EP 17: Token Economics and Investment

What makes a good token economics, so investor will invest in

New format today: interview. Let me know if you want more interview sessions! (Ps: sorry for a few days late. I forgot to click "schedule".)

TLDR below. This is not financial advice.

Catch the episode on YouTube

General Conclusion

In this episode, we interview Arthur Cheong, a DeFi investor. He's on Twitter as @Arthur_0x. From the perspective of an investor, who invests in tokens and token projects, we uncover what makes a good token economics so that investors are interested in investing in that. He also shared his top 3 projects with good token economics, opinions on yield farming and advise when designing tokens.

1. What makes a good token?

Number 1 factor is that there must be concrete value accrual or value capture. What does it mean? Tokens have something that is worthy for you to invest. The most popular token is Bitcoin. Bitcoin is investable because you can think of it as digital gold. It is a store of value because people believe that there is a scarcity in supply and (hence) value. The value did pretty well over the last 10 years and also has shown to be the most reliable token. So bitcoin is investable because it is a good store of value over the medium to long term.

Store of value comes from a very huge network effect. If you are like Litecoin or other smaller crypto, you will struggle to be a good store of value because money has a very huge network effect. It's just like USD. They have huge network effect. When you are using it, you are less likely to use other smaller currencies as your day to day transaction, be it your international commerce, and also financial activities. Most are denominated in USD. It is the same for crypto.

Beyond money, the other investable tokens are some tokens that give you some sort of value capture, like some claim to the cash flow, either through a direct reward distribution or have some sort of buyback and burn mechanism.

These are the one that make it a good token.

2. Summary of Good Token Economics

(1) it is able to tokenise the economic value accrued by the network so that it can be distributed to the users and the community. Because at the end of the day, one of the principle is that decetralisation also means equality or distribution of power to the community and users of the community.

(2) there has to be very clear value accrual or value capture. Either within the ecosystem or compared to alternatives or options outside the ecosystem and off-chain solutions.

(3) token is not just a one-off asset or thing to have one objective, which is probably a store of value. But a token has a lot of other use cases that needs to be tapped on like a way to bootstrap the ecosystem. It's more than just one objective that the token serves, but it has a lot more secondary and tertiary objectives that a token has to serve. To maximise the usage of the token, to maximise the existence of tokens in the ecosystem.

3. If you can have one advice that you can give to token designers or economic designers, what would you give?

To summarise, that would be one to know your competitive advantage of using a token as opposed to the traditional market where no tokens are being used because that is where the strength of tokenisation lies.

The second is to use tokens to its utmost advantage, to explore and leverage all the benefits that tokens can bring. It can be incentivising, reputation building, etc.

And lastly is absolutely find product market fit. Tokens are not a magic pill. It’s not Jack and the Beanstalk, when you have the pill or the beans and you can grow a beautiful solution to eradicate you from poverty. Tokens are really just a means to an end. Tokens are not an end to itself. Tokens can only help to accelerate growth if there is something about growing. That means, this product has good product market fit, that is much better than the alternatives in the space. People are willing to use it, to test it, to try it.

What Else You've Missed in the Episode:

  • Another factor that makes a good token to invest in

  • Why ICO using tokens as a medium of payment failed in 2017

  • 3 Projects that have good token economics and Arthur is personally invested in

  • Equity in traditional finance and equity in the token world

  • Retailisation trend in DeFi

  • 3 factors to note when doing due diligence

  • How to justify the monetary value increase from tokens in yield farming

  • What DeFi looks like in the next 3-5 years

  • Democratisation of financial products

  • Product market fit in developed vs developing market


TLDR:

Tokens are not a magic pill that will solve all issues. Know your competitive advantage of using a token and exploit all the advantages that tokens can bring to your ecosystem. It is more than just a simple store of value — not every token is bitcoin.

If you are keen to learn more, we are currently having a discount for the Token Economics Blueprint course! It's a 10 lesson session and you can choose which section you are interested in. Total lesson time: 15 hours.