cases, tokens are usually vested among five main groups:
- Core Team & Advisors
- Private Investors
- Public Sale
- Ecosystem Incentives
Core Team & Advisors
The core team & advisors category represents founders, employees, and project contributors. These tokens generally reflect the team’s equity ownership of the project. The core team & advisors should be allocated 15–25% of the total supply.
Private investors are people who have purchased equity in the project. This equity can be represented as traditional equity, tokens, or a mixture of both. It’s also important to note that they receive the tokens at a heavily discounted price to the ICO. Private investors should receive approximately 10–20% of the total supply.
The treasury represents the underlying value of the protocol and gives investors insight into the project’s runway. The treasury should generally receive 5–15% of the total supply.
Public Sale tokens are Sold to the general public at launch. The public sale should receive .5–5% of the supply. It’s also worth noting that in recent years public sales have been replaced by incentive initiatives like liquidity mining and airdrops.
Ecosystem incentives are used for growth initiatives at launch and are usually managed by a smart contract that emits the tokens to the necessary protocols. This allocation of the supply is used to incentivize the network through incentives including:
- Contributor Rewards
- Mining/staking rewards
- Growth initiatives
Ecosystem Incentives should take up 45–55% of the total supply and be distributed over 4–8 years to successfully bootstrap a network effect.
Token vesting schedule
While the token allocations determine who receives how many tokens, the vesting schedule controls when they receive the tokens.
Here are some supply terms you should know:
- Token vesting = Emitting tokens to specific groups and stakeholders over a set amount of time.
- Inflation rate = The velocity/rate at which more tokens release into the market.
- Cliff = The lock-up period before funds are vested.
When creating vesting schedules, you should consider the early investors and the community. The aim is to create a schedule that introduces a steady amount of inflation to the market over time and favors all stakeholders.
Overinflating token supply will dilute the value and cause investor morale to decline. Alternatively, you must ensure the token has enough liquidity at the right time so users can swap the tokens with low slippage.
Balancing the supply and demand is no easy task, but there are customary practices amongst most projects that can help to eliminate the guesswork.
The two most significant allocations that undergo vesting are core team & advisors and private investors, so let’s focus on those.
It’s ideal to subject core teams & advisors, and investors to a cliff of at least 6 to 18 months with linear vesting after. Cliffs of at least 6 months reduce inflation and lower the chance that early holders will dump the token. The vesting duration should occur over 24–48 months, depending on your schedule for inflation.
Designating a longer cliff for the core team & advisors compared to the investors is a great way to help stabilize inflation and show your community you’re aligned with the long-term success of the project.
Here’s what we recommend for token distributions:
breakdown of proposed allocations & vesting periods
Ecosystem incentives and public sale tokens release into the market at launch. As previously stated, ecosystem incentives are controlled by a smart contract that facilitates emissions to the various incentive programs.
Tokens allocated to the team and advisors have a cliff of 18 months followed by 30 months of daily vesting. Daily vesting is preferred over unlocks that release large amounts of tokens at once because it helps to regulate inflation as stakeholders only have the ability to sell at the rate at which they receive the tokens.
For private investors, 5% of their allocation is provided at launch to provide instant liquidity, allowing them a chance to stake their tokens and interact with governance. The remaining funds are withheld until the 12-month cliff, followed by 12 months of daily vesting.
If for any reason you choose to allocate 5% or less of the token supply to investors, the cliff can be decreased to 6 months.
Lastly, the treasury receives 10% of its allocation upfront to support the growth of the protocol. The remaining tokens get vested for 24 months of daily vesting.
We’d also like to note that the token supply doesn’t have to be fixed, and vesting schedules can change — with the permission of the community and stakeholders — to complement the market price and overall health of the asset.
After setting your token distribution, you should observe the market and consider reducing the velocity of tokens if the selling pressure is too high.
Tokenomics is an emerging study, and many things are changing FAST. These guidelines should be viewed as initial suggestions to aid your team in designing your project’s tokenomics. It’s also important to remember that the mechanics of every asset is different, so the token distribution should complement the project’s unique attributes.