Tokenomics with Vladimir Menaskop. Part two: towards TGE and beyond

From the first part of Vladimir Menaskop’s primer on how to design a project’s tokenomics, ForkLog readers learned the basics of this Web3 business discipline. This instalment turns to sound planning for a startup’s market debut.

Key inputs

As noted in the first part of the study: “The sequence ‘pre-seed, seed, private A and B, pre-IDO, IDO’ can serve as a perfectly workable pattern.” Building on this, let us sketch a sample tokenomics model.

We will take the classical set-up, in which all project participants (contributing funds—ie, “investors”—the team and retail contributors) vie over FDV.

This model always seemed unstable to me, and there is now no shortage of research backing that intuition (one, two, three). Yet the VC crowd pushed it so hard after the attacks on ICOs that most projects ended up believing in it.

Assume a Total Supply of 1,000,000,000 tokens with ticker EXAM and the following base allocation:

• team: 8% — 80,000,000;
• advisers: 2% — 20,000,000;
• pre-seed: 2% — 20,000,000;
• seed: 3% — 30,000,000;
• private A: 4% — 40,000,000;
• private B: 7% — 70,000,000;
• pre-IDO: 2% — 20,000,000;
• IDO: 1% — 10,000,000;
• DAO fund: 60% — 600,000,000;
• liquidity fund: 10% — 100,000,000;
• reserve fund: 1% — 10,000,000.

Many assume such a table is either ready-made tokenomics or its foundation.

It is not. At this stage you have only inputs for the static part of tokenomics, and even those are theoretical, since the 1,000,000,000 figure lacks justification. There is also a dynamic part—and the interplay between the two.

Before the numbers, a few tips.

First, I used to give every project the same personal warning: not only avoid trigger words like “investor”, “investment” and “profit”, but also refrain from handing your tokenomics around before TGE. Now I can just cite the authority of a16z, whose experts share that view.

Second, revising tokenomics is a “red flag” for many services that might integrate with your project (a recent example). Do it only in extremis.

Third, the numbers matter less than adherence to first principles—above all the “main law of tokenomics”: increase demand and reduce supply so that interest in your token keeps rising.

Hedging within groups

The model above contains internal hedging among groups:

• team + advisers + reserve fund = 11%;
• pre-seed + seed + private A + private B + pre-IDO = 18%;
• liquidity fund + IDO = 11%.

Each group has its own interests:

• the team, and often advisers, want early contributors (“investors”) not to “dump into the book”, ie, to avoid a Pump & Dump;
• investors want to make money, so they seek to get their stake back (“pull out”); for that, IDO profits must allow them to recoup from their unlocked tranche;
• the community needs a live product on which it can earn over time.

That is the ideal. In practice, communities include plenty of degen traders and careless members (“hamsters”) of all stripes who want returns here and now. Hence a once-common pattern:

• a “hamster” joins a launchpad, buys tokens and, once liquidity is added on a CEX or DEX, dumps everything, pocketing a “legitimate” 1–10% or more;
• a variant is the airdrop: the same “hamsters”, instead of holding their free or quasi-free tokens priced near $0, wreck their portfolio by taking IDO gains.

Be that as it may, the groups’ shared interests remain. They arise from the nature of economic relations, not subjective preferences.

Accordingly, the more:

• equity there is among groups, the better checks and balances work;
• finely specified the dynamic interaction, the smoother the effect on the token price at every meaningful moment;
• faster a decentralised mechanism is set up, the more loyal the real community will be—rather than those merely posing as one to extract quick gains.

And remember that Circulated Supply at IDO is far from all you will manage. It is only the start.

The dynamic part

This section typically boils down to three points:

• token lock-ups and vesting periods. The news flow and analytics show how important this is;
• a roadmap aligned with the technical and marketing road maps;
• community management.

The last point lies outside this study; I will touch on it only in passing. The first two I will spell out.

First, more tips:

• locking for less than 24 months makes little sense. Building services generally takes 6–18 months or more, so two years is a minimum that lets you handle tokens in a predictable way;
• the “first in, last out” rule should be universal. If the pre-seed price is lower than private A, the pre-seed must also vest longer;
• “investors” will pressure you. But remember: their greed kills projects—small, medium and large. Here is an example from Vitalik Buterin; it makes clear Solana spent its early years suffering from the parasitism of specific participants.

That is far from all.

Linking road maps

Many are surprised to be asked for complete road maps before tokenomics is drafted. I can justify that requirement not only in principle, but in practical terms.

Consider four road maps:

• technical (the build itself);
• marketing (PR, advertising, SMM);
• economic (tokenomics, business plan);
• DAO (this can include a community-building map).

Obviously, if our MVP lands in one to three months, the alpha in six months, the beta in nine and a stable version in a year (you can safely double—or triple—those), the tokenomics road map should reflect those phases.

