Nate [Token Dynamics] x Ethereum Cypherpunk Congress

my name is Nate I'm the founder of token Dynamics I'm going to be speaking about tokenomics for Cipher punks how to build useful valuable and secure applications that are built to last forever um so a little bit about my background I've been writing on tokenomics and related topics for the last seven years on eats sleep crypto.com you can find all about value acral token utility all these kinds of Concepts that you're probably familiar with I'm going to relate them to tokenomics today and I'm going to speak about how tokenomics are slightly different for protocols that are designed for maximum sensorship resistance all right so first of all start off what is tokenomics there's been a lot of debate around the semantics of this word uh I Define tokenomics as token and economics it's a portmanto it's shorter I use it because it's short not because it's the best descriptor and it's going to be the shelling point for what people call this in the future but there are two parts to economics it's supply and demand and so often people forget that they need to optimize the demand for their token to be used in the protocol and not just rely on artificial scarcity to pump the token price so that's the foundation of what I call the demand side tokenomics framework and again if you're interested in that there are Talks on YouTube you can look up demand side to economics it'll come up and I'm going to be building on that today relating it specifically to how we as Cipher punks want to be building our applications okay so if you've been in crypto for any amount of time you've probably seen a graph that looks a little like this is us we get 99% you get 1% this is the scam pump and dump VC model that they all love and so as cyppher punks the thing I want to talk about today is how do we design things to bootstrap value from zero without having to go to these predatory models that are not Democratic to raise funds or at least AC crew value to a token retroactively um the first part of this is going to be the supply so there are three points of supply side tokenomics that I want to cover and this is actually the easy part so a lot of this you'll be familiar with first thing in Supply emissions the biggest question I get is what should our emissions curve look like or how do we issue our tokens and like where do they all go things like that you can pick a number I'll talk about this later it's really like um the way I like to put it is a token with a finite Supply and no demand is worthless but a token with a theoretically uncapped Supply can still be valuable you've got Dogecoin you've got Monero Dogecoin was a little more valuable now it's more speculative but we used to use it to transfer between exchanges because it had a short block time um so the other part of Supply is incentives and again I'm going to talk a little bit about this later moving on to allocation second Point uh what is the user investor split you're going to see stuff like this the 99% and 1% um there's a wide range of of bands that you can do in this like there's a wide range of of uh team and investor and all these kinds of allocations and so these are the kind of questions that I actually recommend people not get bogged down in this is really the easy part and there's a lot of precedent for what makes for a good allocation to users to investors um the main thing you want to think about in this is the incentives you want to ask like why are we giving people certain allocations especially when you're coming from a blank slate if you're building a protocol that is bootstrapping value from zero you're not going to be beholden to VCS in the same way and you can think objectively and critically about where your token supplies going and why then the last point and I think the most important point of the supply side of tokenomics is the distribution so I've listed a few distribution mechanisms here make no mistake proof of work is a distribution mechanism before it is a consensus mechanism we needed Bitcoin to bootstrap to get it into the hands of people so that we could do more complex systems like proof of stake or maybe not more complex but uh different consensus models like proof of stake that relied on an existing distribution of tokens um icos were another popular distribution mechanism a fantastic one by the way where they're going to make a comeback uh airdrops and so on so these are the points of supply side tokenomics and uh but the overall goal so far for protocols has been manipulating the supply as sort of a central sudo Central Bank in order to create artificial scarcity and pump the token price and that is fundamentally predatory it's something we avoid in our designs at token Dynamics and it's something I'm sharing with you because we're going to offer some solutions to that some Alternatives and so this here this triangle is the tokenomics tremma it makes up it's made up of the three principles of demand side tokenomics so the first one is protocol utility this is the value that you're creating if you've read 0o to one by Peter teal he talks about you want to maximize the value that you're creating in a creative Monopoly where you are the only person doing whatever that is and then you want to capture some of it he uses the term value capture I like value acrel it's not as offputting to people because it doesn't sound like you're stealing something from someone else there is no fixed Pi so you can acrw value to a token in um you know as many ways as you can create it you can even ACR more value than you create but that turns into a Ponzi and I I might get into that later but the second point is value acral and so some people will call this token utility the premise of demand side tokenomics is to use a token in a way that causes it to acre value and generates demand for it from the use of the protocol so you don't just want to create something valuable