Tokenomics Advisor

Transcript

foreign hello everybody okay so we're good to start on this session what is your token worth so uh thank you very much for being here there's so many awesome things going on at this conference um I really value the fact that you've chosen to be in this room today to hear this live um I'm not affiliated with any well-known um uh companies or institutions so I think a little bit of an introduction is an order um I got into blockchain quite late compared to a lot of people speaking on the stage starting um late in 2020

and before that I was working as a financial analyst specializing in financial modeling I worked with startups I built up my experience mostly helping to finance renewable energy infrastructure out in Latin America and all of that was built on some strong academic foundations in finance and economics that first blockchain gig funnily enough was to build a model to support a new token sale and listing and you know I think I'm pretty good at what I do but I can't take all the credit here okay a lot of us remember what markets were like during this period um my clients happen to do very well and luckily for me they were well connected

so I very quickly In the Heat of this Market became a go-to person for more of this work and then that gradually evolved into more complex tokenomics briefs now during this time I had the privilege of working on developing a variety of product narratives and Concepts um I took part in live pitches calls with VCS private investors market makers we had to navigate all kinds of Market events and Elon Musk tweets I saw people break promises break agreements blow holes through budgets mismanage their token treasuries get hacked bounce back and of course I got to see how it all landed when we got to

the bear Market now around last year this time last year I decided okay I'm going to take some time out and I'm going to reflect and digest on what the hell just happened there and really make an effort to integrate those lessons in a way that coheres with my existing knowledge and training and finance and economics because these disciplines should be able to speak to each other right so I think that's really important one of the outcomes of this effort was I developed a teaching course on the tokenomics for token sales and listings you've got a coupon there if you're interested and I also started a YouTube channel called token design aiming to

um well explore to economics from more this finance and economics perspective and I began to engage with online communities like a token engineering Academy which is how I happen to be on stage here today I'm deeply appreciative so um that's a quick look at my origin story and hopefully hopefully gives you some professional context to understand where I'm speaking from where the ideas I want to share with you today so what is your token worth um we're going to use this motivation to explore a lot of misconceptions and misunderstandings that unfortunately are quite serious and can finish you before your time but you know all this is

finance and I'm here on the token economics sorry the token engineering stage um so how does that fit in well let's look at definitions first this has already been published today token engineering focuses on the design validation and optimization of token-based economic systems kudos to token engineering Academy for coming up with such a concise definition there and if we look at the way we typically design our systems we're very often focused on creating systems that generate and deliver utility to end users and of course this is massively important the first stop diagnosis for any failed project is oh it didn't

offering you utility it was just a means for financial speculation and it's ironic that the smart contracts the very smart contracts that enable the potential for utility design also can create a web of obvious obfuscation and confusion that leaves us quite confused about how we really engineer something that has a true utility so this emphasis is absolutely important and valid however if we look at the way we use our tokens um they're not just narrowly used to derive or manage a utility oriented economy they're also use this financial assets to raise startup capital and to

provide ongoing funding during operations okay now these are three very different tasks and even if we look at the two auxiliary Financial functions there they are also incredibly different to each other a lot of this peop a lot of you in this room have the engineering training to appreciate that if you are designing a system to do three very different things well that is going to face you with a very different set of constraints and trade-offs than if you were designing the system to do just one of these things well okay um and well maybe some of you will reply okay well what really matters here is that we get the utility right so we get the utility

then everything else follows us we have real demand that is a basis from for financial value to be sustainably derivable um okay I'm I'm open to that I agree with you to some extent if you are going to Market with an amazing product something like uni swap but with real token utility not just governance um then you know you won't need to be a genius about the way you engineer a token Supply or even the way you manage your treasury to tap your tokens for their financial value but unicorns are called unicorns for a reason they are rare and you should not make unicorn or bust your guiding motto

here that is not a strategy that will maximize your chances of success or even your chances of survival so most conventional startups take two to three years to become cash flow positive let's back that out into a more General economic statement it means that for two or three years you are going to be losing more value than you generate at a fundamental level okay oh but you know crypto is different it's exceptional please don't lean into this in in some kind of lazy way um it won't it I really doubt that if this is the common experience for a startup that you know there's not something

