Tokenomics: What does the price of crypto depend on, and why do companies create their tokens?

Tokenomics is a new discipline at the intersection of blockchain and economics. “Because it is not enough to simply develop a token,” says tokenomics expert Sabrina B.

Sabrina has been in the industry since 2017. In that time, she managed to work on 35+ tokenization projects and advised 100+ startups. Now, she is the founder and Web3 strategist of Nova, a company that focuses on creating token and Web3 economies for entrepreneurs & brands.

In her interview for buidlbee, Sabrina B. tells how tokenomics of blockchain projects is built and why crypto investors can’t do without financial expertise.

“Blockchain is a perfect combination of technology and finance”

The narrative behind blockchain is great. We don’t even know who the founder is! But the goal of blockchain — the possibility to democratize finance and bring freedom — is great too. I think that everyone should have access to a financial market and be able to build their future. That’s why I choose blockchain as my career.

But as a financial expert, I see blockchain as much more than a technology. It is a perfect combination of technology and finance. Use cases we see now would not be possible without blockchain as a technology, but without sustainable business models, they would not be possible too. 

And it leads us to many challenges because while technology already exists, we still need to figure out with economy behind it: for example, modeling tax. Tokenomics is a part of these challenges too.

“There are many domains in blockchain, and tokenomics is on top of it — it serves all of them”

Tokenomics is the contraction of the words token and economics. There are many domains in blockchain, and tokenomics is on top of it. It serves all of them. It’s a new discipline because it is not enough to simply develop a token. You must determine how many coins you need, calculate the inflation rate, etc.

The process of building the strategy of tokenomics lasts from six to nine months and includes these stages:

1. Before tokenization, we create a business plan and model based on financial forecasts. We can do it both for an existing business or a completely new project.
2. Then we try to brainstorm with the entrepreneur — define why they need the token and what for this token will be used.
3. Based on brainstorming, we do a research report with recommendations on future tokenomics: how it will be used, what will be the future of the volume of exchange of the token, and so on. Once we have that, we propose some valuation.
4. We prepare a whitepaper and discuss it with a lawyer. Because, for example, the tokenomics for USA and Europe markets will be different in legal terms.
5. We can start the development of the launch technology and connect the token to the existing application.
6. The last and critical phase is marketing, where we connect with influencers and partners. We need to grow the community to share the product’s vision. It’s also the moment to reach out to private investors, exchange and launchpad, and then finally, we can go on on the public sale. 

All these stages are very challenging because you have to build a strategy, including investment involvement and raising the price of the coin. But not too much: after all, it can kill the project.

That’s how it works: the price is going extremely high and then extremely low (a pump-and-dump situation), so people become involved only for speculation.

“For the project to be sustainable, it has to create a value that is not only based on speculation”

So, to get a proper result, you must build appropriate incentives. Then the investor that has taken the risk at the beginning plan off cashes out after the launch but without destroying the value for the user. 

That leads us to three crucial sides of every tokenomics:

1. Vesting schedule. It is based on equity fundraising. If you invest early, you cannot sell all your tokens — only after, for example, 24 months. And the coin will be released every month. So we are not dumping the market.
2. On the user side, we also need that model called utility. To avoid speculations, we need to ensure that the token has an actual use case and will be used as a medium of exchange, to pay for NFT, and so on.
3. Growing demand and controlling supply, or eventually reducing supply. Even in the beginning, when we’ve just launched and we don’t have a lot of resources.

As I said before, for the project to be sustainable, it has to create a value that is not only based on speculation. And that’s true not only for tokenomics but traditional economics as well.

On the other side, fundraising is a big difference between tokenomics and economics. Because in the traditional economy, only institutional and accredited investors invest early, and in the crypto world, we can democratize the finance office.

Another difference is using the token to incentivize users. That is also done in the traditional economy: for example, Revolut gives you a referral fee anytime you invite people. This money they offer comes from the venture capital fund. In crypto projects, venture capital funds exist too, but there is also the token that we can use to incentivize users: offer users tokens as a bonus for some action, etc.

Despite or thanks to these differences, the crypto market goes quite quickly. The number of users is going [up] by 80% per year, and if we have the same growth, we may have four billion users in 2024.

“Tokenomics is not a replacement for the traditional economy but a new opportunity”

Many people in fintech wonder if tokenomics will replace the traditional economy. I can’t precisely answer that question, but I don’t think it’s a replacement but a new opportunity.

Still, adopting the crypto market could work better if we had a better user experience. Because in Web2, you just log in, click, and done. And in Web3, sometimes you need four steps just to do one transaction.

Also, we have trouble with understanding and learning. And it is not just about understanding the technology but financial education. Without it, you can easily invest in the wrong product.

Here’s my recommendation for self-education:

• About the monetary policy: “The Theory of Money and Credit” by Ludwig Mises. “Denationalisation of Money: The Argument” by Frederik Hayek
• A book to learn about finance: “Finance for Executives” by Nunu Fernandes
• A book to understand the profound effect of cognitive biases on everything from playing the stock market to planning our next vacation: “Thinking, Fast and Slow” by Daniel Kahneman

I also love The Accountant Quits Podcast by Umar Mallam Hassam.