Supply Policy - Tokenomics Design Course (Part 8)

Step 5: Supply Policy in Tokenomics

Overview of Supply Policy

• The discussion focuses on step five of seven in the tokenomics design process, specifically addressing supply policy.

• Emphasizes the importance of following best practices from comparable projects to inform your token's supply policy.

Understanding Max Supply

• Builders often fixate on the maximum supply number, which is largely arbitrary; consistency is more important than the specific figure chosen.

• Examples include common max supply figures like 10 million, 100 million, or 1 billion; Bitcoin’s max supply could have been any of these as long as it remains consistent.

Relevance of Max Supply

• Many tokens do not require a max supply; for instance, carbon credits and stablecoins can be minted as needed without diminishing their value.

• Ethereum operates without a max supply but has transitioned to a potentially deflationary model while still being successful.

Inflation vs. Deflation

• While having a capped max supply is significant for store-of-value tokens like Bitcoin, it's not universally applicable across all use cases.

• NounsDAO illustrates that even with no cap on NFT issuance, controlled inflation can maintain value through known and decreasing issuance rates.

Emission Strategies

• Continuous block-by-block vesting tends to perform better than fixed date vesting strategies (e.g., quarterly unlock).

• Relying solely on deflationary measures (like token burns at launch) does not guarantee utility or value retention; many such tokens have failed.

Controlled Inflation

• Inflation itself isn't inherently problematic if managed properly; examples include Monero's tail emissions and NounsDAO auctions.

• Builders should remember that while they control the supply aspect significantly, it’s only one part of the overall project equation.

Best Practices for Token Allocation

Token Allocation and Vesting Best Practices

Importance of Token Demand and Utility

• Emphasizes the necessity for tokens to have demand, utility, and real use cases, highlighting that supply is just one aspect of the equation.

Norms in Token Allocation

• Discusses typical token allocations and best practices, noting that these can vary significantly based on the type of project (e.g., DeFi vs. NFT).

• Acknowledges that while there are general norms for token allocation, subtle differences exist depending on specific use cases.

Team and Investor Allocations

• Outlines common allocation percentages: teams receive 15-20%, advisors 3-6%, investors 10-20%, treasury 15-30%, community rewards 20-50%, and initial unlock/airdrop at 5-10%.

Vesting Schedules

• Describes best practices for vesting schedules: teams typically vest over five years or longer; advisors three years; investors two years.

Supply Management Insights

• Suggests that having around 50% of total supply in circulation after two years tends to yield better project performance.

Token Modeling Template Overview

Introduction to Token Modeling Template

• Introduces a pre-made token modeling template available at linktree/tokenomics to assist teams in their allocation planning without starting from scratch.

Features of the Template

• The template includes various tabs such as supply curve calculator and supply charts, focusing initially on the first three tabs.

Allocation Fields Explained

• Details fields within the template where users can input total number of tokens (commonly set at 10 million), ensuring proper allocation checks are in place.

Customization Options

• Users can add categories for token distribution (e.g., team, advisors, investors), adjusting percentage allocations easily within the template.

Understanding Vesting Mechanics

Token Vesting and Emission Strategies

Understanding Spacing Months in Token Vesting

• Spacing months allow for the distribution of token vesting over specific intervals, such as receiving a vest every three months.

• Cumulative emissions are affected by these spacing months; for instance, there may be periods with no tokens emitted followed by bursts of emissions.

• While this method is available, steady vesting schedules generally perform better than sporadic date-based emissions.

Customizing Emission Schedules

• A calculator tool is provided to help users quickly arrange combinations of various vesting parameters like cliff months and delay months.

• The supply charts tab offers pre-generated graphs showing allocation and emission comparisons against linear growth rates.

Exploring Curve Types: Linear vs. Sigmoid

• Users can toggle between linear and sigmoid curves; a linear curve means consistent token distribution each period.

• In contrast, a sigmoid curve starts with slower emissions that increase over time, allowing for strategic growth post-launch.

Adjusting Parameters for Desired Emission Shapes

• The backweight factor and slope factor influence the shape of the sigmoid curve; adjusting these can change early versus late emission rates.

• Increasing the backweight factor results in greater growth later in the schedule while decreasing it leads to more early emissions.

Benefits of Using Sigmoid Curves

• A well-designed sigmoid curve allows lower initial emissions to give protocols time to grow user engagement before ramping up token distribution.

• Towards the end of the emission schedule, sigmoid curves typically have lower emissions compared to linear models, providing a smoother taper-off effect.

Practical Application and Best Practices

• The template includes best practices regarding allocations and investing periods but remains customizable based on user needs.