Max Tokenomics Transcript PDF

00:00:01 - A Like I want to explore a bit how I think about tokenomics, and others obviously think different, but for me really, tokenomics is about coordinating people. And it sounds a bit abstract, but stay with me, we're going to get there. So what I always say, and that might be a bit weird to...

00:00:01 - A Like I want to explore a bit how I think about tokenomics, and others obviously think different, but for me really, tokenomics is about coordinating people. And it sounds a bit abstract, but stay with me, we're going to get there. So what I always say, and that might be a bit weird to some people because obviously we're all like technology excited. But for me really my most important question and observation is that for me, bitcoin is an economic innovation. So it is defined in code, but the alignment of people that don't know each other, don't trust each other, have no connection to each other, are completely anonymous. 00:00:51 - A That really makes it work. So alignment of incentives is like the ultra power of of bitcoin. So miners, users, investors don't deviate from the plan to provide like these decentralized payment, store of value, whatever that is. But it's like it's really costly to attack bitcoin now. So I found that article, I have no idea if the numbers add up, but they say like you have to buy like 10 billion of mining equipment now just to do like a 51% attack on bitcoin. 00:01:30 - A I have no idea if that's true or not, but it shows that really aligning people, coordinating people to provide this network and then incentivizing them to not deviate from the plan and making it extremely costly to work against that coordination is what tokenomics is all about. So it's much someone not muted. Okay. Okay, mu. Good, nice. 00:02:10 - A Yeah absolutely. So really, if there's one thing you should learn from this first session, is like bitcoin, economic innovation, because there was the hard coordination problem of providing a decentralized payments store of value, whatever. And for me really, and it's a bit of a scientific and abstract definition, but for me really, tokenomics is about designing coordination mechanisms through incentive design. So we're rewarding people to coordinate and then to keep them coordinated, which is like a constant fight. So this thing is in web two, we had like IBNB and Uber, theyre also coordination mechanisms and they are platforms and marketplaces, but they set like very clear rules and thats something we cant do in web three. 00:03:10 - A Everything is fluid, is trustless, its permission less and so on. So we need different mechanisms and that's why we use tokenomics. And obviously in our decentralized infrastructure, smart contract platform bitcoin, it'all because we can coordinate people. Ethereum would not exist, if you like, the validators or stakers, however you want to call them, if you wouldn't incentivize them to provide this decentralists smart contract platform users can use. This is really what we are always looking for. 00:03:44 - A And that's like what I'm like now, looking. Whenever I look onto coinmarketcap I find new alpha whatever it is. So anation, I ll call myself an innovation romantic. I'm looking for the newest unicorns. So for me, tokenomics is really this tool to coordinate millions of people to co invest, co provide, co create, co own, co govern something in a decentralized network. 00:04:15 - A It can be all of it, it can be an investor, a creator, develop a contrib governance contributor all at once. But these are things we can use tokenomics for, tokens and protocols to do this. And there's lots of things what we can do here is we can coordinate the creation of knowledge or the trading of data. We can bootstrap liquidity or build intellectual property, we can bootstrap infrastructure, digital assets, whatever. And the ideas and protocols, I'm not saying like they solved it, but there's like cool ideas out there that show this, that it works and that we can probably in the future use this mechanism to build the craziest protocols and the craziest ideas out. 00:05:09 - A Now the ocean protocol tries to solve the issue. In the data economy, there's demo zone that rewards you for plugging your data, your car data, and driving around and sharing your car data. Hivemappa lets you try around in your car to do basically what Google street view does. So you're looking at this and lots of different ways to make these massive networks. And I always show this, not because helium is necessarily the best tokenomics or the best and greatest network of all time, but it shows how insane we can bootstrap networks around the world. 00:05:56 - A So, I mean, they found a way that people buy their hardware so these antennas to provide an IoT frequenc where potentially IoT devices can plug in and use the data and they're incentivized, okay, you can buy it, you can, you put it in your apartment and you are rewarded for providing this coverage. And this is insane, because if you think about it, and if you think about what a company like telecom at and t would need to do to achieve this, is insane. They would need to have, I don't know, service technicians on the road. They would need contracts with everyone for plugging this stuff into the, into the apartment. So there's obviously licensing, there's ways to solve this, but not as scalable as the helium network did. 00:06:57 - A And this is what I'm looking for. Like something like this helium has other problems with real demand and so on. But I'm looking for these mechanisms that scale around the world and obviously if you invest in something like this in the beginning it's very valuable. So really I'm looking for tokens that solve the problems that require the coordination millions of people. So decentralized infrastructure, social media, mobility, data economy, finance, regenerateive finance, carbon markets. 