For example:

• Month 1 — start revisiting those you pitched, show the MVP and raise pre-seed, seed, and so on. This affects the process; five years ago I knew it from personal experience, today I can point to a study;
• Month 3 — close private rounds and pre-IDO (though the process usually drags: up to 18 months in a bear market, six in a bull);
• Month 6 — go to IDO and decide what to work with while building TVL;
• Month 9 — schedule various measures; for instance, pause unlocks for groups altogether so that, in case of failure, the selling pressure is milder and, in case of success, demand exceeds supply. You can do the opposite too—depending on how aggressive the team’s strategy is;
• Month 12 — plan measures to reduce supply. By now a DAO should have formed (note: a multisig is not yet a DAO) and processes should be decentralised;
• Month 18 — begin a new mode of community engagement, with mature DAO processes, several dev teams, and early “investors” either exited or content and actively watching the project grow.

Every significant unlock should be paired with heavy marketing, and the road map should instil confidence in steady progress. The DAO map, finally, helps stage decentralisation alongside the project’s technical evolution.

Without this you cannot plan. The claim that “everything flows, everything changes” betrays a dilettante. Yes, things change fast—especially in Web 3.0 and Web3—but that does not mean you cannot plan core stages and delivery milestones. Chasing market fashion is usually a road to hell. Look at the survival rate of meme tokens (it hovers around 1–3%) to see why.

Vesting and cliff

Assume a base lock of 24 months (more is better; Polkadot, for instance, had a full three years). What next?

Divide 100% by 24: roughly 4.17%.

That will be the average monthly unlock we aim for, subject to:

• 0–4% — normal;
• 4–7% — acceptable;
• 7–8% — excessive;
• above 8% — revise.

Percentages can vary by niche, sector, market conditions, and so on.

This effectively programs a steady monthly unlock after IDO. This is not ideal for everyone, but it is a workable start to track token dynamics. Also remember each “investor” group exits differently; unlock first those with fewer multiples from their entry price, then those with more. I have written about this before: here, here and here.

Assume at IDO (month zero, so we end up with 25 months rather than 24 “clean” months) each group unlocks as follows:

• team — 0%;
• advisers — 0%;
• pre-seed — 1%;
• seed — 2%;
• private A — 3%;
• private B — 4%;
• pre-IDO — 5%;
• IDO — 100%;
• DAO fund — 0%;
• liquidity fund — 50%;
• reserve fund — 0%.

The team and advisers receive nothing at the initial listing. That keeps them aligned with the project rather than speculating on the token.

The pre-seed, seed, private A and private B rounds receive in proportion under “first in, last out”. The earlier the round, the smaller the initial unlock and the longer the overall vesting. For example:

• pre-seed — 24 months;
• seed — 21 months;
• private A — 18 months;
• private B — 15 months;
• pre-IDO — 12 months.

That way, full unlock of the pre-IDO round coincides with the stable product release and a fully fledged DAO, so even a wholesale dump should have a milder impact.

Always anchor your plan in the most negative scenario, not the rosy one—otherwise you risk selling out the project’s liquidity, and cheaply.

Funds, syndicates, angels and other “investors”, followed by market makers, will argue the opposite. But remember the system of checks and balances: despite appearances, your positions on the project’s development are worlds apart.

Thus, 6.62% of EXAM will circulate at IDO—that is the Circulated Supply. What next?

Check the table (it will be populated as the series progresses): is that within range? Yes. Acceptability is for the team to determine according to its road maps—no one else.

“Investors”, market makers and even the community know little about the project at this stage; they can advise but not decide.

By the numbers we get:

• team — 0%;
• advisers — 0%;
• pre-seed — 0.02%;
• seed — 0.06%;
• private A — 0.16%;
• private B — 0.28%;
• pre-IDO — 0.10%;
• IDO — 1%;
• DAO fund — 0%;
• liquidity fund — 5%;
• reserve fund — 0%.

In other words, we unlock 1% of the tokens bought in pre-seed. Since that round accounts for 2% of total supply, we unlock 0.02% of all tokens by this point.

Total: 6.62%. Is that much or little?

It depends on the project’s tokenomics. As a rule of thumb, >10% at IDO—unless you are listing 100% for the community—is poor practice.

Maintaining balance between community and early “investors” is critical. Let us count:

• “investors”: 0.02% (pre-seed) + 0.06% (seed) + 0.16% (private A) + 0.28% (private B) + 0.10% (pre-IDO) = 0.62%;
• community: 1%;
• liquidity: 5%.

Bottom line: 0.62% + 1% = 1.62%. That is how much supply enters the market if both “investors” and community contributors decide to “destroy” the token by selling everything.

We add, say on a DEX, 5% to the pool against that 1.62%. Do not forget we also add liquidity in USDT, USDC, DAI, ETH and the like.

How much? It depends on the initial token price.

The initial token price

Many factors matter; take four.

