How to judge the quality of an X to Earn project economic model?

Does the economic model matter for a Web3 project? Maybe 8 out of 10 people will answer important. But to a certain extent, the economic model is not so important. Either the economic model paradigm of most projects has a high degree of convergence, or the ratio of token distribution is often not as professional as it seems to the outside world. In fact, the value of most token allocations is more of a decision made by the founding team on the premise of referring to mature solutions on the market.

Now, let's go back to the question above, is the economic model important to a Web3 project? It is very important, but it has to be combined with various elements such as the vision of the project itself, product quality, etc., rather than simply pile up complex formulas in the economic model to play digital games.

In fact, the goal of a good project may not necessarily be the latest economic model, and even this model will not be very complicated, but it must be the most scientific economic model, which must be combined with product characteristics.

This article of veDAO aims to popularize the elements of the economic model for readers, so that everyone can be more handy in the next project selection process.

What is an economic model?

First of all, we need to understand, what is an economic model?

Economic model: English is Tokenomic, which is composed of two words Token and Economics. As the name suggests, it refers to the economic operation mode of cryptocurrencies issued by different projects in the blockchain ecosystem. The main role is to lead the supply, usage, distribution, incentives, utility, governance, monetary policy, etc. of project tokens.

With the rise of the concept of DeFi and the increase of on-chain participation channels such as interaction, airdrop, Stake, IDO, etc., users have more opportunities to participate in the growth and early stage of the project, so the emphasis on the economic model of the project also follows improve. At its core, it is because it is the mechanism behind the operation of all current on-chain behaviors. As a project party, you must use Token to motivate all participants to jointly maintain the spontaneous operation of the complex economic incentive system; as a participant in the decentralized revolution, you must study and observe the advantages and disadvantages of different Tokenomics to choose investment targets, because Token It is the mainstream financing method of Web3 projects, so Tokenomics is an important factor affecting the return on investment.

The importance of the economic model:

There is a good saying: from 0-1 depends on the product, from 1-100 depends on the economic model. A high-quality product first needs its own good quality to promote the first step, and then needs an economic model to run the flywheel.

Therefore, the economic model has the following importance for a product:

1. Replace the traditional purchase volume

For Internet products, the economic model is equivalent to providing a brand new business model. If we say that the way for traditional products to survive is to lower the price of users even if they are under the pressure of losing money in the early stage of the project, and invest a huge amount of money to buy the volume, complete the market share of the number of users, and gain a dominant position in the market. Then do the aggregation of user relationships and recover costs.

Then with tokens, the task of grabbing the market can be handed over to tokens. On the one hand, through market value management, create a value window for tokens, attract more people to hold them, and complete the possession of users' minds. In this process, the emergence of the token value window will often spontaneously attract more users and the attention of the market, and complete the traditional purchase task in disguise.

During the DeFi Summer period, the struggle between Uniswap and Sushiswap is a classic case: as the originator of DEX, Uniswap did not want to issue tokens at first, but Sushi attracted a large number of users from uni in advance through token airdrops. At the peak moment, sushi users accounted for Compared with uni70%, uni has a sense of crisis.

The cold start and even rise of Sushiswap was based on the process of "vampire attack" on Uniswap. When Sushiswap was launched, it quickly attracted liquidity by allocating SUSHI to early LPs. Every time a block is updated, a certain amount of SUSHI will be released and distributed to LPs; initially, the liquidity required by Sushi must be the LP Token of a specific pool in Uniswap. pull up.

Two weeks after its launch, Sushiswap started liquidity migration, and all LP Token liquidity that participated in SUSHI mining in a specific Uniswap pool was migrated back to Sushiswap, thereby completing the rapid plunder of liquidity.

2. Reduce the difficulty of investment and financing and shorten the cost recovery cycle

As mentioned above, traditional Internet products often need to complete market share before they can achieve profitability, which is one of the reasons why JD.com and Bilibili have continued to lose money. But regardless of policy risks, a Web3 product that issues tokens will often issue its own tokens in the early stage when the project function is about to go online, and advance the income through the economic model, so that the project can conveniently reinvest the returned funds into the project The development of the flywheel makes the flywheel spin faster.