00:07:35 - A I mean climate change is the biggest coordination failure we ever produced, probably most costly, but there's also gaming that you can coordinate millions of people who there's content and ip energy, people working on all kinds of things. And if we want to really look into the unicorns of the future I think they're going to be there and I'm sure that tokenomics is going to be the mechanism that enables them and that's really the thing. Yeah, what I'm looking for and yeah, yes, so I'm just looking into the comments and yes, helium, amazing bootstrapping mechanisms. Nobody uses their IoT. So for helium really the most important thing is their 5G networks need much more demand and real demand. 00:08:30 - A That's, that's like the biggest issue they'facing, at the moment. Yeah, so mean, that's why people freak out about lens protocol and so on. So social media obviously is this insane market and if somebody now unlocks the protocol and tokenomics of figuring out a new social media platform that works with these mechanisms is going to be insanely big and valuable and yeah, lots of people waiting for a lens token. If it's not, I don't think it's out there yet, but I think what was it like? Let me know if somebody knows that. Yeah. 00:09:14 - A So I brought to you seven plus one fundamental principles of tokenomics, which I'm using I think very high level of a project, so very, very high level. And I'also writing a medium article, im'm a bit too perfectionist, that's why it's not out there yet. But you will get that into the reading list for next week. The and lots of good articles. So my principles are obviously not just my principles but one. 00:09:48 - A The smartest thing is in the space and my seven tokenomics principles is really like tokenomics must solve this coordination or coctive action problem. So the solution is something you can't provide by individual behavior or it's not possible. Tokens obviously need clear utility and constant demand drivers, which is why things like arbitraurement or optimism freak out because there's no real utility besides like a bit of governance. The token should have value accrual or accru value, capture value. But we also need is allocations and reward need to be aligned with value creation. 00:10:30 - A So tokens and rewards flowing to the people that create value in my network, in my ecosystem. The next one is we also need suitable distribution mechanisms towards value creating users. You might heard of all the discussions about airdrops, about liquidity mining, attracting mercenary behavior. There's tons of problems with our current distribution mechanisms and we haven't figured that out yet. What we also need is absolutely sustainable reward structures. 00:11:04 - A So not crazy 3000% APy or upon these schemes where I have to buy nfts and these nfts reward other users, the axe infinities and stepn, and obviously supply resilience, which is not, it's important, but not as important because we kind of, as tokenomics designers, we over obsessed the last two years in designing supplies. And it doesn't really matter if you have 3 billion tokens or ten, and then you have like an inflationary supply. Yes, we have, Adrian. Thank you, Max. Could you please explain the difference from.3 and four? 00:11:55 - A I think we're gonna get to that. So I obviously like, you know, we'ren toa go deeper into this, like now. Okay, thank you. Yeah. So our time is okay. 00:12:14 - A Time is all right. So really important coordination problem mentioned that before. We need to coordinate people to offer something we can't offer Al loan. And one thing that I really like is from jump crypto, that idea of positive net utility. So the total benefits for the community as a whole exceed total costs. 00:12:42 - A So really, if you contribute to this, the value for you is much higher for the entire community than for you to provide this, which also goes into this inability to privatize. So this good to provide it by myself is way too expensive through direct costs, coordination costs, transaction costs. So these are like economic principles, you can look them up. But so important is total value for the community exceeds the entire costs, which is also something that we saw in platform and marketplaces and the inability to privatize. Yeah. 00:13:29 - A How do I understand if a project solves a coordination problem? What I always ask myself is like, does this project introduce a new user behavior? Why do I ask myself that is because web two and web three are both really good at introducing newr behaviors. So Airbnb and Uber, they got massive by introducing new user behaviors. You can leee in the stranger's house, you can drive with a stranger around. And that's why they got so massive, because they unlocked this new economic potential. So obviously. 00:14:12 - A And then if you think about big projects is something like offering your comp computing power to secure a network that wasn't something that people did before bitcoin. Staking assets to provide security. Also nothing. Setting up antennas in your home, absolutely not. Lending a stable coin by collateralizing your crypto. 00:14:33 - A Also a new, new user behavior. And you see how this goes on, like curating, being rewarded for curating on super rare. I'm not sure if they still haveb it or like creating, maintaining, consuming content for rewards. The ocean protocol for like providing the best data, keeping it updated and so on. These are things we can, you know, we can do, or you can, you can find out if this really is like a new user behavior and if it's, if it really solves like this, this really hard problem. 