Consensys: 30 Considerations for Token Design and Issuance

Original Title: 《30 Token Design and Launch Questions》

Author: Clemens Wan, Consensys

Compiled by: Biscuit, Chain Catcher

If we compare cryptocurrencies to websites in the web2 world, then SEO and searchability are achieved through liquidity pools and market making for the seamless distribution of these tokens.

Token economics design is very popular now. I have participated in some very interesting and challenging token design projects. The art of designing tokens is more niche and complex than conventional websites. The "market" will determine the value of the token, but designers can at least check all the considerations for token issuance before the tokens flow into the public secondary market.

1. Fungible Tokens or Non-Fungible Tokens?

Every NFT is unique, often launched through metaverse projects, and each released NFT belongs to a collection. Fungible tokens are the focus of most economic design work, mainly covering the interaction and distribution of project tokens with exchanges and AMMs.

2. What is the purpose of the token? (Does it always appreciate?)

Simply describe the purpose of the token in the context of the project and product; this will be the starting point for white papers and blogs.

3. Who will buy the tokens in the ecosystem, and why do they want to buy?

Clarify whether the token buyers are speculators, users of the platform, or other roles such as application developers, consultants, etc.

4. Are there other partners or ecosystem participants who want to use or buy the tokens?

Web3 needs the power of Web2 to succeed. The support of Web2 influencers as stakeholders and partners will be key to the token's success.

5. How do tokens interact with the platform?

Are tokens earned through interaction with the platform? Is there voting and governance involved? Notable patterns include: subscription/access permissions, mirrored access and identity NFTs, tips, fundraising, staking, governance, direct rewards, and B2B incentives.

6. How do tokens exchange with other tokens?

Does token exchange rely on DeFi oracle market data? Are they associated with NFTs?

7. What is the distribution of the tokens? What are the specific percentages?

An attractive protocol for dApps may allocate over 50% of tokens to the community through user rewards, grants, marketing, liquidity incentives, and listing fees. Other portions of the tokens may be used for private sales, project development (team + advisors), DeFi liquidity management, and foundation reserves.

8. What is the maximum supply of the tokens?

We find that most tokens used for mass distribution have a circulating supply of 10 million, 100 million, or 1 billion. This design actually depends on the token price and distribution balance. For example, airline points are psychologically distributed in whole numbers at high value, but the redeemable goods are opaque in actual market value. A commonly used basic model for unit price calculation is: the total circulating supply of an L1 chain is about 100 million to 500 million, with some deflationary mechanisms (e.g., burning tokens to handle transactions). Additionally, larger circulating supplies like 50 billion XRP or 132 billion DOGE may struggle to achieve a unit price valuation above $1.

9. What is the vesting schedule for token distribution?

The vesting schedule is the total amount of tokens released at different stages. Internal teams and investors need a clear strategy (to prevent anyone from dropping out or switching jobs): at least an 18-24 month vesting period for equity and tokens. Other distributions may depend on milestone events of the project, such as airdrops for beta testers.

10. Is there a single-token staking mechanism?

A single-token staking mechanism allows token holders to send their tokens back to the project treasury, thereby reducing circulating supply. There are some complex staking designs that can use these tokens to create new projects or provide multiple liquidity pools to balance minting/burning totals. Ultimately, adopting a staking mechanism can increase token interaction and inflow in the project to pay interest. This staking mechanism benefits "believers" and early investors who do not want to participate in liquidity mining.

11. What type of liquidity mining program will be adopted?

Liquidity mining involves allocating tokens to AMM pools early in the project to create markets with reasonable depth and minimal slippage. This means users can pair project tokens with ETH or USDC to form token pairs for LPs, allowing all crypto players to exchange on different aggregators/DEXs. LPs of these token pairs earn trading fee rewards. Uniswap or Balancer has traditional liquidity mining programs, while Fei x Ondo, Tokemak, or Olympus Pro have more complex mining programs.

12. Will there be airdrops of tokens?

Airdropping tokens is another way to distribute tokens more widely and gain support for the project. Well-designed airdrops serve as proof of early project participation, and the number of tokens airdropped can be quantified based on such proof. However, airdrop biases may be difficult to avoid, such as airdropping ENS tokens to users with early registered ENS addresses; if a specific timeframe is adopted and more tokens are allocated to early trading address snapshots, it may make early users more satisfied.