um deeply important that crypto isn't an exception to but let's look at the way that crypto slash blockchain I'm not making a difference here let's look at the way that it is different one way it really is different and the source of a lot of confusion here is that you get early access to public markets much earlier than if you are pursuing the equity route and you have to wait until you you get to your IPO um so okay if you're planning your business to rely on public market funding you're asking them to back you for up to two to three years before you actually start becoming net value flow positive at a fundamental level okay and maybe you get off to a good start and

then this guy shows up okay that's um it's it's going to be really hard to keep people's attention we'll talk more about that um so if you're not an instant unicorn you'd bet but you have a project idea that with time and care and effort could become absolutely massive and self-sustaining you'd better make sure that you have your finances in order first because they are going to float the boat that you sail in Okay so introductory motivation here Finance matters and it deserves as much attention as the core utility features um of your project and even though you know

um these problems these Financial issues may not be as mysterious as token utility they are rich and complex problems to solve in their own right and once you take this holistic approach and perspective uh you'll find that these these problems are interconnected um your options to finance yourself uh once you're live and once you get going will depend on the structure of your utility economy how it's running and the decisions you took during your token fundraise okay what is your token worth okay we're actually going to answer this now are you ready it's a classic one it depends okay it depends in particular on when you ask this is one of the most

important Dimensions to consider we have three time periods in my view before you list during your private sales in early trading and in later trading okay now spoiler alert I'm gonna argue that the period in which you have most visibility and control over what your tokens are worth it's in the Private Sales okay so um let's it you can raise money through public markets but it involves so many risks that unfortunately so many Founders don't understand um it's it's um it's very dangerous and we're going to look into some of the details now let's start with early Trading so for some of you might be thinking how do we make money in early trading all of

our tokens for you know team and Company are locked up that's the way we create reassurance for the private investors and for the public not to um you know that we're not going to dump on them straight out of the gate very good idea but here's the thing Market making gives you a back door now a lot of Market making the typical Market making contract includes a profit share that's paid back to the company that's uh issuing the tokens right that's hired the market makers the market makers know that this is a golden opportunity and they will sell you hard on this they will say we can make you as much money as you manage to raise privately and if you're on a smaller fundraise you know they won't be lying

to you um sounds great right what's what's there what's the problem here well there are two issues first of all things may not go according to plan um the market May reject your valuation you may not have stirred up your community enough some thud might set in and then you're stuck in a situation where you were planning to raise more money than uh after your private sales and and then you don't have it you're kind of stuck you can't go to your investors saying hey well you know I needed more than I said I needed they want to see results from what you've already been given so that might stop you and then the other issue is that a lot you know the way you maximize value

extraction in this phase is by doing things that are borderline or outright Market manipulation I don't want to Tar all market makers with same brush oral Market making let's be clear it's an absolutely standard activity in traditional Finance when you are a come company listing your equity on public markets for the first time in an IPO you hire market makers what's the difference those markets transparent incredibly well regulated monitored and the structure of those markets really eliminates the the opportunity for some of the manipulation that blockchain enables okay some warning signs you might want to look out for here if you're being encouraged by your listing

Partners to go for a really tight initial Supply really low valuations those might be signals you know compared to your peers at sort of like comparable levels of public interest that might be a cue that they're setting you up for for maximal extraction but frankly you might also just be able to tell when you're being pitched to by some of these market makers you know they are quite proud of all the clever things that they can do for you let's be realistic everybody is doing this regulation is going to close the opportunity but it's not there yet so it's going to be down to you to decide how you handle this however you feel about all that though my main point is

that you know offloading your fundraising needs to early trading comes with risks okay what about later trading at this point um you know the tokens have unlocked to you it's all above board everybody came on knowing what the vesting schedules were so that should be fine right um and um this is often a point of intense interest from uh Founders they will they'll come to me and say what's what's the value of all the tokens that we have at the end of year one and if I give them a straightforward answer uh this is the kind of look that gets into their eyes um please this is absolutely not the right way to think about the value of your token okay if you try to spend the

millions that you think you have you're going to end up in this really surreal world where the more you sell the less what you're selling is worth and you're in the situation which none of us have been you know 99 of us are never educated to handle because financial management is all about saving and once you've saved up something it's yours to spend not here we've never had to deal with thin liquidity okay thin liquidity um limits the accessible Financial value you have you try and sell those tokens into the market you run through the real buyers pretty soon we're not talking about the imaginary ones that are being watched traded in by your market makers there's a limit to you know the real buyers out there and if you continue to