00:15:09 - A Yes. Yeah, another nice question I mentioned that before is like what, what participants struggle to provide service efficiently on their own. That's an example. I already mentioned the telecom setting up this huge network would cost them billions and billions and billions. Probably much more than helium actually raised in their fund fundraising. 00:15:34 - A So s I always, that's my first question when evaluating a project. So if you have any questions, feel free to put them into the chat. Yeah, time wise is okay, but the thing really is, and one way I want to think about utility and I would love this quote from Justin Bond. I'm a bit of a groupie here and fan of Justin Bond, so take it with a grain of salt. So tokenomics, he says, is a mechanism that creates demand for the underlying token if the network is being used. 00:16:15 - A And yes, I mean obviously it makes total sense. So this coordination problems, once you solve it'like, this really really difficult and hard problem and I now, yeah, Justin want the best. I should stop looking into the chat. But really it'like, the token utility is an access to the value creation and the token obviously enables the value creation. So if you want to build on Ethereum, deploy smart contract. 00:16:51 - A I will need to pay for guest and pay through Ethereum. If I want to use the bitcoin network, I need to buy bitcoin. If I want to use the ileum network I need to use, I need to use data credits for which I need to purchase an agen t and so on. I want to get the stablecoin die. I need to look up and collateralize crypto assets if I want to liquidity flowing to my liquidity poll I need to pry LP's. 00:17:19 - A So the token really makes it possible for you to, to access that huge value proposition and solution we're looking for and only if that really exists, there can be constant demand drivers and constant is really important. So I want to use the platform I buy, I don't know, a buy curve, I get the token, I can vote where the money should flow and so on. So really like the unique value proposition my protocol and project has is also what I'm looking for. And there needs to be this deep connection. And that's why usually the token is sometimes a bit like an access key to the solution and usually always directly involved in the value creation of the network. 00:18:21 - A Thats s one of my favorite parts here and I mean there'other things, but really a co idea here is it needs to drive constant demand. So if you buy the token once to get the value, it doesn'make. Sense. So ideally you constantly pay for gas or you constantly buy bitcoin as a store of value. And if obviously usage of the underlying platform goes up, demand should go up and token price should increase. 00:18:49 - A Because usually most platform have some limited scalability or some way where they're like locked. And these are some rules I try to come up and I still think about them. And please feel free if you have other ideas to add them. So token gating for example, isn't a constant demand driver. See for example, bank from BanklessDw, you can buy 35k in bank and it's a one time payment. 00:19:20 - A There's no other real use case for bank at the moment. They're trying to add some, but not really, there's not really anything there. So you buy it once, but then it falls off. So usually, even if you can constantly add people, demand always goes to zero, which makes your token pretty worthless. Governance, obviously. 00:19:40 - A I don't know if that's a discussion, but it's not strong demand driver, arbitrum op whatever. Also one idea I see always with startup is just like they create a utility tokens or people use their platform. If there's no coordination problem here, and the alignment, it's not necessary for aligning the users. This just creates a friction. Because why would I go ono the? 00:20:08 - A I don't know. I want to use canva and I have to buy the canva token to pay for the subscription. That's a friction, that's not a utility. And artificial demand mechanisms, they don't usually last very long. So sometimes people are like, okay, shit, we have no utility, what do we do? 00:20:27 - A Okay, let's add, I don't know, optimism farming for example, which was like something that survived for three years and didn't really work. And tokens that can function with ah so it should be projects that can function without a token. They can easily have problems with demand. So Uniswap is an amazing protocol and the token is absolute garbage. So I think the token is worth nothing. 00:20:57 - A I mean it'a governance token where you can govern about the generalist supply. I think yesterday also the fee switch was decided against, which means theres no val accrual to uniswap. So the token is not really useful. And arbitrum has the same issue. Optimism has issues. 00:21:16 - A They dont really need a token and then cramming utility inside is really hard. And obviously one thing you also need is demand. Sideited mechanisms need to be in place before demand can be captured. So helium has a good idea how to capture demand. The problem is they have no business demand for their Iot coverage. 00:21:36 - A So the mechanisms are in place is just nobody using it. And one thing I really want to emphasize now, adding core utility later is quite hard. So cosmos is doing that quite well. But it gets more difficult once the token'out. But it's not impossible since it's just, it's a standard. 00:21:56 - A So you can always add mechanisms and then find new ways. But obviously if the core utility isn't there, it difficult. Yes, I'm sprinting a bit. Would you consider airdrops to count as artificial demand? Not necessarily geo. So I think it's more, it's more like a bad, or like not a bad, but it's a relatively inefficient distribution mechanism. 