Tokenomics is essentially the combination of token demand and token supply, which allows a Web3 project to achieve high token liquidity. It allows the use and exchange of token in the project’s ecosystem, increase its demand amongst the users and avoid token inflation. Join us on this episode of Diving into Crypto, as Jason Fernandes, co-founder of AdLunam, shares insightful information about the importance of tokenomics in Web3 projects.
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Transcript
BUILDING GREAT TOKENOMICS - JASON FERNANDES
Participants:
JP ( Host)
Jason Fernandes ( Co-founder of AdLunam Inc)
JP
Okay, ladies and gentlemen, as we said before, we're going to flag off our program Diving Into Crypto today, Thursday, the 7 July. Flagging off this program with the co-founder of AdLunam, a master tokenomist, and advisor for various projects. He's been quoted numerous times in various publications like CoinTelegraph, Bitcoin Talk, and so on. A well known person in the crypto space has been a blockchain speake as well. Give us a reaction since I know that you may be putting your hands together, you may be freaking your head out, but give us a reaction on Twitter spaces to offer a warm welcome to Jason Fernandes. Jason, hey.
Jason
Hi, everybody. Thanks so much for that introduction. Jervis, how's everybody doing today?
JP
It looks awesome. The room is filling up and people are jumping in, so that's absolutely fantastic. And Jason, I'm so glad to have you on the show today. I know that obviously we've seen a lot of your work. We've seen a lot of what you do in this space, but the room is filling up with people who want to know so much about tokenomics. And ladies and gentlemen, before we start, I want to share with you that the views expressed by the , of course, belong to himself and that all information shared is for education purposes primarily. Right, so. That being said, this is JP from Adlum, Inc. Speaking to you about Web3. Let's get started. Jason, before we begin, please tell us a little about what drew you into the Web3 world.
Jason
st heard about Bitcoin around:JP
Okay, that is something that drew you into it, was it you stumble onto it along the way in your journey in tech? Is that what happened?
Jason
nd this was around when I say:JP
Awesome seems to be that it's a classic case of somebody that's just found their love as they were doing things that they enjoyed in found something new to love as they were going through the journey of finding this journey in tech, right? And it's absolutely wonderful. So Jason, a lot of us in this room, to be honest, me, I'm one of these persons as well. The moment I hear the word tokenomics, I think about numbers, I think about the economy, putting the two of those things together. But I know it's important, right? And I know that this is a space that you can shed some light on. So very briefly, but on a broad level, Jason, what is tokenomics and what is not tokenomics?
Jason
Sure, that's a great question. Let's start with sort of a traditional equity based company like, let's say a Web2.0 company. The focus of Web2.0 companies, for example, was to grow value in their equity. So for example, if you're an investor, an equity based investor in a company like a traditional Web2.0 company, the company is structured in such a way that value accrues to equity holders. Now in a Web3 company, particularly where cryptocurrency and tokens are sort of like the main area where value is generated, you really have to sort of reimagine your business from the perspective of having a token and building value in that token to where everything that you do, all the utility and value that you provide to users, go towards a token.
Jason
And because oftentimes that token is limited in supply, basically the only way for value to be expressed is for that token to go up in price over time. And so essentially constructing a token, that is particularly when it comes to utility tokens, because security tokens can often be fairly easy. They are just basically equity tokens for the most part. Oftentimes they refer to a security. But a utility is interesting because you actually have to build that utility on your own platform and make it attractive to where people would want to have a token to access various parts of that platform. So that's sort of the crux is like sort of developing utility in a token and then locking that token to where all value accrues into that token and the token rises up in price over time.
JP
Okay, so the more utility that you have based on how you design the function of your token, that's obviously the first thing that is the baseline of what tokenomics is, right? So assume I'm a new project. New projects come to AdLunam almost every day talking about how they want to launch the next biggest thing since sliced bread into the entire Web3 universe, right? What are some of the things that a project if they want to build their tokenomics. What are some of the things they should keep in mind, Jason?
Jason
So tokenomics, it can mean 2 things. One is a sort of token utility. So what are the utility that token provides access to? And it can also mean sort of like token architecture or token distribution. Colloquially speaking. For some reason I've noticed lately, a lot of people tend to conflate the two and see sort of refer to tokenomics as more just token distribution. But I think we'll focus on token utility because I think that's the core here, right? So in terms of designing good token utility, again, it comes down to trying to figure out what is your business model.