I have to admit that in the current web3 context, the main way for projects to make money is through selling coins. But when a project has the conditions to issue coins, but does not choose to issue coins, it means that the pressure of profitability is completely transferred to product quality, which returns to the business model of competing with traditional Internet products.

This phenomenon is not uncommon in the Web3 industry, especially for teams that change work content from game chains. Due to the particularity of the game, such teams tend to absorb many Web2 practitioners. Therefore, due to the natural fear of going overseas, supervision or the limitations of traditional game operation ideas, although they are working on blockchain games, they have not been able to Dare to issue coins, which makes the team's operational pressure extremely high and reduces the success rate of entrepreneurship.

Not only that, but for pure Web3 projects, not issuing coins will also mean being passive in the Web3 market. Take Opensea as an example, it once occupied more than 98% of the market share. Relying on the 2.5% transaction fee, its highest monthly income exceeds 350 million US dollars.

However, because Opensea has always been slow to iterate and wants to take the road of equity financing, it has not issued coins, and then projects including looksrare, x2y2, blur and other projects use token airdrops and incentives to snatch the giant users on Opensea.

According to Dappradar data, as of June this year, the total lock-up volume of Blur, which has made innovations in the economic model, reached 167.7 million US dollars, accounting for 65% of the NFT market, while the former king Opensea dropped to 27%.

Economic model classification:

At present, in the industry, regarding the classification of the economic model of the X to Earn project, its token types can be divided into four categories: governance tokens, utility tokens, special tokens and NFT.

Here we quote the definitions of the four types of tokens in the article "Tokenomic, the Economic Order of the Encrypted World" by Buidler DAO:

It is worth noting that Buidler DAO directly regards bill tokens as a special third type of token here, but in fact this category can be expanded. Some chain games and social products in the current industry generally use the regular dual currency In the mode, an off-chain token similar to points is implanted, which can only be converted into on-chain currency under certain conditions. And this type of point-based tokens should also be regarded as a special third type of currency.

**Based on the combination of these four tokens, the current mainstream solutions can be divided into single currency, dual currency and three currency models. **

Single currency model: refers to a single token issued based on the ecological content itself. This type of token often only carries a single governance function (such as UNI), or has both governance and utility functions.

However, because most of this model adopts a fixed supply, if it only carries the governance function on the chain, it means that the value of the currency is difficult to be reflected, and the willingness of the holders to hold the currency will decrease as the project iteration speed decreases.

If both governance and utility are at the same time, it means that users will obtain more tokens through various means, which will eventually lead to an explosion in the inflation rate, and at the same time affect the market's value evaluation of tokens during IDO.

Therefore, many project parties have optimized on this basis, either splitting the governance and utility functions, which is the so-called dual currency model, or embodying the utility function in the form of points.

Dual currency model: The so-called dual currency generally refers to the combination of governance currency + utility currency, and on this basis, the elements of NFT will also be added. The earliest proposal was near, and the Suanwen USN issued by it can be integrated into the protocol layer as the native asset of NEAR to pay for gas and storage fees. This can be regarded as the earliest prototype of utility currency. Since then, the dual-currency model has been carried forward by the cliché Axie.

The emergence of the dual currency model has greatly delayed the death spiral cycle of the original single currency model. Through the association between the utility currency and the governance currency, the selling pressure of the governance currency is transferred and consumed, and the risk of failure of the project party is also reduced. But on the other hand, to manage a dual-token system, the difficulty is not just multiplying by two, considering the possible correlation between tokens and tokens. And when there are more than one kind of tokens in the system, how to reasonably allocate the value has become a necessary consideration. In addition, since utility tokens are often issued indefinitely, it is easy to fall into an inflationary situation. If excessive inflation or other related reasons lead to a price drop, in order to maintain a sufficient level of incentives for users, more tokens will need to be issued, which will further strengthen inflation.