you also want to uh acrw value by using the token in that protocol in a certain way and we're going to talk about some examples but I'm outlining the high level first the third point of demand side tokenomics is economic security which is fundamentally incentive alignment um Economic Security technical security is a lack of bugs in the code Economic Security is a lack of bugs in the incentives so you want to have aligned incentives all the way around and what I'll talk about is there are actually tradeoffs between these three things which is why it makes for a good framework in thinking about your protocol design the um high level here is demand side tokenomics maximizes users demand for a token not speculative demand for a token and so as Cipher punks when we're creating these protocols that are coming out of nowhere like Bitcoin we need to have good economic models that are going to bootstrap value automatically rather than asking people to buy in on a concept and then later uh you know dumping 1% of the token Supply and liquidating the entire amm or order book to zero and so the the uh Capstone property here that that you get emergently if you optimize for all three of these is what VCS called defensibility so it's basically the economic Moes that your protocol has that allow it to sustain itself long term with a competitive advantage and in our uh in our world we're thinking about the kind of economic incentives Financial alignments that you can make that allow it to survive without additional help or upgrades from the team so we're really thinking of this holistically and I think defensibility is the right way to define that for us and the uh the other point that I wanted to make a note of is cipher punks need to acrw Value because if you're building anything important you're G to have people after you you might have legal battles to fight you might be tornado cash found founder you might be building something that really needs value acrel and if you don't have that you're relying on the Goodwill of your community and that is not fundamentally as sustainable as just acre value to the Token fundamentally by inserting it in a way that captures some value uh in the protocol getting some claps here love it okay so uh let's see did we skip ahead no okay um so I want to talk about distribution a little bit here yeah I might might actually talk about this later I'm going to skip back to the slide let's go here so the tokenomics trilemma like I talked about there are tradeoffs between these three things it's what makes this this trilemma a good way to think about things is you can optimize for two at the cost of the third and so the uh main objective is to optimize for all three using some creative mechanism designed some toonomic mechanism or uh game theory that you're inserting into your protocol that solves for each of these uh points so the first example I like to use is unis swap um the first time I started using this was like few years ago they were talking about the fee switch they're still talking about the fee switch this week they're talking about the fee switch and they're basically saying are we going to take money from users and charge them more or are we going to take money from LPS and cut into their already negative margins and uh this is a byproduct of Unis swaps failure to capture value initially um so you can see they actually have a lot of Economic Security there are no token price dependencies in on uni in the Unis swap protocol beyond their front end and the very few things that they vote on um but they struggle between protocol utility and value acrel so there's a trade-off there second example uh teral Luna classic uh token price dependency was what both caused it to acrew a ton of value because you needed Luna to use the protocol for everything and uh it also compromised it because there was a token price dependency so there's this inherent trade-off between a lot of toonomic mechanisms around value acrel and economic security synthetics is another example and they recently stepped down their value acrel by allowing people to Mint SSD with ethereum as collateral so they weren't quite as overweighted like Luna was with anchor on USD on um us uh and they are able to just be the uh substrate you know collateral asset for all of the synths in their ecosystem so they're actually stepping down their value acrel in order to get more Economic Security third example Bitcoin uh Bitcoin has a security problem it's a crisis and it's kind of slow motion and it's you know been ongoing for years we've all seen it coming uh they now have you know they're confronting the possibility that they might not have enough fees to pay for their security to pay miners to keep hashing on bitcoin they have three options they can either raise the block size uh do a tail emission so raising the block size um yeah they've shown very reluctant to do right we went through the Block Wars uh seven years ago uh seven to nine years ago they could do a tail Mission or they could move to proof of stake um and so right now they're kind of uh threatening users with less security and users meaning individual users protocols that are appending transactions and using Bitcoin as an L1 um you know various types of users they are trading those users uh economic secur or like usefulness in the protocol um with uh you know their design um and so they're compromising their Economic Security it's a trade-off between protocol utility and Economic Security okay so practically generating demand uh for a token in your protocol um generally in a protocol design you can think of a protocol like a Marketplace between multiple groups of users so say you have Alice Bob and Charlie and Alice wants milk Bob wants eggs Bob wants chickens and each of them have like one of the other things that the other has this is called a coincidence of wants in economics and it's supposedly the reason money was created but