Jason
Like any company, whether you're Web2, Web1, you have a particular business model, you have a way presumably to make money and then you have, you know, essentially you have your users that can help you sort of grow and help grow the ecosystem because oftentimes like the network effect and things like that govern that. You're only as useful as the number of users that you have and based on how active they are and things like that, like certain metrics. So the idea is to try to figure out what are the factors that benefit me as a company. So what are the things that can help me grow? And you incentivize that. It's very similar to a country. A country might say, hey, we have all this cash and they're trying to figure out a way to distribute it.
Jason
So they'll say, okay, if you work eight hour days and you work really hard, we'll give you a certain amount because obviously it's in society's interest for people to be productive. On the flip side, if you run a red light, we're going to take some of those tokens away. So in a similar way, you would construct your own tokenomics to sort of incentivize people that are good actors and help grow the economy and disincentivize actions that would basically do the opposite of that. And so creating utility is one thing, as in sort of providing a service that people want, but then you also have to create the set of incentives that would encourage people to behave as good actors and then you create a set of disincentives for them to not do anything bad, essentially.
Jason
So that's sort of the crux of constructing these things.
JP
Okay, to summarize a little of what you said, just so that we have a good understanding, the utility is going to be based, of course, on the number of people in the community that are actually using your token. That utility, you want to keep the design of that in mind to supplement good actors ,right? So not supplement, I mean to complement good actors and let them continue that. And the actions that restrict you token, you want to limit those.
Jason
Yeah, well, it's not that in every situation, more people or more engaged people make your ecosystem better, although that is generally speaking true for most companies. But you could also create basically building utilities is actually building use cases for your token. So if I have the token, what can I do to spend it? So that's what sort of building token utility is. And then you create a set of incentives to grow your ecosystem and then obviously a set of disincentives to prevent people from basically to prevent bad actors. And so creating those incentives go sort of hand in hand with Token utility.
JP
Okay, so Jason, I'm sorry we lost you there for a little bit. The voice didn't come across. What you're trying to say didn't sound as clear. Could you brief that once again? And hopefully we're going to get that sound across and your ideas across really clearly. Still sounds like you're part of the Transformers team.
Jason
How about now?
JP
Okay. Jason, can you try that once again?
Jason
Okay, All right.
JP
Much better.
Jason
All right. So to answer your question, what I said is that it's not necessary that in every model it matters that much how many users that you have and how engaged there are, they are. I mean, you could have a business use case where it's just a question of building utility. So Token utility is like, what is a utility? What is a use case for this token? So if I have the token, where can I spend it? How can I spend it? What do I get from spending it? That's sort of like the key thing of the token utility. Now, oftentimes we see that the network effect is important, not necessarily in every company, but I would say it's just true for at least 80 or 90% of companies.
Jason
And so part of what you want to do with your Tokens is incentivize people that help grow that economy, that ecosystem, and grow that network.
JP
Okay, I believe that summarizes it for us about this particular question that we had. The next one, Jason, is to pick up a little on what you mentioned before. You mentioned, of course, tokenomics, token architecture, and token distribution, and sometimes they just use interchangeably. But I want to dwell a little on token distribution, right? And how do you see that Token distribution affecting a project?
Jason
Yeah, that's a great question. It matters massively, right? So the first thing that's important is to try to figure out how much you're raising, right. And you want to raise sort of the factors that you want to consider is you want to consider your burn rate and you want to basically be able to survive for at least a couple of years, maybe three years in a down market. So that becomes one of the factors that you look at to determine how much you're raising in total. The other thing is that you don't want to raise any more than absolutely necessary because the assumption is when those tokens hit an exchange, that they will jump up in value significantly. So anything that you sell now, you're doing it at presumably a pretty steep discount. Visa, Vis, introducing that liquidity later.
Jason
So your focus is to sort of spend.
JP
Jason sorry, we kind of lost you there for a bit and you're saying something extremely interesting where you said that you're at a point where you're already offering this at a discount. Could you take it back from there, please? Once again.