1. Market conditions. Our assessment of the sector (key players and their metrics, total addressable market and other quantitative indicators), the cycle (bull, bear or flat), and so on.
2. Comparison with the lead fund’s or target syndicate’s portfolio: at what price and round did they enter earlier deals?
3. Project assessment on base metrics: FDV, TVL, etc.
4. Distribution of “unearned” multiples between rounds.

On the last point: a 10x spread across private rounds, as in the ICO era, is no longer apt. Typically it is three to five multiples to IDO at most—and preferably lower.

For illustration:

• pre-seed: $0.005;
• seed: $0.007;
• private A: $0.009;
• private B: $0.01;
• pre-IDO: $0.015;
• IDO: $0.02.

Compute by: Price (IDO) / Price (Round) − 1, the number of embedded multiples for each round:

• pre-seed: 300% (three multiples);
• seed: 185.71% (a little over one and a half multiples);
• private A: 122.22%;
• private B: 100% (one multiple);
• pre-IDO: 33.33% (a third);
• IDO: 0%.

(Colleagues will forgive the liberty: since the market quotes returns in “x’s”, I will stick with the canon.)

Again, this is idealised; “investors” usually demand more. Our concern here is tokenomics principles, not how to sway others’ opinions.

Now note: what a startup is “worth”, how it is valued and how much cash it actually has are different things.

Valuation, FDV and other metrics

There is no unified method for valuing a startup. The simplest is Total Supply times round price:

• pre-seed: $0.0050 * CONST = $5,000,000;
• seed: $0.0070 * CONST = $7,000,000;
• private A: $0.0090 * CONST = $9,000,000;
• private B: $0.0100 * CONST = $10,000,000;
• pre-IDO: $0.0150 * CONST = $15,000,000;
• IDO: $0.0200 * CONST = $20,000,000.

A few psychological points:

1. If a token costs less than $1, retail “investors” can buy it, and funds and other large players more easily grasp an “acceptable fair future price”, since $1 per token is a threshold many projects never clear.
2. A $10–20m valuation looks like an average starting point for a startup. You can push beyond it, but only if you prefer to play hype rather than ship a solid sector product.
3. Valuation itself means little. First, you will not sell the full allocation in every round (if you do, well done—but that is the exception). Second, a dollar of valuation is not a dollar of liquid cash. Third, you must invest heavily in development, not dump into a pool or, worse, onto a CEX.

Hence the next topic any respectable project should discuss—allocation and liquidity management. We will return to it in part three. For now, a few more vital points.

Metrics to monitor

First, track how many tokens you unlock in each period (week, month, quarter—your call). In practice, a perfectly even schedule is impossible—there will always be tokens rolling over from prior periods. Still, note that introducing as few tokens as possible into the market is often best.

The simplest approach is to issue 1% per period (or similar) so the impact is within the margin of error while circulating supply grows by a predictable amount. A concrete example is Starknet.

For exactly this reason I always recommend reserving 1% for a reserve fund:

• it lets you measure token turnover. If the 1% gets distributed, the first full distribution cycle is definitely complete;
• if unused, you can lock it, burn it, and so on;
• burning is a solid way to reduce supply, but it does not fit all projects—eg, if you need to pay staking or farming rewards and other DeFi mechanics in tokens. A reserve fund, by contrast, can both withdraw and replenish;
• finally, a reserve fund can hedge hacks and other mishaps that the crypto industry suffers from.

From this follow several metrics worth tracking at IDO and beyond:

• the number of unlocked tokens and their share of total supply;
• the growth in circulating tokens per period;
• the proportion (by percentage and amount) between rounds, to avoid imbalances and uphold “first in, last out”.

Token demand and supply

To repeat the fundamental rule: reduce supply, increase demand—and thus heighten interest in the token. How exactly? In brief:

Reduce supply by:

• incentivising every “investor” group (both private rounds and IDO) to become token hodlers;
• setting vesting and cliff periods so that 100% of supply does not “hit the market” at once;
• maintaining balance of unlocks across rounds under “first in, last out”;
• creating a reserve (stabilisation) fund and topping it up from protocol fees and any service revenues, whether NFT sales or buy-backs;
• building a DAO fund and carefully deploying it once the product is ready;
• burning all unused tokens: unsold allocations; tokens left with the team if headcount drops; tokens set aside for specific spending (eg, base marketing) once that is done;
• introducing lock-ups via staking, farming, SBTs, etc. The goal is for holders to lock their tokens indefinitely (while earning “profits” from the protocol side of the project);
• working with the community.

Increase demand by:

• raising interest in the token as a utility and/or governance instrument;
• paying protocol fees in the token;
• paying stakeholders, including for locking LP, in the token;
• bringing in the community from the earliest stages; the aim is to build a club of supporters, not “hamsters”;
• adding boosters: NFTs, SBTs, etc;
• forging collaborations and maintaining an information presence;
• handling negativity—smoothly and clearly;
• scaling the project after choosing a vector: go deep (Uniswap) or broad (Solana).

Both lists are open-ended; we will return to them in part three.

End of part two