One thing that has been keeping me up at night (literally.. it’s 2 am ET) is tokenomics.

In the current epoch, both crypto teams who have been building through the bear market and opportunistic memecoiners’ are launching tokens at a breakneck speed.

While some of them have been thoughtful in their approach - as you can tell from the cover art in my last post on $W - I am also tickled by memecoins that are based on a dog withf a hat.

I have MANY thoughts. But to keep it simple, in this post, I’ll share thoughts about launching tokens and how teams could think about launch pricing mechanisms.

At this point, I’m an expert quite good at conceptualizing token launch tokenomics so if you’re a team building, I am happy to discuss your options as an onboarded advisor. You can reach me here @711_Joseph (twitter)

Let’s dive in.

NOT FINANCIAL ADVICE. NOT A RECOMMENDATION. DO YOUR RESEARCH. DON’T ASSUME, VERIFY. HIGHLY RISKY ASSETS.

At best entertaining, at worst a conversation starter…

For the uninitiated, every launched crypto token has “Tokenomics”. These are a series of characteristics / metrics that help potential buyers to (i) understand the details behind a token (ii) compare its metrics to other tokens and (iii) allow buyers to calculate price.

Key metrics include total token supply, circulating supply, allocation breakdown, vesting schedules, utility breakdown, etc.

A key aspect of tokenomics is… it’s launch.

There are several ways for a project to launch a token. Initial Coin Offerings (ICOs), Initial DEX Offerings (IDOs), or Initial Exchange Offerings (IEOs). These are all fundamentally similar and are labour-intensive.

The future is bonding curves token launches.

Before explaining these, there are some key considerations ahead of a successful launch

• How does the team generate demand for the token?

• What is a “fair” launch price for the token?

• How can the team maximise the funding gained from the token sale?

• Should there be an airdrop component to the token launch?

• How does the team remunerate themselves over time?

• Is there a transparent way to sell the tokens in the future (team sale / project roadmap fulfilment)

• Is there a way for the team to ethically join the token sale?

• And more...

Well, read on as I answer all of these and more.

Now we understand what tokenomics are and key considerations when launching, let’s talk about bonding curves.

When launching a token, other than airdropping a % of a project’s tokens to active users (while the team/advisors manage the rest), projects can use a smart contract to launch and create a market for their tokens.

These smart contracts operate using a token bonding curve.

A bonding curve is a mathematical concept that defines the relationship between the price and supply of an asset. In the token launch event, as more tokens are bought, the price increases, and as tokens are sold, the price decreases. This is all done seamlessly on chain and without any middlemen or active selling by the team.

We can think about this in many ways but for our purposes, imagine you are launching a token. You have a total supply of 50,000 tokens. You want to launch with a circulating supply of 10,000 tokens (20%).

When selling using a bonding curve, you will get a chart that looks like the one below. At any point, you can apply a function to the x-axis to get a price, y-axis.

In such launches, you don’t typically see projects selling individual tokens, it’s typically grouped at different “price variation intervals”.

To put it simply: you divide the 10,000 tokens into 100 boxes. Each box contains 100 tokens. When launching the token, you are going to sell each box at a fixed price; starting with initially selling the first box and then each box until the 100th (last) box.

All of the tokens within each box are sold for the same price. When the box is completely sold, the price changes as the next margin token within box n+1 is now sold.

However, you could sell all boxes for the same price (flat line y=c).

But you should be thinking - “But why would anyone buy the first box if they could wait and pay the same price?” Correct. Hence we have to sell the first box for a fixed price that then increases as the # of sold boxes increases. Box 1 would be the cheapest but box 100 would be the most expensive. Remember, each box has 100 tokens in it.

If there is a linear increase in price per token (y = m * x), you will see a curve like below.

For my fellow integral nerds, you can think about the funding raised by the team using the following illustration.

Now you should be thinking - “Sure the price may increase, but how can I tweak the curve such that buyers are incentivised to join the token launch ASAP and not wait for the price to rise? Good Q; now you’re getting the hang of this.

Enter logarithmic or exponential curves (y = logax and y = ax respectively).

For exponential curves, initially, the price of each box would increase in small increments and then the increments get larger as more boxes are sold. Logarithmic curves’ initial incremental prices per box would start higher and then each jump would reduce as each box is sold.

At this point, you should agree that exponential curves make the most sense to incentivise users to act quickly. The eagle-eyed among you would be wondering - “what’s the relevance of 100 boxes?”. Well, this determines the variation interval as aforementioned but as you rightly deduced, the curve would look more like steps.

For example, see below for one with 50 boxes (intervals) and 100.

50 intervals / boxes

100 intervals / boxes

My view is that it makes sense to have more intervals as it means people are more incentivised to join the earlier “steps”. But there is a balance to be had!

The fundamental idea behind a bonding curve is that when someone joins the earlier step, each subsequent participant will have to pay slightly more for the asset.

To me, these curves are elegant as they act as the underlying mechanism for automated market makers. They enable liquidity without the counterparty complexity and volume requirements required for a traditional order book.

Projects should consider other parameters when creating a bonding curve for their token. Namely:

• What is the 100th box valuation? | If the 100th box’s price causes the circulating market cap for the launch token to be too high, this could be prohibitive to buyers in the last 10s of “boxes” causing the launch to fail

• Decay feature? | If the number of boxes sold remains at, say the 70th box, the team could decide to decay the price of the boxes in order to get their fill

  • I strongly suggest that teams think long and hard about this. I have a view that works. Reach out to me to discuss @711_Joseph (twitter)

• When does it all end? | I would consider what happens if the bonding curve is only 60% filled and stays there. The team should agree on a level from launch, at which point they can consummate the token launch.

• Is this the primary issuance? | One thing that concerned teams may do is to line up their token launch with a public crypto exchange launch or airdrop. This means that while the bonding curve launch is ongoing, the tokens are already circulating

  • To me, while this means that arbitrageurs will ensure that the public price of the tokens is maintained (otherwise they buy and sell into the bonding curve as needed + assume this functionality in the smart contract) it makes it MUCH HARDER to completely sell all 100 boxes and no matter the hype the bonding curve launch will have a gravity to it.

  • This is an extremely nuanced point so again, if you want to discuss @711_Joseph (twitter)

• Launch and Close Pricing | At what price does the bonding curve process start and end at? This is crucial as it also defines how much is raised

• The project is its own LP | Following the launch, the project would open its open token LP pool for traders to buy and sell. Projects should be conscious when raising using this method that some of the raised funds could should be used to create deeper LP pools

That’s all folks!

Launching a token well is much harder than it seems. While the tech is all there and straightforward, tokenomics can make or break a project.

Hopefully, this piece goes some way in providing a clawing post for some project teams but if you want to discuss your options together and hear more direct answers to my aforementioned questions posed throughout, you can reach me here @711_Joseph (twitter).

Thanks for reading. God bless.

Joseph - 3rd April 2024, NYC US.