Jason
So I said you have to consider basically how much you're raising. That's really important. And essentially one of the factors that you look at is sort of your burn rate and try to determine how to stay alive at least two or three years in a down market. So that's sort of one of the factors that you consider in terms of how much you want to raise, but you never want to raise any more than absolutely necessary because as I mentioned, the assumption is that once those tokens start trading that they will massively jump up in value. So whatever you sell now, you're selling essentially at a massive discount.
JP
Right, so Jason, we got up to the point at which you don't want to raise too much money. The point at which this happens is the assumption is that once the tokens start trading, they're going to go up in value tremendously. And at this particular point, what's happening is that because you're giving these tokens out, you're giving them out at a discount. So we've got up to that part and please go ahead. Okay, it looks a little like Jason is getting back to Twitter spaces. Sometimes these glitches do happen, ladies and gentlemen, but I know that so far, whatever he shared has been spectacular. So take a moment and give him a reaction right now. Right, and Jason, let us know when you're back in the room.
Jason
Jervis, can you hear me now?
JP
Okay, I can hear loud and clear, go for it.
Jason
Okay, could you tell me the last thing you heard?
JP
Yeah, so the last part was the point at which you don't want to get over capitalized because you're or rather, you don't want to take too much money because you're already offering the tokens at a discount at this point.
Jason
Yeah, that's true. So but you also want to don't want to raise too little money, because if you're raising anything less than two or 3 million closer to the 3 million range, then you might be sending a wrong message to retail investors, because a lot of times, they'll figure that you're not raising that money because you can't raise that money. And that's a problem because basically, no matter how much money you raise in these private rounds, the end goal is sort of the retail investors at the other end of this sort of rainbow. And the retail investors on the other end, what they're looking at is they're looking at which of the companies, the institutional investors that have investing. Because keep in mind, these retail investors are not tokenomics experts, right?
Jason
They don't understand token architecture, but they presume that institutional investors do. So ideally they're looking for crypto specific investors. They're looking for investors that have a track record of understanding the deep ins and outs of tokens. Because growing a token is not the same as growing a company. I mean, you could have a situation where the company is growing in value, but that value is not accruing to the token, right? Yeah, so it just depends on where that value is created. That's why in Web3, identifying the factors that influence the price of a token and ensuring that there's enough utility is sort of like one of the main steps in deciding when to invest. And so institutional investors make this decision based off of years of experience and sort of retail investors take their cue from them.
Jason
So if you raise less than like 3 million or so, you're sending a message that maybe you can't raise more money and institutional investors are not so comfortable. On the flip side of that, if you raise significantly more than that, let's say you're raising like four or 5 million and you don't have a really good reason for doing that as an investor, we'd look at that and go, hey, why is he raising that extra million at such a deep discount? Because if he thinks this token is going to 10x at launch, then he wouldn't be selling an extra million on this. There was some other reason that we don't know about yet.
JP
Wow, that sounds like something extremely important that projects have to keep in mind. Jason, could you elaborate a little more on maybe some of the strategies that companies can use as they price each stage of their token? Do you have any thoughts on that?
Jason
Yeah, sure. So generally speaking, I've seen a lot of token distributions and what you want to do is you want to ensure that your seed round isn't too far off from your public round. So generally you can have a jump in excess of 2.5x or 3x from your seed round to your public round. The reason being that the people at the public round, generally, if they see that on your tokenomics, they would usually take that pretty badly because they would say, hey, what happened in the last two months to massively grow your value 3x-4x? How did that happen? In what is usually a very short period of time?
Jason
And if nothing has happened, then why is it that we are paying such a premium visa vis the seed investors, your two margins or bookends is sort of your seed round and then the public round. And so you want to make sure that there's not more than a 2.5x multiple, although there's no hard and faster rule, of course it varies, but generally speaking, anything more than that and you'll start having a lot of pushback from public investors. So then when you go into your seed round usually you are probably raising somewhere around let's say 500k is about average in terms of a seed round. And we're 500K. The seed round is supposed to propel you into your so usually you might have a seed round, a private round, and then a public round, or you might have a seed round.
Jason
Private round one, private round two, and then a public round, or maybe a seed round. Private round one, and then maybe a strategic round and then a public round. So each round is supposed to propel you into the next and that's because investors that you get in the previous round are supposed to push you off into the next round. So let's say you have your seed round. If you're raising $500,000, let's say the minimum that an investor, that an institutional investor would be interested in, for the most part in getting into projects would be somewhere around 50K. So at $500,000 you basically have ten seats in your seed round to begin with.
