Picture this:

You’re seated at your desk, cradling a steaming mug of your favourite beverage. The soft glow of the dimmed lights sets the stage for your imagination to wander into the dazzling realm of possibilities.

Despite the grip of the bear market, you find inspiration in the mantra echoed throughout your Twitter feed: 

“Bear markets are the time to build.”

Visions of spearheading a groundbreaking crypto project flicker through your mind as you shift in your not-quite-luxurious desk chair. 

The future materialises before your very eyes.

A surge of excitement courses through you, prompting you to pace around the room. 

But then, reality strikes. You freeze in your tracks.

A torrent of questions floods your mind: How do I design a token? What exactly is tokenomics? Do I truly grasp its meaning? And what on earth is crypto, anyway?

Perhaps I’m projecting, but if these thoughts resonate with you, you’re in the right place.

In this article, we won’t delve into every detail, but we will illuminate the first seven critical considerations for those who find themselves on the brink of designing their own token.

Drawing from a brilliantly crafted a16z article, let’s dive into the seven essential sanity checks to undertake before embarking on your token design journey:

Also Read: Time Is Literally Money With Chronos Finance

1: Define Your Objective

You must begin by establishing a clear goal for your token.

 Determine its purpose and how it aligns with your project’s overall vision. Understanding your token’s objective will help guide your design choices, ensure that your token meets its intended function, and provide a solid foundation for evaluating its success.

Consider the following questions:

  • What specific problem does your token address?
  • Who are the intended users?
  • How does it create value for its users?
  • What incentives will drive user adoption?

Answer these questions. Internalise them. Communicate their answers with your team, if you are lucky enough to have one, and engrave them in stone by writing your mission statement. This will now become your bible, your guide for the future that is about to come.

A powerful purpose will forge an unbreakable bond between your token and its users, so create one.

2: Do Not Reinvent The Wheel

Before diving headfirst into creating a new token, evaluate existing solutions and protocols to determine if they can meet your needs. 

A database of projects to reference from is a powerful tool that you should embark on creating.A great place to start your research are a16z crypto, CoinDesk, Messari, and The Block, as well as our extensive list and analysis of noteworthy protocols here at ChainDebrief (ps- we do it better).

After you have this list of victims, you must now deconstruct their tokenomics, incentive structures, and governance models to understand the root causes of their outcomes. Evaluate this existing work from first principles, and explore any potential vulnerabilities that you might find, any room for improvement and any noteworthy causes of failure as well as success.

By leveraging established technologies and token models, you can save time, resources, and avoid unnecessary complications.

3: What Token:

Next, you have to decide what type of token best suits your objective.

This isn’t a trivial task. Ensure that you are familiar with all the token types available, and that you have a clear understanding of what token types are optimal for different use cases and future projections of your project. With smart contract code being immutable, this isn’t an easy fix if you get this wrong.

Here’s a brief overview of some common token types and their attributes:

  • Utility tokens: These tokens give users access to specific products or services within a platform. They’re created to enable users to engage with and benefit from the platform’s features. When opting for utility tokens, ensure they offer genuine value and utility to the users and have a strong connection to your platform’s functionality.
  • Security tokens: Representing ownership interests in underlying assets, such as company shares or real estate holdings, security tokens are subject to securities regulations and compliance requirements. This makes their issuance more complex compared to other token types. If your project deals with asset tokenization or investment opportunities, security tokens might be the right choice.
  • Governance tokens: These tokens allow users to participate in decision-making processes and influence a platform or protocol’s future direction. By granting voting rights on various aspects of the project, such as development proposals or platform upgrades, governance tokens enable decentralised governance. If building a robust community and encouraging active user involvement are essential for your project, consider implementing governance tokens.
  • Non-fungible tokens (NFTs): NFTs represent unique, indivisible digital assets, like artwork, collectibles, or virtual real estate. Their scarcity and individuality make them valuable for specific use cases, such as digital art or in-game items. If your project revolves around creating or trading one-of-a-kind digital assets, NFTs could be an excellent choice.

To decide on the token type for your project, thoroughly assess the goals, objectives, and use cases you want to address. Make sure the chosen token type aligns with your project’s vision and offers tangible advantages to your users and stakeholders. Keep in mind that a well-crafted token is vital for nurturing a flourishing ecosystem and propelling the long-term success of your project.

4: List Down Your Assumptions, and Try to Break Them. Ruthlessly

When crafting a token model, it’s essential to bring your assumptions to the forefront and dismantle them without mercy. This exercise will expose potential weak spots and reinforce your design. 

