Why NFT Brands Look to Tokenomics
Today’s article is by Shaman (Twitter, LinkedIn):
Tokens are an increasingly popular way for projects to expand their ecosystems. But why are they doing this, and what are they hoping to achieve? Let’s dive in . . .
Tokenomics have deep roots in gaming and gaming rewards. In traditional video games, users can attain in-game currency (let’s call it ‘gold’ for the sake of this post) as a reward for various activities, such as battle, looting, dungeon crawling, and more. The system is set up as a cyclical one — user plays, user gains gold, user has ever-expanding utility for that gold (in-game only, of course). The dopamine rush of defeating a boss, or finding and opening a treasure chest, is one of the reasons for the proliferation of the gaming space in general. So, with a cycle of ‘play game, earn gold, spend gold, play game’, users are provided an expansive experience that is (hopefully!) enjoyable, entertaining, and rewarding. The problem here is that it is a closed loop ecosystem — the gold can only be used in the game, and the assets in the game can only be used by a single player in the game, and not exchanged or sold (unless sold back to an NPC controlled marketplace).
The NFT space is looking to capture a similar dynamic — with one massive addition. In NFT projects, the ‘gold’ (let’s move it back to token, actually), the token cannot *just* be used within the project. In this case, the token — because it is typically an ERC-20, the most common form of tokens in cryptocurrency — can be removed from the ecosystem in which it exists and sold on an open market. Uniswap, Sushiswap, and other decentralized exchanges (DEX) allow for conversion of one token to another — assuming you can find both buyers and sellers in a marketplace (which is no guarantee!!). Tokens are simply a medium to exchange value — but now, that value can be exchanged not only within the existing NFT project, but beyond.
Something many projects overlook in the issuance of a token is its utility. Very few projects can simply launch a token in a marketplace and find immediate buyers and sellers. Looking at a few good examples can be helpful — $APE has clear an immediate utility — Yuga Labs not only required all purchases of its Otherside land to be in $APE, but it had a merch drop that could only be redeemed with $APE coin. That utility means that a marketplace for the token will form, and buyers and sellers will emerge.
Looksrare is another good example. $LOOKS was provided initially as an airdrop, and now as a reward for those participating in the ecosystem. The utility is clear — it is utilized in the creation of an OpenSea competitor, and market dynamics have taken hold with their unique rewards systems.
Other tokens have struggled to find footing — $MILK from Cool Cats was initially broadly exchanged, but the utility for the token has tapered off — leading to market participants largely looking to liquidate their tokens as quickly as possible. $LOOMI from Creepz is another example — the utility of in-project purchases is vast and they are putting together a great ecosystem — but as soon as the utility runs out (i.e. the market can’t produce enough goods for token-holders to purchase), liquidity events take place and users try to sell their tokens in exchange for eth.
A proper balance of token, utility, and demand is critical for a healthy tokenomic approach. As immature markets evolve, we will see a number of different tactics and innovations with regards to utility, provision, and earning mechanisms surrounding tokens. But one thing is certain — the ability for tokens to expand beyond the universe of individual projects is a major sea-change to participant rewards, and will impact everything from NFTs, to gaming, and beyond.