00:22:32 - A That's how I would call it. But we're going to get to this until a second and another one from Vasu demand side of tokens is that the problem is that we have lots of smart meters. And I did an analysis on helium and the problem is most people are just using Wii to connect their IoT devices to, and Wii is just so much more efficient. And helium has their own frequency, which is called Longfi, and we don't really see adoption, and they hoped for the adoption of Longfi. So I think helium still has a chance. 00:23:16 - A With their 400 billion of funding for VPN and Wi Fi and 5G networks. They're building lots of stuff. But I think that network first one amazingly executed, greatly bootstrap. But I don't think it's going to work. Yes. 00:23:36 - A Okay, okay, more questions. So I'll try to juggle that this project difficult. Okay, let me go through it and then like just bomb your question and we then do them at once. ##k so we establish value, accrual comes after o coordination utility. We need to coordinate people. 00:24:07 - A There needs to be a utility and constant demand for the tokens. Now what? So if we are creating now a lot of value in our network, the tokens need to reflect that value of the network in some way. So some will call it value capture, some call it value accrual, but a small percentage obviously, of the value should accrue to the network. And there's a multitude of ways how you can achieve that. So medium of exchange and units of account are like utility tokens, like the gas infrastructure. 00:24:40 - A There's fees distributed to the protocol and treasury. So curve takes a treasure, takes a percentage, putes into the treasure re and that manages also the token supply. Equity like characteristics are important. If this is basically a share in a protocol, like a property, right? That could be interesting. Collateralization, that's something I missed here, I forgot to add. 00:25:08 - A So if there's an asset in synthetics, for example, there could be a store, there could be a real asset below being a store of value. Obviously like bitcoin and ethereum achieved that. That's a good. When people just believe that something has valued, that's like a value accrual mechanism, if you like it or not. Buyback and burn is a classic. 00:25:35 - A So you buy tokens or you buy them and you burn them, like BNB chain does it. So they burn some of the tokens, and then obviously as demand and network usage grow, the value of the network grows, but the supply shrinks, which obviously means that the value of the network is more reflected in the overall token, and then these tokens have more value. There's the burn and mint equilibrium. Helium uses that. And then obviously you can also stake their tokens and lock them. 00:26:08 - A So if they're locked and if they're not changing hands all the time, there's also some, or the chances are just higher to for value to accrue. It's a fairly interesting concept. Add I added interesting pieces to the reading list. This one is also really good. It discusses the thing and people are very, very, they have different opinions on how value capture and accrual really works. 00:26:44 - A One thing, and this is also a cool example, is how it works in Ethereum. Basically, once ethereum increases like in usage and goes through the roof, the thing becomes deflationary and Ethereum burns more fees, which means the existing token holders or more value of the network accrues to the token. And usually that should be reflected in price. There is a really cool article. I think it's quite good from consensus. 00:27:21 - A I like that. If you want to go into this is a cool example of how ethereium makes that okay, a bit behind time, but that's okay. So number four, Audrian didn't forget your question. So here we're looking at how can we capture and distribute value to token holders, to the treasury, to the project in alignment obviously of allocation and rewards of value creation. We are looking are the allocations really flowing to people that will create a lot of value now and in the future? 00:28:04 - A So helium for example, I think the founder sent helium to his wife, looks rare, had a very questionable, I think. So the founders cashed out like I think $30 million when the hype came and lots of watch trading happened, obviously. And if you have these insider allocations then aptos at like these problems is really pointless because you want to develop an ecosystem that trials and if it doesn't, you will run into problems. So if in five, six years there are no tokens anymore to reward ecosystem participants, that's going to become problematic for you. And one interesting thing is also like tokens should reward value creation, not just participation. 00:29:07 - A So like yield farming was a classical example. Like people just there was apy of 3% more they went there. So rewards for certain activities were just like not going, they were just going to people that participated, not created value. Or people are holding NFT collections and getting revenues. Or like an axie infinity, you basically like the value creation was not really given. 00:29:36 - A Like you just got more nfts and then you got more tokens and that created a crazy money printer. And obviously the simple value transfer from one user to another doesn't count as value creation. So examples obviously is like Eve goes to stakers that provide security. That's clear. Like decentralized smart contract platform, you want to have value creation, axie infinityarded anyone that participated, regardless their contribution, which led to crazy inflation and then the ponzi collapsed and so on. 00:30:10 - A Yield farming, farm damping, a classic also is the distribution of worthless governance tokens or my favorite example is just APEC coin staking mechanism. I mean it's literally you buy acoin and, and you stake it and there's nothing happening in this ecosystem. Like the rewards are entirely useless and completely pointless. And why exactly? So to I have to advance a bit faster. But token distribution mechanism are essential to get tokens to the right users. 