Jason
Now sometimes you're already down to eight or nine because you've taken in some funding from friends and family and other close friends, so you're really already down to eight or nine seats. Now, the assumption is that at least what you hope for is that every investor brings like three investors in the next round. So if you have three rounds, which is a seed private public, then your seed round, let's say you have ten investors there, then you have a possibility of having 30 possible investors in your private round. Of course it doesn't directly correlate and oftentimes it's much lower than that, but this is what you're shooting for.
Jason
So the thing is that every 50K seat that you give out in your seed round results in you losing possible investors by a factor of three in the next round because you go from 30 to 27 to 24, 21 and so on every time you lose an investor, institutional investor in the seed round. So you have to be really careful with filling up your seed round with friends and family or even funding your seed round yourself. I've had a lot of people that I know that said that we self funded our seed round. Well that is not helping at all because you've given up a bunch of allocation now and unless you know a bunch of investors that you can bring into the prior round, you miscalculated. And so oftentimes then you have your prior round.
Jason
And the thing is that like so let's say for example, an investor comes in towards the end of the seed round. Well, it's in his interest now to bring other investors to you because as soon as you have a few investors in the private route he can immediately on their books. Effectively that token has already doubled in price. It's already increased in price anyways because somebody at this moment is paying more for it than they did. So that's sort of why each round propels you to the next. And that's sort of why you want to be careful with how you structure this and ensure that there's sort of enough meat on the bone for each round, all the way up to the public round. I think it was going to be sort of how does each stage of the token price impact investing?
Jason
And I sort of touched on that. I guess I basically answered that in my previous question in terms of how at each stage it's supposed to propel you to the next base of the price. Another question is sort of what can projects do to keep their token prices high? And I think the focus behind that would be focusing on price is generally a losing proposition because tokens sort of go up and down in price and there's very little a lot of this is massively due to market forces. The key thing for projects to focus on is building utility into that token and building use cases within their token. A really lazy way to do this is by focusing a lot on staking.
Jason
I mean, every project has some degree where staking is an option where you can sort of stake tokens and receive a yield, whether that be yield, farming or even just sort of an APY. But every project has that and that's fine. But relying on a model where that is sort of the focus, where you just stake tokens and then you get more tokens over time, that's not super sustainable. The idea is to sort of build actual utility, actual use cases, build something that people want to use using whatever tools you have and then essentially they have access to that using their token. So the key thing is to sort of grow those use cases for the token and that's sort of the only way you can go forward. Jervis, are you back?
JP
Yes, looks like it. I'm sorry. I was the one that had actually dropped off and I had this fantastic speech that I was giving to the audience that obviously nobody could hear. So yeah, the jokes on me.
Jason
Now's the time to do that.
JP
Right, so I thought we'd lost you. So I was doing a brief recap on all the topics that we've covered and I was asking, of course, everybody in the room and ladies and gentlemen, you can do that right now. Give us some love. So, Jason, I believe you were already asked about how do you keep token prices high and what are some of the factors that impact the rise and fall of tokens because in a bear market, everybody wants to know that as answer, right? But that being said, like you said, there are some market forces that get into that. So do you want to elaborate on that a little more?
Jason
Yeah, sorr-.
JP
Jason, you're on mute.
Jason
Yeah, thanks. What I said is I did answer that before. That was my previous question. I mean, that was the previous question that I answered. But what I was saying is sort of focusing on price is a losing proposition because a lot of that is due to sort of market conditions. The best thing that you can sort of focus on as a project is on building utility in your token. So let's say you're a game and essentially that token is used within your game. The better your game gets, the more exciting your game gets, the more reasons people want to use your token. And then the scarcer it gets, and obviously the scarcer token gets, the higher the price goes. So usually scarcity has a relationship with price. The scarcity, the price goes up.
Jason
So you have to sort of building utility that will require users to spend that token.
JP
Awesome, okay. The more utility and the creation of scarcity is one of the key things that projects should factor in their business. Now, Jason, there's a lot of people that I know that you probably come across these projects through your experience, through the time that you've been in the crypto industry. You've seen a lot of transition, right, of people trying to move from a classic standard, not just Web2, but even from a brick and mortar type of business, wanting to get into either the metaverse or to get into the Web3 space altogether, right? What are some of the things you want to tell those guys between being a brick and mortar business and being a Web3 business?
