How Can Tokenomics Auditing Guarantee Profitability and Expose Risks in Stablecoin Projects? — part 2
Author: Stylianos Kampakis
This research article is a comprehensive extract from a peer-reviewed research paper, Auditing Tokenomics: A Case Study And Lessons From Auditing A Stablecoin Project, which I wrote at the Centre for Blockchain Technologies, University College London, UK. The Journal of The British Blockchain Association has published the complete paper.
You are reading part two of this article. Kindly find the first part introducing tokenomics, tokenomics auditing, and the five effective methods of auditing stablecoin projects. This section delves explicitly into the BankX stablecoin project and how our team’s tokenomics assessment of this project helped determine its feasibility, profitability, and risk level. Beyond the specifics of BankX stablecoin project tokenomics auditing, you’ll discover its general relevance to auditing tokenomics projects and prospects. I hope this article, an offshoot of comprehensive auditing for BankX, will provide a crucial starting point for your company’s or business’s blockchain auditing.
Contents
- About BankX
- Essential Steps for A Successful Tokenomics Auditing
- Importance Of Tokenomics
- The Future of Tokenomics Auditing
- Conclusion
- Bottomline
About BankX
BankX envisions to remedy the corrupt, tyrannical, bureaucratic, aristocratic, plutocratic, inconsistent, and unreliable financial systems and replace them with the Individual Created Digital Currency (ICDC). Hence by 2030, just anyone can mint currency, earn interest, leverage without liquidation risk, and stake to make much more returns with complete autonomy and decentralisation.To assert the viability of this project, BankX needed a professional tokenomics audit to position the team on the right track.
Essential Steps for A Successful Tokenomics Auditing
Using the BankX project as an example, typical auditing of tokenomics should be conducted in the following two steps
- Foundation
- Analysis
- Foundation
To establish a reliable auditing foundation for any blockchain project, define the following standard:
● Goals of the system
● Tools of the analysis
● Assumptions
BankX is a stablecoin inspired by elements of two other blockchain projects, Hex and Frax, while also adding its mechanisms. Both Hex and Frax seem to have flourished. At the time of writing, Hex is at position 201 of Coinmarketcap, and Frax is at position 204.
The goals of the analysis were tied to the system hierarchically, with the most important goals at the beginning.
Goals of the Analysis:
- The peg does not break. This is the principal objective of any stablecoin system.
- The BankX token’s price will not crash or spike to unsustainable heights. In other words, the BankX token’s price should either be stable or slowly appreciate over time.
- The BankX token is a store of wealth.
- The system is moving towards increased usage of the BankX token as collateral to mint XSD (meaning there is increased demand for XSD).
- BankX has autonomous, sustainable liquidity pools.
- BankX token can achieve the goal of being Always Net Deflationary (A.N.D.).
Tools of the Analysis:
- Empirical proof
If something has been proven to work in other systems, it is assumed that it can also work for BankX.
2. Balance-of-forces analysis
It is assumed that if an action within the system applies an inflationary or deflationary force, it can always be balanced against another action/force within the same system. The actual magnitude forces applied depend on the protocol’s economic levers.
3. Numerical analysis
When relevant, we will apply numerical techniques and simulations.
2. Analyses
Once this foundation is established, the audit describes the various mechanisms and how they interact.
A standard tokenomics auditing analysis can include:
● Balance-of-forces analysis
● Empirical and data analysis
● Game theory analysis
● Marginal cases analysis
The audit also contains a full table of the dynamics at play and describes whether they work in an inflationary or deflationary way.
The audit then proceeds to analyse the peg stability of different stablecoins, demonstrating through empirical evidence that Frax, at least at the time of the audit, could perform just as well, or even better, than “traditional” stablecoins, such as USDT and USDC. The similarity of BankX’s and Frax’s mechanics is, therefore, considered a positive aspect, which provides evidence that the stablecoin can work as expected and maintain its peg.
The audit then uses game theory to analyse BankX’s bonding curve mechanism before moving on to the marginal case analyses. One of the marginal cases includes data from the Terra/Luna crash that took place in 2021, therefore combining empirical evidence with theoretical structural analysis.
The analysis tries to unravel whether something similar could take place for the BankX token and the likelihood of such an event occurring. The audit also analyses one more marginal case relating to the interest rate provided by BankX and the collateral ratio, analysing some of the system’s vulnerabilities and how the system can intervene to prevent a crash.
Importance Of Tokenomics
If someone wants to construct micro-economies projects using blockchain technology, they need to find out how tokens operate inside the systems or network to become self-sustaining. There is no such thing as a singular straightforward approach when it comes to tokens. Blockchain has led to many new and unique applications and implementations.
Tokenomics permits teams to design new models or adapt to an existing one that fits the project’s aim. If the processes are done correctly, it can result in a well-functioning and reliable platform. Tokenomics fundamentally applies monetary policy used by traditional banks to blockchain networks.
It covers the entire process of forming, maintaining, and occasionally eliminating a currency from a network.
The Future of Tokenomics Auditing
Tokens, currencies, and the projects supporting them are still in the early phases of determining what works and does not. Tokenomics is thus heavily reliant on knowledge of how a token initiative might address future difficulties.
Most teams in the blockchain and crypto realm responsible for creating a network do not end up as their masters. So, users must understand that what works now for their token initiatives cannot work tomorrow. The network’s development and maturity may need changes to token governance methods.
Successful token initiatives have used effective consensus techniques to ensure that network users’ capacity is dictated.
An essential point to consider in a tokenomics methodology is the future commercial potential of tokens. The utility of a token in exchange for the things and services it delivers determines its fundamental usefulness.
Many businesses have created decentralised markets where users can exchange tokens for items and services offered on the platforms.
Furthermore, companies ensure that gains are delivered to consumers through dividends and other financial rewards.
Businesses may very well be able to boost user loyalty simply as a result. Similarly, projects may guarantee that a robust network with consistent token circulation is available.
Some projects feature tokens held in reserve and then given to the businesses later to help the business thrive.
Conclusion
As blockchain adoption grows across multiple industries, tokenomics will play an ever-larger role in this process. Therefore, being able to audit and analyse tokenomics designs objectively, and suggest potential improvements, is a process that is only predicted to grow in significance over the next few years.
Tokenomics auditing is still a new niche, and many of these methods will adapt and evolve as more audits are published.
Because the BankX auditing use case was a maiden project, some of the methods employed might seem unfamiliar, especially from the perspective of traditional econometrics, which is more data-driven.
Nevertheless, the rapid expansion of blockchain, and methodologies such as agent-based modelling, will allow for more detailed audits. Soon, auditing tokenomics will be a necessary process for launching a project.
Bottomline
Tokenomics remains a field in its infancy. Considering that it changes many of the foundational cornerstones of the current world economy, there is much to be explored and expected.
With the broader adoption of tokens across multiple industries, we’ll continue witnessing more complex and specific use cases daily, perhaps distinct from BankX.
Tokenomics is the study of highly disruptive technology. Its growth will depend mainly on the government’s regulation of token economies and the ease with which organisations, producers, and consumers can be tokenised.
Tokenomics will remain a formidable force in the blockchain ecosystem as the digital race and search for technological Eldorado intensifies. No one should be left out.
