This article will give Web3 product designers an understanding of Web3 tokens, such as their tokenomics and token launches. It also explains why Web3 tokens change the game in terms of venture capital investing. Now retail investors have access to early-stage startup investements, and real-time price feeds make Web3 tokens highly liquid VC investments, compared to what is common place today. Stay tuned for future Web3 Design Courses where we will do deep-dives into products in the Web3 Stay tuned for future Web3 Design Courses where we deep-dive into products in the Web3 ecosystem.
All Web3 tokens have a pre-defined monetary policy controlled by the blockchain. For example, is it an inflationary or fixed-supply token? And if it’s inflationary, what’s the token’s issuance schedule? This monetary policy is fixed, and cannot be changed once the token has been launched.
As we’ve seen, most cryptonetworks have their own native utility token, which powers the network; however, smart contract blockchains give anyone the ability to launch their own token, defined by its own monetary policy and programmed with arbitrary utility. This led to an explosion of new Web3 tokens on Ethereum starting in 2017. Now tens of thousands of Web3 tokens exist across various cryptonetwork ecosystems.
Web3 projects often publish a website and a whitepaper that explains the team’s motivation and approach. This inevitably leads to a discussion about the Web3 project’s token, specifically its monetary policy and token distribution plans. Let’s say a blockchain launches with a fixed supply of 1 billion tokens. Pie charts often illustrate how these tokens will get distributed to project stakeholders. For example, a portion of the tokens are sold to public, and/or private investors, to fund the development of the project. This crowdsale is called an ICO, or initial coin offering. Other tokens are usually distributed to the founding team, the project’s treasury, or adjacent foundations.
Web3 tokens also democratize venture capital investing. Up until now, investing in early-stage startups has only been available to accredited investors through Series A, B, and C funding rounds. The 1000x gains already have been realized by the time retail investors have the opportunity to invest. Also, typically, VC investments are illiquid – after the funding round, it often takes years for the startup to find product market fit so that seed investors can realize a profit. Web3 tokens change the game. They are like highly liquid venture capital investments, with real-time price feeds, sometimes before the project launches.
So far, Web3 tokens have been successful at funding the development of Web3 ecosystems, but let’s now talk about some concerns, starting with the obvious one: scams. Anyone can launch a token and sell it on the open market. In the past, people have launched tokens without a legitimate project backing it. Scammers create intriguing marketing content and hype it on social media to create demand for their token, without any intent on building a product in the first place. When others start buying the token, the token price goes up, and the scammers dump their token supply on the open market. The token price then crashes, and the original investors are left holding a worthless scam token with no legitimate project backing it. This is called a “rug pull”.
Token launches themselves present their own problems. Who has access to the token’s crowdsale? Does the token get distributed to many individual retail investors? Or, are the crowdsales just available to big-money, private investors like VCs. If VCs, or the founding team, hold a large portion of the cryptonetwork’s token supply, then this calls into question the true decentralization of that cryptonetwork. Some argue that this is no longer a neutral, decentralized network, but one that is controlled by a large minority.
There is an alternative to crowdsales – something known as a “fair launch”. Satoshi launched the Bitcoin protocol in 2009. There was no crowdsale of pre-allocated bitcoin. Bitcoin nodes just started mining bitcoin, and the circulating supply of bitcoin grew from there. Yearn Finance, a popular DeFi protocol, is another example of a fair launch. It distributed 30,000 YFI tokens to early-adopters of the Yearn Finance protocol in what is called a “token airdrop”. Juxtapose these fair launches to other Web3 projects with token pre-allocations and crowdsales. The diagram above shows how Layer 1 smart contract blockchains distributed their initial token supply.
Perhaps from the perspective of Web3’s ethos – that of decentralized inclusivity – fair launches are preferred to public crowdsales, which are preferred to large token pre-allocations to private investors, founding teams, and adjacent foundations. I’m not trying to pass judgment here – it’s a complex issue that founding teams are experimenting with. Token launch is one thing, but the sustainability of the project over decades is another. The SEC definitely takes a stance on this. Anything other than a fair launch appears to the SEC as the sale of unregistered securities, which they intend on regulating over the next several years.
If you enjoy videos over reading when it comes to online learning then checkout the course on YouTube. This is part 5 of 7 in the Crypto Design Trends 2022 series. Also, make sure to stay tuned for future Web3 Design Courses where we will get into more interesting topics about emerging dApps.