Jason
So, I mean, Web3 and metaverse are essentially two very different concepts, right? So if a brick and mortar business wanted to sort of enter Web3, there'd be any number of ways they could sort of do it. One way, if you're talking about solely the metaverse is, of course, sort of building their home and building their home in the metaverse. So that would involve sort of buying property and maybe Decentraland or Sandbox some of these larger metaverses and then essentially just setting up a location over there to where they can sort of have where their customers can sort of have a place to come in and develop that community that's solely on a metaverse thing.
Jason
Of course, one could create their own metaverse, but I'm not sure what the benefit of that would be for a traditional brand if being a metaverse wasn't exactly core to their business plan, right? So that would be from the perspective of the meadows. Now, if you're talking about like, Web3 in general, again, pretty much any company can use tokens as a way of doing things right. So, for example, let's look at AMC Movie Theaters. Let's look at AMC Movie Theaters. Or like INOX Movie Theaters, for example, you pay money and essentially those are your tickets to enter the screening. But you could always basically say, we're not going to accept purchase tickets at the door. Instead, you need to own these tokens and you need to own a certain number of tokens before you can watch, let's say, one movie a week.
Jason
Or if you own twice or three times at those tokens, you could maybe watch two or three movies a month. So you could be on a four movie a month plan, for example. And essentially you have to stake tokens in order to access the movie theater. So it could be as simple as that, basically. So it just really depends on what their business plan is and kind of what their focus is in terms of how to reimagine their business from a perspective of, again, building value in that token.
JP
Awesome. Okay, Jason, I think that's a classic case of being able to build a utility for people to use it and increase mass adoption of crypto in our daily lives. Thank you for that. Okay. We also have, I think, two questions that are coming in from the audience. So the first one that got activated, I believe, is bruce, you have a question? Go for it.
Bushan
Yeah. Thanks, Jervis. So, Jason, I would like to understand strategically that if there is an economics design for a product over there and over a period of time, they wanted to switch to the regulated market, or you missed the legacy market and wanted to launch their own scripts shares. So what are the things need to be kept in mind while designing the tokenomics at the very beginning or if they in the future wanted to go try to convert it into the legacy scripts and wanted to launch into one of the available exchanges itself?
Jason
Sure, that's a great question. So you can't really convert it from one to another. So, for example, if you as a company have released tokens down the line, I suppose you could have some sort of redemption program where basically the people redeem their tokens for your services, but you wouldn't want to do that because you'd see a massive selling pressure, because there'd be an entire amount of people that have bought your tokens, let's say, for speculation purposes that wouldn't redeem their tokens for, let's say, a membership or something into your service. So you would see a massive drop in token price if you try to, quote unquote, convert it. Usually if you're as a company, you're building value within the token and then, let's say, down the line, you want to, let's say, do an equity raise.
Jason
The thing is, it's really important, again, the order that you do this in. Right. So, for example, the. Way you just suggested is probably the least objectionable way of doing it. A lot of times companies will do a token raise simultaneous to them doing an equity raise. And then from a perspective of somebody who's a token investor, I'm always very suspicious. I sort of look at those companies with extreme skepticism. Let's put it this way, because I wonder, because I know that a new company can only provide so much utility. And if they've got equity investors and they've got token investors, then that value is being split between both people because they're essentially serving two masters right now.
Jason
In contrast, let's say you'd launch a project that involved a native token and the native token has already proved its utility and it has a very stable price, let's say a decent price in the market, it's being live traded. Then let's say there is another sort of another avenue for revenue that the company might find. Let's say there's a new revenue stream that is easier to access because you have the token and the token business. And so you have sort of an easier route to, let's say, a new business or revenue stream. Then you might do that revenue stream and then that revenue would not accrue to the token because let's say your token already has established value, so that revenue would accrue, let's say, to the company's coffers in general.
