TL;DR

It’s also estimated that 9 in 10 blockchain projects will fail, and an average lifespan of a token is just 15 months.

With success rate this low, I want to share my thinking to identify the projects that could survive and flourish.

Coinkickoff Research

The problem is – there are so many projects, but our time & energy is limited. It would be great to spend days researching one token, but crypto moves fast so save some energy for the decision making.

That’s why I focus on the most important parts of tokenomics that really matter.

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Start with Why

According to Sinek, “very few people or companies can clearly articulate why they do what they do.”

This is even more applicable to crypto projects and their tokens as well. It seems like projects pop-up daily based on a dominant narrative at the time.

I believe that before investing in a token, spend some time to understand why a project needs a token in the first place.

This can be broken down into three questions:

1. Why does the project need a token?
2. How does it work?
3. What does it do?

Looking for the Real Reasons for Token’s Existence

Actually, I believe that most projects don’t even need a token to function. Think if the projects below really need a token to function?

• DEXes and DEX aggregators
• Collateralized stablecoins
• Lending protocols
• Yield aggregators
• Wallets.

Ignas | DeFi Research @DefiIgnas

1/ Do #DeFi protocols really need a token to work? 🧵

10:03 AM ∙ Oct 27, 2022

508Likes

121Retweets

For example, it’s possible that the vampire attack by Sushiswap might have compelled Uniswap to issue their own token. $UNI has been for a while like a nuisance but thanks to potential revenue sharing finally launching, UNI starts to make sense.

In any case, most projects issue a token anyway. There are obvious reason why:

• Raising money
• Building a community
• Bootstrapping liquidity

So many protocols treat tokens just as a fundraising tool (obviously, they don’t say it openly).

But great projects are those that have deeper underlying reasons for the token to exist. These are well-thought features that are not that obvious:

• Distributing ownership and power (Who decides which token is listed on Aave or where/how rewards are distributed?)
• Risk management (Who evaluates the risk and takes responsibility if protocol is insolvent?)
• Option for future utility (First launching as a community/fundraising tool, but features are added to decentralize the protocol and relinquish ownership to the community in a planned manner).

Understand the real reason a project ISSUED a token before investing, that goes beyond fundraising goals.

Analyze How the Token Ecosystem Works

The “how” part can be complex, especially for projects that use innovative game theory.

Every project has the tokenomics explanation in its documentation section. Finding ‘how’ it works is easy. Understanding it well is more challenging.

I believe that the best token designs have a flywheel effect - a virtuous cycle that drives adoption, usage, and appreciation of the token.

This creates a positive feedback loop that reinforces the token’s ecosystem.

veTokenomics by Curve is probably the most copied design: veCRV encourages long term holding, incentivizes liquidity and attracts other protocols to build on top of Curve.

Remember, however, that token designs vary in complexity, with some being intentionally complicated to deceive investors, and others offering unique innovation and creating value.

Your challenge is to differentiate between the two.

After all, “If you don’t understand where the yield comes from, you are the yield.”

Staking is probably the simplest and arguably most useful feature of a token. And if a project manages to reward users with ecosystem airdrop tokens, then it’s a strong value proposition. Think of Celestia’s TIA or ATOM by Cosmos.

Yet once in a while a token appears that is so unique and different, that it changes the trajectory of the industry. The originality of tokenomics can push the industry forward and jump-start a new bull market.

My goal is to find those tokens before the rest. Here are 7 examples from the past:

Zero to One in DeFi Tokenomics: Top 7 Innovative Tokens

IGNAS | DEFI RESEARCH

2023年1月24日

Read full story

Look for Tokens With Value Generation to Holders

After understanding the underlying reasons why the token exists, and how it works, its time to find out how a token generates value to investors. We don’t want a token that doesn’t have any use case.

Examples:

• Paying fees
• Revenue sharing
• Discounts on fees
• Governing the protocol
• Used for liquidity/risk management

Be wary of projects that raise money and then neglect their token holders.

Most popular examples are revenue sharing from protocol fees. Or some projects have integrated the token into the core functioning of the protocol.

For example, Pendle with its vePendle design is pumping. vePENDLE rewards users with boosted LP APY and the share of protocol revenue. And since Pendle managed to position itself as the yield/points farming hub of DeFi, the token benefits from increased adoption/TVL and other metrics.

vePENDLE also give right to vote on incentive distribution. Overall, vePENDLE tokenomics are simple and value accrual is straight forward.

