Tokens are digital assets that are created, issued, and managed on a blockchain. There are over 2000 cryptocurrencies out there. If your token is to survive, it must be designed well. It must have value, scalability, utility, and the ability to withstand inflation.
Note that tokens have an algorithmically pre-set supply and issuance schedule that is difficult to alter at a later stage. Hence, being careful right from the design stage is imperative. How tokens are created and distributed, and injected into and removed from the platform are important decisions to be taken right at the outset.
I list below, important questions to ask at the time of launching a token.
Will you launch a Security Token or a Utility Token?
A Security Token gives the holder a stake in the platform. A Utility Token is a currency that can be used for purchasing goods and services within the closed economy of the platform.
=> Issuing a security token attracts more regulation and many projects have gotten into trouble with the SEC for issuing unregistered securities.
=> Examples of Utility Tokens are: BNB tokens entitle you to discounts on the Binance trading platform. Filecoin is used to pay for data storage space. BAT (Basic Attention Token) is used to pay for advertisements. Governance tokens (like COMP and UNI) give token holders the right to vote on proposals that impact the future of the project.
Will you launch a Single Token or Multi-Token Project?
Most projects launch with a single token. An example of a dual token platform is Maker. Maker has a stablecoin- DAI and a governance token- MKR. An example of a triple token platform is Steem which has- Steem, Steem Power, and Steem Dollars.
Will you develop a New Blockchain with its own cryptocurrency or generate tokens on an Existing Blockchain?
Most tokens are built on existing blockchains. Using an existing blockchain has the advantage of quick and easy implementation. Filecoin operates its own blockchain.
If you do decide to launch your token on an Existing Blockchain, then which Blockchain would you use?
Most tokens are launched on Ethereum. The ERC20 token of Ethereum is a convenient standard. Businesses do not need to reinvent the wheel and build a token from scratch. They can use the tried and tested token which will be interoperable with most other tokens that are also built using the same standard. Ethereum however is slower compared to other blockchains.
=> EOS for instance can handle up to 4000 TPS vs 15 TPS for Ethereum and creates new blocks every 0.5 seconds vs 10-20 seconds for Ethereum. Transactions on EOS are “sort of” free. Protocol and smart contract upgrades are easier on EOS. Another blockchain, Stellar Lumens has a confirmation time of 2-5 seconds and can support thousands of TPS.
(Other blockchains though are less secure, have a shorter track record, and provide fewer network benefits.)
How many tokens will you issue?
The total supply of tokens along with the issuance schedule must be decided in advance. A hard cap on tokens guarantees scarcity. In case there is no cap on supply, inflation is likely to continually erode value.
=> For example- Bitcoin has a hard cap of 21 million BTC. Currently, there are about 18.5 million BTC in circulation. As of now, 6.25 BTC are released with every block which works out to ~52,000BTC per year. This will reduce to 3.125 BTC from ~ mid-2024. Litecoin which is similar to bitcoin in many ways has a higher hard cap of 84 million LTC. Tron's total supply is fixed but is at a very high level of 100 billion TRON. Ethereum has no limit on the total supply of tokens.
Will there be a mechanism for Burning Tokens?
Burning of tokens is a mechanism whereby tokens are sent to an address from which they can never be recovered. Burning increases the price of tokens by reducing its total supply. Burning should ideally be linked to the usage of the platform.
=> Binance burns BNB tokens every quarter based on the volume of trades on the Binance platform. Maker burns MKR tokens based on the amount the protocol earns through stability fees. Ethereum Improvement Proposal 1559 (EIP1559) proposes that the bulk of transaction fees get burnt.
How would you divide tokens between the Creators (founders and developers), Investors, and Users?
The founders getting compensated for their work with platform tokens is definitely fair. However, excess concentration of tokens in a few hands (as measured by the Gini Coefficient) is dangerous. Wide distribution of tokens reduces the possibility of excess power in the hands of a few who might manipulate the system.
=> In the case of Filecoin (FIL), 5% went to the Filecoin Foundation, 10% to Investors, 15% to Protocol Labs and the balance 70% to miners.
(I’d point out that Andre Cronje (creator of Yearn Finance) has high credibility, among other reasons, because he didn’t keep a single YFI token for himself. YFI is among the best performing DeFi tokens currently trading at over $30,000.)
What is the minimum size of the Fundraising?
The project must determine in advance what is the minimum amount that must be raised without which product development will not be viable. In case the minimum amount is not reached, the amount that is raised must be returned to investors.
How would you divide tokens between Private sale, Pre-sale, actual ICO?
Tokens sales are often multi-stage with investors being able to avail different terms:
* Private sale is an early-stage sale to investors that is unannounced to the public. These investors take the highest risks and also get the highest discounts. A roster of high-quality investors at this stage adds measurably to the credibility of the project.
* Pre-sale happens prior to actual ICO and investors are offered a discount albeit a lower discount than that offered to private sale investors.
(Note that private sale and pre-sale investors who have received a discount might dump stock at the time of the ICO and pocket a margin between ICO price and early-stage price unless there is a lock-in period)
What would be the Unlocking Schedule for tokens allocated pre-ICO?
Tokens allocated to Founders, Venture Capitalists, and other Pre-sale Investors must have a lock-in period. The Lock-in period ensures that early participants are incentivized to improve the network and not cash out and exit scam.
=> Taking the example of Filecoin again, the tokens allocated to Filecoin Foundation and Protocol Labs vest linearly over a period of 6 years. As far as the initial investors are concerned, they are incentivized to opt for longer vesting periods. 6 months vesting gives no discount while 3 years vesting gives a 20% discount.
=> In the case of bitcoin, miners need to wait for 101 blocks before they can spend the block rewards earned.
Would you want to Reward Early Adopters for their faith?
Gaining users is among the biggest challenges for any new platform. Token distribution can be used as a means to attract users. An example is when a greater proportion of governance tokens called SUSHI were rewarded to early adopters of the Sushiswap protocol. This incentivised many users of Uniswap to jump ship and move to Sushiswap.
How will the token, balance the interests of Platform Users and Platform Investors?
Investors want the token to appreciate in value and platform users want a frictionless user experience. For the token value to climb, there must be a clear link between the usage of the platform and the token. So, as the platform usage increases, the token value also goes up. The token must actually add value and not just be an added layer of complexity for the user to navigate.
=> One criticism of Chainlink is that LINK token is unnecessary. Users are forced to buy LINK to participate in the Chainlink oracle ecosystem when they could have just as easily use ETH.
How to control for Token Velocity?
Token velocity is the number of transactions with a unit of currency in a given period of time. High token velocity reduces the value of a token. Even if the platform is very popular, the token will not be able to capture the value. Some of the ways to reduce token velocity are introducing (a) staking functionality, and (b) burning functionality