no one really knows the history of money um so but the idea here is that a protocol can disintermediate a central solver and so any protocol that you would build will have this kind of Coincidence of wants you can think of it very simply stack up the list of things that people on one side have list of things that other people on another side want and then you strategically insert some mercenary user that you pay with something from the excess of the have side and then you optimize the protocol with uh you know some kind of mechanism to facilitate this kind of Market um and the essential questions that you're going to ask here are who can you charge so like who's willing to pay right and who has the money to pay for things uh who do you need to pay to do things and by what mechanism are you actually organizing everybody in the protocol and so this gets into the concept of tokenomics so these are ways that a token can be inserted into a protocol that cause that token to acre value that is also doing something useful in the protocol that is providing uh you know a missing piece in this solver optimization sort of marketplace model I want to talk about the uh there's actually a kind of a good direct mapping to the kinds of assets we already have in traditional Finance so mechanisms and tokens are going to more or less resemble three asset classes from traditional finances are equities Commodities and currencies and thankfully there are already precedents for how to Value these things so if you look up online you can see how do I value a currency how do I value an equity or how do I value a commodity little more hairy there but we'll talk about it so first example tornado cash took a0 3% fee from uh transactions and it acred it to the treasury and you can value tornado or could have valued tornado when they had a treasury using a discounted cash flows model um but this is kind of like a you know just a service-based business charging a fee um and you can model it like uh company that has regular revenues it's just a very straightforward way to acre value to a token and this is the thing everybody's been avoiding because of Regulation which we'll also talk about later but um that's you know maybe the most direct way that you can ACR value to a token and it's a great one there's nothing wrong with it it's fantastic especially if you're bootstrapping from zero and you have no reason to fear us Regulators uh which we'll also talk about in a little bit maker is also Equity likee so the maker token has a buy back and Burn System basically like an equity it's you know a lot like paying a dividend or buying back a share of stock it's just technically not that so uh both of these are value valed similarly to equities you can use discounted cash flows and then you have a couple Frills in your models to account for the different behavior of tokens um but basically I don't think I mentioned this before but the um you know any model that you have is going to track the ways that the token is used and um and account for that in the uh model itself so it might not be directly a discounted cash flows model when you're thinking about how much is this token worth but it's going to look a lot like it second is uh commodity like so you look at the best substitute for this when you're trying to understand how value URS to this token and again these are helpful mental models for designing a token it's not necessarily going to tell you what the price is at any given time but with adjustable assumptions you can zero in pretty close to what the intrinsic value of a token is and that's what we're concerned with because there are what I call Price floors and I've written about extensively the minimum possible value for a token to sustain longterm and that's what designing things to resemble trafi assets will do it'll give you an actual minimum price based on its use in the protocol I'm going to show that with the currency like I might might do a sample calculation but um with commodity like tokens and mechanisms you know BTC supposed to be digital gold um they you know you can use the closest analog of gold and say if BTC had 10 times this market cap what would each or uh 10% of this market cap what would each Bitcoin be worth um that will give you you know some number that you can use to approximate what BTC is worth and if you're considering a commodity like uh mechanism in your protocol then you can compare how the commodity like mechanism would acre value uh as opposed to to the equity like mechanism that you're considering and the uh most useful information in designing a token and designing a protocol is going to be the comparison between these mechanisms mechanisms rather than the actual uh information and price that you get on the other side um I have an as asterisk here next to eth because eth people like to say is digital oil but it's actually not really because there's a gas market so eth has sort of turned itself and it has each of these three properties but it's turned itself into uh or has been from the beginning a currency for a small Market of of block space and they've also become you know the eth token has also become Blue Chip collateral in eth based defi so it's got some currency like properties it also pays out a dividend so it has some Equity like properties but fundamentally it's bootstrapping from something like a a currency um and I have written at the bottom here Standalone gas tokens are not that valuable they're actually just currencies for a really small particular market and when you have a digital commodity like block space or something like that that is more or less uh fungible between chains like for the end user they're not particularly caring whether something is on ethereum or Bitcoin or whatever else uh it's not going to acrew that much value to make your token just a gas token so that's another question I feeled a lot is uh can we just build this as a gas token and