Evaluating Demand and Supply Mechanics

Evaluate the market cap (MC) vs fully diluted valuation (FDV) ratio.

A low MC/FDV ratio means more tokens are going to be released to the market, putting downward pressure on price.

Consider who will buy those newly issued tokens!

I agree with this qw that FDV is a meme in a short run. Just look at how much Worldcoin recently pumped!

But you probably don’t want to hold these tokens when the bear market kicks in. In the end, the real demand should offset the supply increase.

My current thinking for this cycle is short to mid-term: market cap matters more than FDV as long as major unlocks are 6 or more months away.

Assess Token Allocation

Assess a token’s long-term potential by understanding the token allocation. There’s no simple answer what allocation ratio is the best. It differs per project and dominating narrative at a time.

Remember the ‘Fair launch’ tokens with 0% allocation to the team?

Everyone is focused on that fact, that too big allocation to the team can lead to sell-offs.

Yet small allocation to the team is also a problem: too little can undermine the team’s financial motivation to build.

Andre Cronje famously wrote in his “Building in defi sucks (part 2)” blog post that giving 100% of the tokens to the community was a mistake.

Building in DeFi sucks

I still have all the responsibility and expectation, except I have 0 of the reward or upside. Don’t do this, I was an idiot. - Andre Cronje

It seems the ‘fair launch’ trend is out of the window for now. The last attempt was BRC20 tokens but 99% of them quickly inflated away…

Approach for Long-Term vs Short-Term Holding

I focus on mid-to-long-term holding so I look for tokens with a long-term linear unlock schedule (no big cliff unlocks) and MC/FDV ratio above 0.8. Team and VC allocation around 30%.

If your focus is on short-term trading, you should master token analytic tools:

• Etherscan: Check the ratio of tokens held by whales. You should also check if tokens are locked in a smart contract or held in a single wallet address.
  

(Example: Top 100 holders collectively own 89% SNX, but in fact 32% are locked in staking)

• Dune: For dedicated project dashboards or community build dashboards like this one by DeFi Mochi.
• Nansen: Find out who holds the token and where are they flowing.

Other less know tools below:

Ignas | DeFi Research @DefiIgnas

1/ Staying on top of the #DeFi & #NFT game requires research and analytics tools.

These are my top 10 under-the-radar resources to help you stay ahead: 🧵

8:06 AM ∙ Jan 26, 2023

609Likes

243Retweets

If you are looking for the 100x tokens, I’ve shared 5 strategies in the previous blog post:

How to Find 100x Gems: 5 Strategies

IGNAS | DEFI RESEARCH

3月20日

Read full story

Assess Real Liquidity

Check if there is real demand for the token and if you can buy it.

Don’t rely on trading volume alone as crypto exchanges are notorious for “wash trading”- buying and selling tokens from themselves to create an illusion of demand.

Check liquidity depth on Coingecko or Coinmarketcap to assess the real liquidity.

There are sometimes unique token designs, but the liquidity is low which means big investors who can push the price up cannot come.

Features of the Token Come Last

The “what” part is straightforward - it’s the features of the token, such as voting, staking, VIP access, payments within the app, or burn on every transaction.

In my experience, projects that don’t know “why they do what they do” often focus on offering the most features possible. There are all over the website with intricate graphics and design to entice you to BUY NOW.

and regret later.

However, don’t fall for simple marketing - look at how these features support the protocol’s growth and create real value for token holders.

I liked this simple approach by Crypto Linn to invest in protocols that make their users rich. A simple yet powerful framework.

One to three killer use-cases are all you need.

Keep It Simple

Finding the next gem token can be a challenging task, especially with the sheer number of new tokens being introduced on a daily basis.

It’s difficult to keep up with all the new projects and conduct thorough research on each one of them.

That’s why I kept this guide short and simple – it can be summarized in just 6 actionable points:

1. Purpose: Understand why the token exists and if it’s worth your time.
2. Function: Examine the flywheel effect and potential for long-term success.
3. Value: Look beyond flashy features and focus on real value for token holders.
4. Dynamics: Consider token allocation, MC/FDV ratio, unlocks, and buying pressure.
5. Liquidity: Check the depth of liquidity and demand to evaluate token value and growth.
6. Analytics: Master tools for informed decisions on investment and selling.

Disclaimer：

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