🔎 Tokenomics: The Good, The Bad & The Ugly

Out of 100 top crypto projects, less than a third generate more "revenue" (fees) than what's spent on inflationary incentives.

That is, very few are "making money" net of issuance.

Out of the 23 “green ones”, 10 are decentralised exchanges

This text will take you on a journey through some Token Terminal, Messari and CoinGecko data to elaborate how:

• only 2 out of 100 top tokens capture positive "inflation-adjusted cash flows";
• the market is not overpaying for networks that "make more money than they print";

✅ Which Networks Are "in The Green"?

The chart above is based on TokenTerminal's TotalRevenue (which sums all fees paid by users), and on each token's inflationary calendar.

If we exclude fees captured directly by supply side providers (like miners or liquidity providers), and only account for ProtocolRevenue, the figure gets grim. 9 tokens in the sample remain "in the green".

Let's take a closer look at these 9 tokens. Which of them have a mechanism in place to divert revenue to tokenholders?

The following table weeds out 7 tokens with no such mechanism. Most of them accrue fees to a treasury, whose allocation can be voted on by tokenholders ("governance"). A bunch implements what Cobie calls "fake staking": inflationary bribes to those who lock their tokens and choose not to sell.

Only 2 coins directly capture part of the value being created on the network: GMX and Sushi. One buys ETH/AVAX with fees and gives it to stakers; the other buys its own token (Sushi) with fee revenue and distributes it to stakers. That is, by locking up your tokens, you access a "dividend-like" stream.

🤔 Is The Market Caring?

The market is lenient. Issuing a fuckton of tokens is the fastest path to riches.

Networks with the highest nominal issuance attract both the most revenue and the most TVL.

In this sample, a healthy "revenue-to-issuance" ratio didn't translate into more resilience in the bear market. Quite the opposite. The scatter plot below suggests the "net profitable" networks (in green) had their tokens smashed down the most, in the past 3 months.

🎪 Insiders vs. Outsiders

Another hypothesis explored here is that allocating a higher portion of the genesis supply to the public is good for the sustainability of the token.

I tabulated the percentage each token reserved for insiders vs. outsiders (treasury allocations counting as "insiders"; only airdrops, mining programs & ungated public sales counting as "outsiders").

There's no clear correlation, but one can interpret tokens with higher "Outsiders' Share" have more chance of being ascribed a U$ 1B+ market cap.

In red: 0–25% to outsiders. In orange: 26–50%. In yellow: 51–75%. In Green: 76–100%.

However, it does not appear that these outsiders-friendly tokens did any better, this year, in terms of returns.

Performances (in USD) for the past 7, 30, 90 and 180 days. Tokens more concentrated in the hands of insiders did not fall more than their "more fairly distributed" counterparts.

⚖️ The Legal Conundrum

4 years ago I wrote about “The Immaturity of Tokenized Value Capture Mechanisms”.

On the immaturity of tokenized value capture mechanisms

It's become clear to me that the saga of tokenomics boils down to one simple question: how to distribute the value captured by the network to its tokenholders, without making the thing a security?

The Howey Test is 4-pronged: you get a security when there's (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit and (4) to be derived from the efforts of others.

Most token designs try to invalidate (3) and (4), by pursuing plausible deniability for "the expectation of profit" (like Uniswap's feeSwitch parameter being set to 0), or by making sure that profits can only be derived from one's own work (like "work tokens" do — see below).

📄 On Taxonomy

The go-to model in 2017–19 was that of “work tokens”: you put up the token as “something to lose”, perform work to the network (i.e. produce blocks, submit price updates) and earn the right to a portion of the revenue (fees) it generates. Basically a way to get “cash flows” without anyone “depending on the efforts of others”.

“Governance tokens” flooded the market in 2020–21: on these, the network diverts profits to a treasury, and coin holders vote on how the money is to be spent.

In 2022, the “veToken” and the “xToken” rose to prominence. The first is a more compelling governance token, where votes are mainly to control supply issuance parameters. "xTokens" are the closest we got to cash-flow producing assets: you stake the token and get a portion of the fees paid by users of the network (e.g. SUSHI, LOOKS).

Over the years, token designers have flown closer to the sun. The market has become more welcoming to new narratives. The chart below depicts an unprecedented spike in the turnover among top coins. The turnover is the number of new coins in a subset (top100 and top200 by market cap), on a month-to-month basis.

This past bull cycle brought unprecedented rotation among top coins. Bear markets painted in red.

🕳️ Conclusion

• The industry is flirting with more audacious token models (from a legal POV). The normalization of all-anon teams is probably a driver. Designs that directly capture value created by the underlying network are slowly losing taboo status.
• The market is not particularly favoring "net-profitable" networks. Nor tokens with higher genesis allocations to the public. Teams are incentivized to aim for a high FDV and rampant dilution. Fun fact: Curve’s $CRV supply will not be fully circulating until around the year 2320.
• Inflation and token allocation data is messy. Messari is probably the most comprehensive source, but there is no easy way to verify the numbers reported. Most of the inflation metrics tabulated for this article were calculated manually, starting from "official rates" and adding up early allocations that get vested. Genesis allocations also follow disparate naming conventions and implementation patterns. Today, it's practically impossible to check such data on-chain in a standardized way.

The numbers for this analysis are from June 19th 2022. They are here.