Jason
And then of course, if you did an equity raise post that or issued shares, then the value would come from that extra revenue stream. However, the value that was already going to the token would be carved out of that. And people who own shares, for example, to the exclusion of tokens, wouldn't have a right to funds that came in through the token model. So it becomes very complicated, particularly because generally speaking, it would be a rare situation where your token is doing so well that you want to have this additional revenue stream. But that revenue stream doesn't go to the token because generally speaking, you'd want to create to modify your tokenomics in such a way that those tokens were also used for this new revenue stream.
Jason
That way the tokens would be scarcer and therefore go up in price, which should be what your point of building when you build is your point is to sort of increase token utility. So sometimes developing another revenue stream can sort of be on the opposite side of this.
JP
Okay, Jason thanks for that. I think that answered the question spot on. Don't serve two masters. Be focused on your project and build a value there. Okay, our second question comes in from Alexey, who's been accepted. Alexey, go for it.
Alexey
Hi. So my question is quite funny in nature there. I really want to know, like since the market is going down and bearish right and we're talking about economics there, is there a way that we can make a project where we can play upon the bear market.
Jason
The project can what on the bear market? Could you say the last part of your question again, please?
Alexey
So see, what I really want to understand that is there a way where we can develop a project which rather than say, making money upon the bulls, can help make people money upon the bear market as far as economics is concerned.
Jason
Actually, I don't think so. Right. Because it's not a question of making money. Tokens go up in value. They go up in value when you increase utility in the system. So there's no correlation whereby your token could go up in value in a bear market. Anyways, it's going to be very difficult to have your token go up in value. And I don't see how you could make a system whereby people benefit from the fact that it's a bear market. Because generally speaking, it means in a bear market, there's not a lot of funds in the industry in the first place. So all projects are struggling. There's no sort of relief, that's the voice of a project. Sorry, go ahead.
Alexey
Yeah, since you mentioned it's projectability of the project that can actually raise the prices in the market for any project. Right. So how is tokenomics relevant there? To be very honest, if it is utility we're looking at and how does that work? If it's just utility and there is just tokenomics on the other end and it's for utility that's actually raising the prices there. So what importance does to economics bring to a project?
JP
Jason, if you're answering that, we have lost you for a little bit. If you would like to stop that again, Alexey, that'll be the last question for the evening.
Alexey
Jervis, can you hear me?
JP
I can now, I can now. Go for it
Jason
Yeah. So what I was saying is that tokenomics is of primary importance to any project because that is your business model. So what is a company without its business model? It doesn't exist right? So your tokenomics is basically articulating your business model from the perspective of tokens. So if your business model is selling tickets to watch a movie, your token model is selling tokens to watch that movie. So how you construct those tokens and how you build value in that token, particularly if that token is scarce, is of primary importance to your business and in fact, that determines your entire market cap.
JP
Excellent. Yeah, I think that answers the question, Jason, in terms of if you don't have your utility, of course you don't have a business. And that's what the tokenomics show to everybody. So ladies and gentlemen, that's all the time that we have for this show today. But Jason, before you leave us, are there any final thoughts that you like to share with us and to people across the world when it comes tokonomics just a quick thought.
Jason
Sure. So I said this earlier about how you can have a good company that has poor tokenomics. And so you have a lot of investors, when they look at a company, they get enamored by a bunch of other stuff that implies that the company will do really well. So, like partnerships and this and that, and then they don't quite focus as much as they should on how those things impact the token price, right? So the question an investor should always be going back to and then obviously you, as a company should think of is, how does this increase my token price? How does this result what I'm saying right now, how does this result in my token becoming scarcer and thus increasing in price?
Jason·
So everything from a perspective of an investor has to be about how does this impact the scarcity of the token in the market, right? And not just, oh, this is really pretty, they've got these really great famous partnerships. The question is, how does that impact the token? And that's sort of the primary thing that you have to think about, right?
JP·
So there you have it. I mean, ladies and gentlemen, that was Jason with his insight on tokenomics sharing with us the fact that it's absolutely fundamental if you want to have a successful Web3 company, no matter what sort of market that you're in, focus on your tokenomics and it will take you to the heights that your company deserves to be. So, Jason, thank you so much for joining us on the show. Ladies and gentlemen, thank you so much for being here. We will see you again next week at the same time and the same place. This is JP from AdLunam, Inc. Speaking to you about Web3. Have a good day. Cheers.
Jason
Thanks everybody for coming.
JP
All right, cheers. Jason, thanks for being here.