Three-currency model: This solution is not a popular choice in the Web3 market, because the three-currency model was generally regarded as a repair based on the dual-currency model at that time, but there have been certain innovations since then. The more well-known three-currency model is the VCT model that appeared last year: on the basis of the traditional governance currency + utility currency, an asset value capture token is added.

There is a strong correlation between VCT Token and Utility Token: In terms of quantity, regardless of inflation or deflation, the ratio between the two will always remain 1:1; in terms of price, since each Utility Token can be "exercised" at any time "(Exchange a VCT Token from the project party, and then exchange it into a stable currency equivalent to the current VCT Token price). Therefore, the price of Utility Token is always greater than or equal to the price of VCT Token.

In addition, VCT Token is "indifferent" to ordinary players, will not increase the burden on players, and is not circulated in the secondary market, and will only be used when "executing rights". And the process of "execution" is one-way and irreversible. Each utility token and VCT can only be "exercised" once, and the utility tokens and VCT tokens after "exercise" will be destroyed.

for example:

• The number of game utility tokens = VCT = 10000
• The total value of VCP that accesses advertising revenue and legal currency revenue = 10000 USDT
• Then 1 VCT=1 USDT at this time
• When the utility Token of the game was sold on a large scale, it started to fall continuously from 3 USDT
• Through the "execution" mechanism, players will feel that they can at least lock in the rate of return of 1 USDT, so it will not cause panic. On the contrary, due to the deflationary expectation of "exercise", it will effectively restrain the decline of utility tokens.

When this model was proposed, it sparked a heated discussion. Before that, many game teams had already used VCT exclusively by dividing a certain proportion of tokens from governance tokens. In other words, is it necessary to introduce new currencies under the premise of related functions in the future? In addition, the "three-currency" model represented by VCT is also based on the fact that enough value can be captured at the beginning of the game, which is the icing on the cake. But it can't solve the problem of where the initial liquidity comes from, and it can't help.

Several elements of the economic model

After talking about the classification of the X to Earn model economic model, we still need to pay attention to several dimensions:

The first is the three elements of the economic model:

Supply: the source of the target token, usually in two ways:

• Public offering: ICO, IEO, IDO, Launchpad, Fair Launch (Benddao model, same cost for all), ILO (X2Y2 model, initial liquidity issuance, most small projects will do this now).
• Incentive behaviors: Airdrop, TVL investment incentives, Stake incentives, Volume incentives (projects based on exchanges), Liquidity (DEX main positions), P2E (X to Earn mode).

Three terms to watch out for:

TGE: How many tokens are in circulation at the moment of issuance Cliff: how long to freeze before unlocking Vesting: How long does it take to unlock tokens

Demand: the usage scenario of the target token, generally including: value storage, spending, mining, governance, agreement income, mortgage,

Memes, speculative demand (sector rotation).

Value capture: In the end, it is necessary to solve the token value capture path: service fee payment (MV=PY), buyback & destruction (after staking, this is rarely used now), Staking agreement income, and buyback rewards.

Summarize:

In general, a good economic model should have the following characteristics: low inflation rate, high incentives, low selling pressure, rich usage scenarios, sufficient liquidity, and the main group of governance comes from the B-side, etc.

In addition, when we invest in public chains and other projects that require decentralized autonomy, we need to analyze whether its economic model has incentives for maintainers and the value capture of Tokens, so as to ensure that the project can provide users with continuous and stable services , while allowing network maintainers to capture value and reduce selling pressure from maintainers;

When we invest in projects involving a large amount of capital transactions such as DeFi, the focus of the analysis should be how the economic model coordinates the interest distribution relationship between LP and governance token holders, including whether income can motivate LP to continue to provide liquidity, governance token Whether currency holders can distribute reasonable income, etc.

But having said that, a good product is the key to user retention. As mentioned above, the economic model can only complete the conversion of 1-100, but the most difficult 0-1 needs to rely on the quality of the product itself and the means of operation.