Toxic Tokenomics: Destined to Make You Exit Liquidity

Gm, Dear Reader, 

Recently, we’ve been guiding you through a thought exploration journey covering what gains genuine mindshare in crypto in the current attention economy as well as offering a mental framework for what might one day be successful and have the opportunity to go mainstream and “win” in crypto. 

Sounds great! All you have to do is find solid projects working to build products people actually want to use and a solid product market fit! 

Right….?

If only it were that easy. There is however a deep deep problem with this and that is the highly toxic and extractive tokenomics models we’ve seen up to this point in the market. 

The Harsh Reality of Tokenomics

If you, dear reader (and most people), were honest with yourself, you’d admit that you are most likely here in crypto (and quite specifically reading a crypto newsletter) because you hope to make money. 

You hope you invest in a coin that will be able to bring you multiples in return on your investment. It’s the dream of most people in this industry. To get rich or otherwise change your life via crypto. You’ve seen stories of countless others doing this so why not you? 

The problem is in how the entire game is designed.  

Understanding the Predatory Game

Tokenomics models are almost exclusively designed to benefit the team and early investors and by the time the token is available for retail investors to buy, you will often be acting as exit liquidity. 

Teams need poor suckers to buy their tokens so that they can exit and profit. 

This is the issue of low float/high fully diluted value tokens (Binance Research wrote a good report on this) 

It’s a constant predicament. Teams, VCs and early investors will be up 100-1000x with vesting schedules that are often unbelievably predatory in that there will always be a continuous flow for years of tokens being dumped on the market directly onto the heads of uninformed and inexperienced retail investors.  

In many cases you’ll see a huge disparity between a token’s initial circulating market cap and fully diluted market cap. This usually means that there will be hundreds of millions or billions of dollars worth of that token waiting to hit the market over the next few years. 

How high exactly do you plan on your investment going when this type of selling pressure is hanging over your head?

The Dynamics of Supply and Demand

A quick reminder that price is the equilibrium of buying and selling pressure. Both parties are crucial in this dynamic. More buyers/demand means that the price will go up and more sellers/supply means that the price will go down. 

With retail still not having returned to the market in meaningful numbers and a huge fragmentation in the number of new tokens launching competing for mindshare, plus old tokens from previous cycles, this leaves us in a state where we simply don’t have enough buyers and way too many tokens with teams and VCs who are up crazy multiples and more than happy to dump on you.  

This explains the terrible performance of recently launched tokens. Check out our overview on the performance of recently airdropped tokens (spoiler: it hasn’t been looking good) 

The Predicament

This puts you in quite the predicament. You finally found a great project with solid fundamentals, a great team working to build a product you think has a genuine chance of reaching a mainstream audience but because of how predatory the tokenomics are designed, the opportunity for this investment to go up for you will be heavily limited. 

That’s the predatory name of the game in crypto. There’s money to be made, but most often not by you. 

The majority of the upside for tokens will be captured by insiders and in the private market. 

Demanding Better 

How do we change this? Users have to demand better token design and stop enabling teams and VCs to keep getting away with this predatory behavior. Token design should be long term focused and built in a way to benefit all parties involved, not just teams and VCs. 

For more insight into topic, Cobie has a great mind and covers this topic very well in his recent article. 

His takeaway?

“Opting out of participating in these markets is voting with capital” 

If market participants stop putting their hard earned money into these predatory traps, teams and VCs will be forced to adjust or wither away and die. 

Unfortunately the little guy doesn’t always have a voice. Crypto is about changing that. Join other Crypto Pragmatist readers and connect with the M6 Labs team in The Lab and come make your voice heard.