try and sell and and sell at the price you will push the price down and that will create a value narrative that is at risk of becoming um uh self-reinforcing right so um to make things worse um you know actually let's pause there this is not Theory at this point like I worked with a project that was had tokens unlocking to them and they were only able to sell 10 of the tokens that were unlocking to them each month without crashing their price so month on month ninety percent of their valuable assets were just piling up you could just open cupboards and all these tokens would fall out they're entirely useless and um you know they hadn't factored that into their planning

um so you know it's it's a real thing this isn't Theory the other issue you have is that this thin liquidity unfortunately in the your early stage in the early stages of your Market is likely to get even thinner yes your community is out there and they're all excited about that initial launch we were hearing earlier about the importance of getting marketing right um but you know you got some Pepe to buy uh you know next month so as you go along people get distracted PL you can't we heard some amazing Stories um from Trent there about the way that Community can support the development of real utility but on the financial side in the markets please don't be romantic about this the people

you will attract are incredibly speculation driven and a short-termest um if you're a great you won't escape this it's a Honeypot thing the better your project is the more speculators you're going to attract because you're in open markets there are no controls this is what permissionlessness means it means you get human nature showing up at the door okay um and another thing that you see happen is that um if you've been experiencing Market shocks that that rock um you know entire markets you'll find that your liquidity does not bounce back as quickly if Ethan and BTC recover you you somehow have this lame sort of okay a little bit more but not where we were it's like they leave the party and

they're like oh we can go back in ah let's try the next bar down the road um again it's just being realistic about the nature of these markets and who's in them and then to compound everything your investors who are liquidating their tokens because this is the entire Point okay why you have investors have they can invest in equity they can invest in tokens why are they investing in tokens yes it gives them access to the sector but from Financial perspective the key Advantage is that they are able to exit early they are able to they have access to public markets that allow them to liquidate early and um what we're seeing now since markets have cooled is that if

you're if you're you know having a conversation that's going well they'll be asking you for Equity now much more than they did before because that sort of like um upside differential has has come down quite a bit and um okay what about the vesting isn't that supposed to keep us safe well under the current Arrangements you know once tokens are unlocked they're unlocked this is this is the current standard I think it would be interesting to explore um you know maybe with account abstraction creating higher level rules that limit when people can sell but then we would need the investors to come in and say that's a good thing but if they haven't been selling tokens for six months they have they can do whatever they want with those six months worth of token okay oh and maybe you think you're going to get some cover if you're an

amazing project and that okay they're going to huddle they're gonna They're Gonna Keep hold of the tokens no they've got an entire portfolio that they need to make work if you are doing really well you might be the one project that makes their portfolio perform and compensates for everything else that didn't okay look look at how many Investments VCS are making that might give you an idea of that kind of sort of exposure Behavior now all of this is is a little ironic really when I first came to this at some of the stories I was hearing was like look this is an answer to shareholder capitalism which is always biased in favor of investors you now have a common token common Financial assets around which all the stakeholders can coordinate but if your stakeholders

get value from your token in different ways having a common instrument may actually create conflict and in some ways like um you know the the incentives between um Founders and investors are much better aligned in the traditional scenario because they're joined at the hip for five to eight years until until they get to exit um so you know the case that I've been making here is that tapping the financial value of your tokens through public markets is um is really risky and um you know really shouldn't be taken lightly and if any of you see the sort of fights that I get into on LinkedIn or whatever I'm

usually whenever I hear people saying we're doing price modeling I say wow what are you doing well um hopefully this provides some context around why I'm so skeptical about or cautious about price modeling is because if people misunderstand you know what that what that um represents or the certainty around that metric they they can stumble into some difficult financial decisions so this leads us in a really interesting situation where um the private sale offers us the most control and certainty over what our tokens are worth and it won't feel like that when you are knocking on people's doors and they're sort of like telling you what you know yes no yes no um but really you're you're at the Mercurial whim of the markets um later

on and and this is when you can negotiate when you can really take hold of what's going on so what is your token worth well um it's commonly said things are worth what people will pay for them okay this captures the spirit of market value okay and that contrasts with another notion of value called fundamental value where you use Theory to define a measure or relationship between observable attributes of an asset or hypothetical attributes of an asset and what it's worth now again this is a point of difference between me and and other very smart experts but there are no there is no consensus on a fundamental approach to the value of tokens at this stage at