To do this effectively, follow these steps:

  1. Pinpoint your assumptions: Start by noting every assumption you’ve made about your token model, whether it’s related to user behaviour, market trends, tech advancements, or any other factor that influences your token’s efficacy and value.
  1. Scrutinise each assumption: After listing your assumptions, dissect them with a discerning eye. Assess their validity and contemplate the consequences if they prove to be false. This practice will help you spot any gaps or shortcomings in your token model.
  1. Put your model through its paces: Examine your token model under extreme conditions, or by intentionally pushing assumptions to their limits. Observing how your model holds up under duress will illuminate areas needing enhancement or further development.
  1. Seek diverse perspectives: Gather feedback from a variety of sources, especially those with differing viewpoints or expertise. They may identify potential problems or suggest alternative approaches that could help refine your token model. Foster open dialogue and debate for a comprehensive assessment of your assumptions.
  1. Refine and elevate: Harness the insights from these evaluations to improve your token model. Tackle any weaknesses or vulnerabilities discovered along the way, and be ready to update your assumptions as required. This iterative method will help you forge a more robust and durable token system.

By vigorously dissecting and challenging your assumptions, you can cultivate a sturdier and more adaptable token model. This process will help you foresee potential issues and ensure your token system is better equipped to tackle the uncertainties and obstacles it may encounter in real-world scenarios.

5: Generate Your Abstraction Barriers

When designing tokens, it’s crucial to create well-defined abstraction barriers to minimise complexity and reduce dependencies between various components of your token model.

Abstraction barriers are essential interfaces between different levels of a system or protocol, permitting each component to be designed, implemented, and modified independently. They lead to cleaner code, fewer bugs, and superior token design. Especially crucial in decentralised systems where projects are usually created by large distributed teams, they are a must-have when designing the backbone to your token design.

Here are some advantages of abstraction layers:

  • Reduce interdependencies: By minimising dependencies between distinct components of your token system, you create a more robust and maintainable design. Ensure your teams are aware of each other’s assumptions to prevent conflicting decisions that can result in bugs or issues.
  • Encourage composability: Well-defined abstraction barriers promote composability, allowing developers to build on, extend, and remix your token system with other protocols. This aspect becomes increasingly vital as more protocols interact with one another, leading to a broader range of possibilities and increased complexity.
  • Foster communication and collaboration: Clear abstraction barriers can decrease development times and make it easier for teams working on various components of the protocol to collaborate effectively. This approach helps create a more inclusive and expansive community of builders around your token system.
  • Simplify protocol understanding: By establishing well-defined abstraction barriers, token designers make it easier to anticipate how specific changes will affect each part of the token design. This approach also streamlines the overall protocol, making it more accessible for anyone to understand the mechanism and contribute to its development.

6: Reduce Exogenous Parameter Dependability

We are almost there. Our next fight is against exogenous parameters which could plague your poor project and tokens.

Exogenous parameters are external factors not inherent to the system but affecting overall performance and success. Examples include the cost, throughput, or latency of computing resources. 

Reducing dependence on such parameters is essential to avoid unexpected behaviour and maintain a stable token ecosystem. 

Here are some key considerations:

  • Limit parameter range dependency: Ensure your token model functions effectively regardless of changes in external parameters. For instance, if your protocol offers a service and provides a fixed token reward as a rebate, avoid a situation where high token prices make the reward greater than the service cost. This could result in users exploiting the system, depleting rewards or overusing the service. Design your token model to remain stable and functional, regardless of external parameter fluctuations.
  • Anticipate technological advancements: Decentralized networks often rely on cryptographic or computational puzzles, the difficulty of which is usually dependent on external variables such as computing power. When designing your token model, consider potential advancements in technology or computational methods that could disrupt the system. If your protocol rewards users based on solving these puzzles, ensure that your token model accounts for changes in computing efficiency or the availability of outsized resources.
  • Incorporate adaptive mechanisms: Build adaptability into your token model, allowing it to respond to shifts in external parameters dynamically. This can include adjusting token rewards or difficulty levels in response to changes in computing power, network size, or other factors. By incorporating adaptive mechanisms, you reduce the risk of system exploitation and promote long-term stability.

By minimising your token model’s dependence on exogenous parameters, you can create a more resilient and robust ecosystem. This will help you prevent unexpected behaviours and maintain the stability of your token system in the face of fluctuating external factors.

7: Iterate and Improve

Finally, token design is an ongoing process that requires continuous adaptation, evaluation, and refinement.

 As your project evolves, user needs change, or the market shifts, you may need to adjust your token design accordingly. 

Actively gather feedback, measure success, and use these insights to iterate and improve your token system. Be open to change and ready to embrace innovative solutions to ensure your token’s long-term success and relevance.

Final Thoughts:

As you reach the end of this guide, a renewed sense of clarity begins to take hold. Your heart races, and the future seems brighter than ever before.

As you return to your dimly lit workspace, your favourite beverage still warm in your hand, your eyes gleam with determination. The once-daunting task of designing a token now feels surmountable, and the realm of possibilities within your reach.

Your groundbreaking crypto project now seems closer than ever. The bear market may have been the time to build, but now, with a deep breath and newfound confidence, you’re ready to create the future.

So, go forth and conquer, token design visionary. The world awaits your next big move.

Also Read: What Bitcoin’s Evolving Supply Distribution Tells Us About Decentralization

[Editor’s Note: This article does not represent financial advice. Please do your own research before investing.]

Featured Image Credit: Chain Debrief

This article was written by Harry Vellios and edited by Yusoff Kim