00:30:55 - A And we have multiple different ways we can do this. We have like airdrops, we have liquidity mining, we have bonding curves, we have icos ideos, we have proof of proof of work mining proof of stake mining. So there's lots of different ways we can do this and we can use this to incentivize people and to get the people to the right contributors. And really here the problem is airdrops, like for example, Uniswaps Airdrop, it actually showed that people that got uni from other sources retained better than the airdrop recipients. Because, I don't know, it kind of makes sense because they went, they invested much more energy to get these tokens than just to airdrop them. 00:31:52 - A So the question really is like, is this efficient if we drop $15 million or billions of dollars in tokens on the market and it gets to the people, or doesn't get to people that are contributing and creating much of value. And yeah, icos, they're also pretty inefficient, I would say, distribution events, I think ethereum'tokenomics, the only thing that gets really criticized is like the ICO and then bonding curves, I think, I really hope curious rabbit will also do a bit of on bonding curves because I think bonding curves could be quite an interesting distribution mechanism for the future. In order, the last, or like the last two things really is supply resilience is another important thing. And the last two ones are like the reward structures and the supply resilience. And they are like not like ultra, ultra important. 00:33:01 - A Like if you have really strong demand, your demand, your supply can be a bit shitty, but really the point of your supply. And that really goes back to the quote from Justin Bonds. It should be designed in a way that it supports the usage utility and future development of the project and avoids putting stress on the network. So it's not like we make deflationary, like, I have startup founders that come to me and say like, hey, can we have this mechanism? So price always goes up. And I'm like, why? 00:33:30 - A How does that support the utility of your project? How is demand, how is demand affected by that? And then they're always like, yeah, okay, makes no sense, right? So things your supply should avoid, obviously is uses the disruptions, high token velocity, which leads to also very volatile, like volatile tokens that always change hands and prices shoot up and prices shoot down and so on. Like supply shocks are, are really annoying. So token unlocks, vestings lock up periods, lots of tokens get dumped onto the market and we lose cash or like 30% new tokens. There's a lot of sell pressure. If demand can't keep up, we'going to have people that are going to think like, ah, the project'maybe, not that good, high inflation is also a problem, or even governance problem through token concentration or a lack of ecosystem rewards that hinder development. 00:34:41 - A So there's lots of ways supply can fail, but it really, ideally you have demand and supply shocks, but your supply is resilient, so it can adapt to changes and without hurting the utility. That's really the sweet spot. And yeah, I think really I love this webpage of ultrasound money. Ethereum really, I think is like kind of like the gold standard for supply stability at the moment and for resilience because you want to ensure sp usage, even demand skyrockets, flattens out, whatever. But Ethereum burns tokens when demand explodes and it becomes inflationary when usage drops. 00:35:36 - A So it's a bit like a central bank that introduces a lot of liquidity and ye when the economy needs stimulation and obviously economies can overheat. And Ethereum obviously wants participation, but not too much because theres a limited scalability. So it doesnt want to keep prices very low so that people are constantly incentivized to use this to an absolutely maximum degree, which then could lead to this whole thing breaking down and being congested. So that's really why I look at supply resilience. It can adapt to changes. 00:36:21 - A And the last thing really before I can brief is sustainable reward structures. So what most projects lac is like this sustainability loop where the token is it's used to fund new projects, to fund new developers and that bring a positive ROI back into the treasury, which hopefully leads to even more growth, new initiatives, whatever subd whatever. And a self sufficient ecosystem that is not relying on external funding. Thats what we want to look for. And obviously rewards should be sustainable and not depending on new users joining. 00:37:02 - A So in axie infinity, people had to buy nfts to get in and that money was used to reward other people that was obviously not sustainable. You reach a point where, where there's not enough people buying in and the whole thing comes crashing down. The best rewards come from real revenue, obviously ri positive initiatives. And then we have these crazy apy'we, have axie Infinity, which I mentioned. There's a little cool game which is the bitcoin miner game, which gives you real crypto, but it distributes that from real ad revenue so you can get free crypto and sweatcoin or the sweat economy. 00:37:47 - A They also, I'm not sure if they achieved it yet, but they connect affiliate products and real world products and take a commission for you working around. So there's like real money coming from real companies into the ecosystem. So yeah, so overall that's it, right? Like coordination problem, token utility and so on. And obviously in the end your supply should be resilient. And like, sustainable reward structures are not necess, they can be a bit optional. 00:38:23 - A So if you are in growth phase and you spend a lot of money on growing, then it's okay for you to have like, you know, you know, like a non sustainable rewards for a while.