this stage in projects development um you know in in a sense it wouldn't need to be right or wrong if everybody else was doing it that would still be a valid point of coordination but we don't even have that consensus and as it stands these methods are just so highly uncertain that I think it's all noise and not signal you are I really don't think this is the right way to go and I say we need to guide ourselves with a market value approach and that's this is what your investors are going to be doing because what are they in this game for they want to generate a financial return and they're going to do that by selling tokens in financial markets so one of the key things they're going to look at when you present them with an offer is am I buying this at a value

where if I then bring it to Market it's likely to get an uplift is it going to be valued higher in the market all this is is a classic Strat strategy of Buy Low sell High Okay so what are the metrics that they look at in order to get a grip on this one's called the initial market cap this is the initial circulating supply of tokens multiplied by the listing price then you have the fully diluted valuation which is all the tokens you've pre-mined or created at Genesis multiplied by the round each investor is bought at let's look at the meaning of these two things the initial market cap is a measure of an estimation of trying to figure out is the market likely to accept this

valuation when we go to our listing is this like way out of whack with other projects that are sort of like comparable in some way and for the fully diluted evaluations kind of similar to like saying once all these tokens are unlocked and circulating what's that valuation going to look like is that something that the Market's likely to bear it's implicitly a measure of dilution risk or inflation risk as well and you need to read that out fully you need to know you need to look at your vesting schedules as well now trouble is that you need to make these comparisons not just with regard to public data with regard to private data as well because you are not going to be the only people pitching to these

investors there are entire groups of projects investors all talking to each other and they together create a private Market that is subject to its own Dynamics right and um you know if bargaining powers in the hands of investors they're going to negotiate sort of valuations that leave them with more chance of capturing upside and if bargaining powers on the other side that allows them to press um for uh deals that keep more value for them and for their Community but we have a problem here these markets are highly opaque nobody really the only side that is constantly getting offers crossing their desks are the investors the builders you know the

developers have plenty on their plate so what can we do here what's what's what do I think is the right approach it's that you do some market research and you do as much market research on the deals that have recently closed and those that are still open in the market that you think are similar to yours and then you can create a chart a little bit like this where you take metrics that Define and summarize your uh your offer and then see okay how does this place relative to the maximum and minimum and the average in the market now the goal here isn't always to hit so here you the blue triangles are the average values the red diamonds are the live values running through the model the goal isn't

always to hit the average right it's rather it's to if it's not at the average it's to be able to say okay this is why we're not here and prepare those arguments in advance in case they are brought up by your investors and notice that at this point this table includes many more metrics than just the valuation metrics that I mentioned and that's because all these things are subject to even your vesting terms are subject to um uh to these market dynamics you know I remember when there was a change in Market regime at some point suddenly investing schedules lengthened by two two years that was that was the change we needed to make to get investors to accept that why because they had the bargaining power so you know yeah there was an economic argument but that

economic argument stemmed from from the nature of the market and their beliefs about how how the situation had changed um this is really hard to get hold of um it's opaque we're working we're collaborating on building a database that is queryable and that's um we meet with a token engineering Academy so hopefully we'll make progress with that but if you're doing this for yourself like any small amount of progress that you can make is better than going in blind I promise um and something else this points to is that this is not going to be a One-Shot exercise you're not going to make your tokenomics bring it to the investors and then shop around and then you'll get you no because this is an open negotiation

this this represents what's known in traditional Finance as comparables transaction analysis it's it's a completely normal approach and it's used when as a valuation lens when the value of your underline of the asset in question is uncertain and it says okay what what's the kind of field that we need to get to to get to a deal that is likely to be accepted and yeah the learning from that is that this is all in negotiation and while you're still fundraising you will have to change your offer several times and understand why so that's why I recommend that you get hold of an amazing tool like the one I've built there but you do have lots of other tools that are out there I've seen a

couple a couple of people Market theirs but you know so you might still get value out of the teaching course where I explain all these Dynamics and indeed please do come on Saturday where we'll be working through how to build a an offer from scratch from the ground up in a way that identifies and saves your interests and gives you the maximum chances of success so thank you very much I didn't time that do we have uh time for questions brilliant we don't have unfortunately we don't have time for questions but I'm sure people will find you throughout the day um Roderick will be here and available for questions and yeah again come to the bar camp on July 22nd and have the

chance to work on a token offer live thank you so much Roderick thank you so much everyone thank you [Music] [Applause] [Music] foreign