A blockchain ecosystem requires a crypto token for it to function. What differs from one ecosystem to another is the way the token is used. With the crypto and ICO space being such a new one, there still aren’t specific standards or regulations regarding the use of tokens across a blockchain ecosystem. At the same time, anyone looking to invest in an ICO would want to know not only how the blockchain solution would work but also how it would be made sustainable. And, this is exactly what the token economy of the project is all about. So, when you are wondering how to launch an ICO, first think of how your token would work in that ICO and within the project.
What is Tokenomics & Why is it Important?
The key to creating a successful crypto token and its ICO is to build it in a way that incentivises its use. Tokenomics essentially refers to this application of the token on the blockchain ecosystem. It describes the intended use of the token, its supply, transaction validation process and, of course, how it will be used. The reason a detailed description is required is to emphasise the long-term sustainability of the crypto economy. This is especially important because ICOs are such a new concept that there really isn’t a real-world example of sustained use and growth in value over a long period.
So, tokenomics essentially allows the investor to gain insight on how the model will work over the long term. And, this understanding is crucial to enhance the credibility of the ICO as a means to garner financing for the project.
A well-designed token economy has some key features, such as:
- The token has specific utility within the blockchain ecosystem
- Token use is incentivised, offering specific advantages to users
- It is a store of value and the value has potential to increase when the project gains traction
- It is scalable and fungible
- It can be traded on an exchange
Key Components of Good Tokenomics
Tokenomics is the blue print of the token project being developed. Development of feasible tokenomics requires a team of financial experts, business advisors and accountants, plus experience in the crypto arena. Here’s a look at the key components of tokenomics.
· Functionality of the Token
This would be the primary aspect any investor would look for before putting their money into a project. Information about how the token would be used within the ecosystem, benefits that the use of the token would bring, and its other utilities should be clearly defined.
· Token Supply and Demand
The total number of tokens to be released and the estimated hard cap should be clearly mentioned, along with the minimum required investment. The phases in which the tokens will be put up for sale and how many tokens would be available in each phase are also part of the tokenomics. You should avoid an ICO with a very high initial token supply. You can’t ensure that demand for the token would be at par with the supply, which would create doubts about the project in the investor’s mind.
· Token Distribution
Token distribution is the key to your tokenomics and can play a vital role in achieving the objectives of your project. It should ensure that you create value for your project, its investors, founders, team and other stakeholders.
· Use of Capital Raised
Investors are interested in knowing how their money will be used to generate dividends for them. It is important to clearly indicate what percentage of the amount raised would be dedicated to various spheres of the project, such as development of the system, marketing, operations, legal requirements, logistic, etc.
· Detailed Report of Expected Expenditure and Returns
There should be a detailed report with year by year estimates of the expenditure that is expected to be incurred to establish the project so that it gains traction. The report should also provide the roadmap of how much dividend investors can expect year after year. This provides greater confidence that the project has a clear financial path and is well thought through by the team.
The place potential investors will look to for information regarding the token will be the ICO whitepaper and the project’s website. Therefore, these are the places where you should provide a detailed account of the token sale, allocation of capital raised to various aspects of the project, utilization of resources, etc. So, in answer to the earlier question of how to launch an ICO, instilling trust in potential investors regarding your tokenomics could be the key to you ICO’s success.