expect that it becomes valuable well maybe from like a speculative standpoint but not fundamentally um and so the third asset class that tokens and the mechanisms they use tend to resemble are currencies uh currencies can be valued with a thing called the equation of exchange which is just mathematical notation for the idea or the axium that a currency has to be worth at least as much as the things that it buys so if you have a currency that's really private and really good for you know really liquid in certain markets like the dark web this currency is going to be worth in aggregate the value of all the goods that it's paying for accounting for that each unit might be spent multiple times that's called velocity and that's a part of the equation of exchange so this is where we see in practice the strongest price floors Monero has been slowly trending up in keeping with adoption over time and I've been saying for the last couple years that it's because of this property it's the currency like mechanism it's that Monero is used as a currency and so as its adoption and saturation of the market both increase uh it is increasing in value steadily and there are some other factors on the supply side that I won't get into that are keeping it more stable as well synthetics another currency like token it's used as collateral for synths so the fundamental value of snx is proportional to the demand for synthetic assets that are built on it uh and so it's used as a medium of exchange for uh you know buying synthetic assets or a medium of exchange as collateral for these synthetic assets okay so back to supply side uh I have Monero up here Supply doesn't really matter that much um people get caught up on like how much Supply should we issue what's the number is it 100 million 200 million and the answer is pick your favorite it doesn't really matter that much uh Monero has a tail emission there is an infinite number of Monero that will ever be Minted as long as Monero is online it's going to Infinity uh the key is that the demand is outpacing the supply so that's what you want to be thinking about when you're trying to design an economic policy um the emissions curve also doesn't matter a ton it's just whether you get the adoption right and so a static emission curve is actually probably not the best because who are we to forecast how quickly somebody will adopt our protocol or our token uh Satoshi had no competitors so it didn't matter that he said let's have it the emissions every four years um he could just do what he wanted he had a a blank canvas um but the point is don't stress too much about Supply um allocation is much more more important and you have this I have this blunt question like why are you giving away tokens and that is both rhetorical and literal like I want to ask why are you giving away tokens because there can be good reasons to give away tokens you want to think about the incentives that the people you're giving those tokens have to hold it um and again if you're integrating the token with some kind of toonomic mechanism then people are going to want to hold it because they need to in order to use your protocol the challenges for protocols like stepen for example come in when nobody wants to hold the token they've just given it away to everybody you know third world token farmers who are dumping them to pay their bills for their next meal you don't want to do that um so you have to have really good reasons to think about why you're giving tokens away to people especially when you don't have to give them to VCS who are going to demand exit liquidity and things like that put a lot of stress on your protocol and your token price um so distribution the third point of supply side tokenomics uh choar Jane from multicoin Capital had a has a really interesting take that uh new markets or bull market Cycles are kicked off by or at least frenzies are kicked off by a new distribution mechanism and so these are kind of the metas that have been for the last uh 10 years but but uh proof of work was dominant until 2015 when people realized what crypto was and uh you know the early adopters got in that that 133% uh of the early adopters uh then icos in 2017 initial Dex offerings and initial exchange offerings in 2019 airdrops became a meta for token farmers in 2021 carried over into points in 2023 and I'm going to talk a little bit about uh what 2025 might hold but before that I want to loop back around to this nope that's that generating demand got it okay so uh we have a really interesting event turn sort of turn of events this week uh the regulatory conditions have changed in the US we were heading one way we're now maybe heading another and um so the sitting president of the United States in 3 months will own a crypto lending Market that I I don't know I don't know exactly how bullish that is but it's not bearish and it also has implications for bootstrapping Value to your token uh raising it has actually a lot to do with the democratization of uh access to Capital um and so we'll start with some of the pros here uh we might actually have sane Regulators who are willing to hear some of the arguments that are made for crypto uh the first crypto Wars if you remember in the 9s were won through us um you know regulation through the by leveraging the law in the United States and that was because the US had a functioning court system we now have someone going into office who uh whose supporters at least are all very in favor of a functioning court system and all the signs seem to me that this is going to um change the you know change the degree to which US politicians are following the laws that they purport to um so we may get an Administration that is favorable to crypto I don't like the idea that Cipher punks wait for favorable regulatory conditions I think that's silly but I do think that it's worth considering that uh maybe the most anti-establishment thing we can do is um