13. Will cryptocurrencies be accepted as a means of financing?

While swapping project tokens and cryptocurrencies from investors through on-chain wallets seems straightforward, legally, accepting cryptocurrencies as financing in exchange for equity or tokens can be tricky, and managing funds can be a nightmare.

14. Does the DAO model help with the project's financing or token issuance?

There are many legal terms that separate entity financing from crypto community financing. If fungible tokens are a prerequisite for joining the DAO, or if the DAO valuation is associated with the token itself, then theoretically, as the community grows exponentially, the project can increase the token's value. DAOs created for communication and distribution purposes have emerged in the market. The initial issuance of non-fungible tokens on Discord is another way of public issuance. This also applies to NFT collections distributed on Opensea or other NFT markets.

15. Does a community DAO make sense for the token project?

Not all DAOs need to use fungible tokens in their treasury, but tokens create an interesting atmosphere for the project and have the advantage of transparent on-chain voting for structured proposals. I like the idea of projects using a basic framework to encourage users to vote and govern on-chain regarding built-in parameters in the protocol. Creating a DAO on the project is a way to add character and community discussion to the project, such as making all code open source, with community voting mechanisms and distributed control being a commitment to users.

16. Is there a deflationary mechanism in the token?

Standard protocol tokens like Ethereum have a mechanism based on consensus reached at set block times (e.g., every 10 minutes). Mining rewards are aimed at infrastructure providers and validators. As the network continues to operate, the burning mechanism reduces the total supply of tokens. In the long run, this design is beneficial for the token's economics.

17. Does the project need a custodian to manage core keys?

It is strongly recommended to use a custodian to manage and hold large asset pools. Similar to the security of web2 platform admin passwords and authentication access, development-grade crypto wallets should not be stored solely on private GitHub.

18. If the project manages the keys itself, what security mechanisms and operations are in place?

It is advisable for project administrators to create multiple keys and multi-signature mechanisms. DAO multi-signature administrators or smart contract owners have significant responsibility for the security of funds.

19. On which testnet will the token launch?

Choosing which testnet to launch emphasizes the importance of the project code.

20. Has the project undergone an audit of its smart contracts?

The token business logic of the project is recommended to be submitted to a third-party security agency for auditing after not requiring extensive changes. Note that most audits need to be booked 3-6 months in advance, with fees ranging from $60,000 to $100,000 depending on the complexity of the code.

21. How do investors claim tokens during the private placement?

The initial allocation of tokens usually requires a smart contract generated by a secure wallet for distribution, along with a release schedule. If the project uses Carta to create a shared on-chain release version, it may make it easier for investors to understand the token situation.

22. How to monitor and measure the success of token issuance?

The project team needs to clearly list all information about the tokens to buyers and market data providers, as well as monitor the interactions of the fungible token smart contract sets.

23. What is the price discovery strategy for token issuance?

Tokens do not have a standard pricing mechanism (unless the project has already conducted fundraising activities internally within the DAO before issuing tokens). One approach is for the project to fund a 50-50 pool on Uniswap or create a liquidity guiding pool on Balancer, allowing the market to price the code.

24. Are there restrictions on token purchase eligibility for different regions or types of users?

This will determine whether the project needs to design a whitelist feature or use the official website for KYC verification.

25. What needs to be uploaded for the DAO charter or project documentation?

Typically, users use Gitbook to obtain pure technical documentation and use wiki documentation to get all information about the project.

26. What is the budget for liquidity pool allocation?

Some projects allow investors to inject funds into liquidity pools to become LPs, while others hire professional market makers to manage the allocation of liquidity pools.

27. How to communicate with token holders?

It is recommended that the project team update announcements for regular investors every two weeks, monthly, or quarterly. I think more holders would also read Mirror or media blogs for historical information. Additionally, the project team can hire social media experts to run Twitter accounts or post announcements on Discord.

28. On which network will the token and DAO launch?

This is not an easy choice, as the Ethereum mainnet has the highest fees but the strongest liquidity. It is advisable for the project team to consult investors or the DAO for opinions.

29. Are the project press releases and FAQ documents easy for investors to understand?

Clearly expressing the project's vision and token value is important. Most people would distill the project vision into a one-page document, but the project team also needs multiple supplementary documents for Q&A and press releases.

30. When the project team launches the token, where will the press conference be held?

Is the press conference open to everyone, and can I participate?