Advanced Web3 Tokenomics Design — Part 4: Staking
Nearly all the crypto-assets currently launched by web3 companies suffer horrible tokenomics design. In this blog post, I will be discussing the importance of staking to enhance tokenomics design as a part 4 of a complete series. This work is a follow up to a previous blog post “How to Design Web3 Tokenomics”. Web3 founders are the main target, but crypto investors in general might find the content interesting to help them make investment decisions.
Staking Introduction
Web3 projects often offer staking of their token to their members which help them ensure a lower quantity of tokens are in circulation to reduce potential selling volume. When the tokens are staked, they are locked for a certain period of time which prevents the owners from selling them during periods of volatility. For this reason, projects are willing to give additional rewards to participants. I have seen projects offering as much as 200% annual percentage yield (APY). Most of which ended up shooting themselves in the foot since they cannot afford to honor these promises. With that said, I have seen other projects, such as Illuvium, who designed their staking program quite well. Illuvium were injecting the staked tokens into a liquidity pool on decentralized exchange which generated the necessary returns from transaction fees to reward stakers. The returns in this case was an additional revenue streams to the Illuvium economic model.
Staking to Activate Additional Revenue Streams
The proper way to offer a staking program to token holders is to invest the staked amount of capital into unlocking new revenue streams. This could be based on yield farming on liquidity pools, however this means in a downturn of crypto-industry, these revenue streams can suffer as well. Other methods could be to buy assets such as real estate and re-integrating the revenue stream from the renting activity back into the reward of the stakers. Assuming, one can generate 10% rent income from real estate, this means the reward to stakers could be 50% to 75% of that income, while the rest is split between the project treasury, and their early investors. This way, everyone wins. Meanwhile, there are additional risks involved in buying real estate assets, and it should be disclosed to stakers. Tokenizing real estate, SaaS, Ecommerce business, are all excellent examples of non-liquid investments that can be accomplished with a long enough staking period for those who choose to participate to get the benefit of their token appreciation over time plus the additional passive income received from the new revenue streams associated with this staking program. Once the stake expires, the asset should be sold prior to ensuring stakers can liquidate their capital.
Any type of non-liquid investment could be thought of, ideally if they are un-correlated to the crypto-industry it gives an additional edge for the crypto project to survive in a period of downturn. Syndicated investments into venture capital, crypto launchpads projects, are also all decent non-liquid investments that could pay off. Projects should consider having different categories of staking pools based on various investment projects, and when enough capital has been staked, the investment occurs.
Charitable Contributions
Assuming that some of the stakers are willing to split some of their passive income with charitable causes, projects could even set up an endowment fund to support charitable projects such as planting trees, curing cancer, etc. This way, stakers can do good while locking their capital and still receive a portion of returns for the additional risk involved.
Overall, any mechanism that reduces the in-circulation supply of the token while increasing revenue generation for the entire project economy is a good idea as long as members understand the risk involved in the investment itself. If bad investment occurs, non stakers could be protected, and only stakers of the specific investment would suffer. Unless the project chooses to design their staking program differently.
Conclusion
I explained the importance of integrating staking, ideally to unlock additional non-liquid asset and revenue streams uncorrelated to the crypto industry into tokenomics models of crypto-assets. In the next blog post of this series on Advanced Web3 Tokenomics Design, we will cover the topic of “Profitable Loan Programs” to help web3 builders in designing better economies for themselves and their community.
Please subscribe to the other social media channels where comprehensive content will be added:
Use my referral code below for various crypto tools used for trading:
Centralised Crypto Exchanges to trade with Leverage and Grid Bots:
Keywords: #web3 #crypto #cryptocurrency #ethereum #blockchain #tokenomics