take advantage of the condition that exist right now um on the con side you know to the the counterargument here is his cabinet's going to be full of VCS and VCS don't want to democratize access to Capital and so um while we may have the opportunity to work within the US regulatory system in the next couple of years uh there's probably going to be some push back and people are going to want kyc and uh proving that you know that people investing are accredited investors or whatever um so there are some potential downsides ahead uh regulatorily as well um and and furthermore the you know the looser the regulations the weaker the ecosystem the more strict the regulations uh more strict regulations will push defi to become better in an evolutionary way long term we're not going to have that opportunity anymore which is uh both a a pro and a con so distribution and this is going to be the the Practical bit here that I'm going to leave you with I see three main distribution mechanisms we've talked about how to bootstrap value to your token now we're going to talk about the practical ways that you can issue a token that are going to work especially well with demand side tokenomics a return to icos so Matty tokenomics has a really great protocol called Legion it's icos 2.0 and I would recommend people check it out if they're thinking if any of you are thinking about raising or bootstrapping Capital this is a good uh sort of more regulator safe way to go about it and these are going to go from compliant to what I call a compliant without the need to comply from left to right but a return to icos is a trend that I'm looking forward to seeing as a token economist second is auction Primitives so Factory Dow has a really cool auction it has a binary search mechanism that allows you to approximate the actual or the fair market value of a token while bootstrapping it um this is another fantastic option and it's moving more toward the a compliant side which is not needing to comply because you're not breaking any rules it's more a gorist approach and the third is what I call zombie Forks so uh a zombie Fork you're familiar with a Vampire Fork Sushi swap did this extremely well in uh 209 2020 early OG defi um they still have liquidity Sushi swap is still the main uh LP pool for several Blue Chip assets that's incredible all they had to do was promise people tokens so a zombie Fork is something a little different but in the theme of Mythical Monsters uh there are hundreds of thousands if not millions of tokens out there where the whole Supply is like just hanging out in a liquidity pool nobody's doing anything with them and these tokens exist you can just use those tokens in your protocol there's nothing stopping you from doing this and with demands side tokenomics you can bootstrap value directly to those tokens so if you have a good de demand for your token and for your protocol you can just pick another token and use that so these are kind of a compliant strategies that we're pioneering at token Dynamics we're doing R&D on this kind of stuff we're putting our resources into this and if these kinds of things are interesting to you or if token uh demand side tokenomics is something you'd like to explore can reach out to me this is my link tree and you guys will be able to reach out to me here and uh you can find us on Twitter at token Dynamics all right any questions we might be if we have time uh we can do one y we got one here I i' probably got a bunch but just because you touched on Sushi swap do you want to uh obviously I know what happened with sushi swap do you want to like um say more about like the whatever the path the curve of of sushi after it was um initially issued yeah I mean which part of it would you like me to speak to I don't know that I have even the expertise that you do actually I'm I'm curious what you're what you're thinking I'll touch on well I guess I'm I'm I'm I'm I'm personally interested in how doable like uh vampire attacks are and different kind of vampire attacks and so what did it look like was it like a big burst of like everybody loves Sushi because that was a burst you needed to get it off the ground or was it like you know Slow Burn or I think the opportunity for sushi swap is kind of passed I think vampire attacks are really difficult um although yeah so to to sort of answer that question I think um Sushi swap worked because people were frenzied about aird drops and back in the time of like yield farming and you know the uh the food token era of um all of these tokens that were just named after food uh that kind of approach worked because people had a legitimate expectation that those tokens would be going up in value in the near future um you would need the same kind of frenzied conditions to pull off a vampire Fork now um but I I think it's still possible and as we go into what is potentially another uh bull market there might be the opportunity to Vamp vampire attack things again um I'm not sure whether the uh whether Sushi swap could have succeeded today for example um but something I have seen with another vampire Fork that people don't actually know too much about is uh tether against usdc so tether charges a 0.1% Redemption fee but they wave it for themselves so they can uh keep people from redeeming tether while uh anytime the market dips on the tether to usdc pair they're able to buy up uh usdc cheaply redeem it for tether and Arbitrage that you know 0.1% uh so we are still seeing vampire attacks but it's Slimmer and Slimmer margins um so that maybe could answer the question but I don't know that I could speak to the particular curve of sushi and how they executed it I have to do a full case study and be super interesting I mean that was a more interesting answer to be honest I'd keep talking about it but obviously we got to start yeah let's keep yeah for sure I'll find you after yeah thanks thank you all right thank you guys thank you Nate