TeaThe blockchain and cryptocurrency space has grown incredibly, with new projects and tokens popping up on a daily basis. While this growth is exciting, it also poses risks for investors and users. One of the most significant risks is the need for greater transparency in tokennomics, which refers to the economic system underlying a token or cryptocurrency.
Tokennomics is a complex concept that includes everything from token distribution and supply to incentives for various stakeholders, such as developers, users, and investors. Transparency in tokennomics means that all these aspects are clearly defined, communicated and available to the public.
Why projects need to be clear about their tokens
Transparency in tokennomics is the degree to which information about the mechanics of a cryptocurrency or token is open and accessible. It contains details regarding the issuance, supply, distribution and use of tokens within the network.
according to first results Web3 analysis and aggregated by Hacken through Trust Army, a research and educational platform to create Crypto DYOR, the situation could be better. Trust Army found three clusters after reviewing the toenomics of the first 100 EVM-compatible projects in the first product version. The data obtained is interim and will be supplemented with the following reports within the fully launched 1.0 version.
First, few projects share information about how their tokens are distributed openly, even when it could be better. These companies publicly list all their recipients, use separate wallets, and use smart contracts to lock up tokens.
The second group is made up of companies who, intentionally or accidentally, hide where their tokens come from. Either they need a whitepaper on their websites or drop the part of their paperwork regarding token sharing. And finally, the third group shows how their tokens are divided in a way that is difficult to understand. Even if it wasn’t done on purpose, it still adds to the general uncertainty.
Out of 100 verified projects:
- 17% of projects hide their whitepaper.
- 34% of projects hide their token economics.
- Only 50% of projects got smart contract audit.
- 33% of projects have 1%+ tokens of the total supply in whale wallets.
- Only 1–3 wallets in 39% of projects hold 10%+ of the total token supply.
Having transparent token economics fosters trust in the blockchain sector by allowing investors and users to better understand the value proposition, economic incentives, and network usage of tokens.
A major advantage of transparent token economics is that it enables users and investors to verify that the token is not being misused or used fraudulently. As a result, if all relevant information becomes publicly accessible, insiders are less likely to be able to manipulate a token’s price or exploit it for unethical purposes. Conversely, if tokenomics are opaque or unclear, it can be challenging to determine whether a token has any intrinsic value or whether its price is being artificially inflated or suppressed by insiders.
Transparency in token economics can also ensure that token issuers are held accountable for their actions. This is because investors and users will be able to better monitor the actions of token issuers if they are open about what they are doing. As a result, token issuers will have more duty and accountability, which could increase trust in the network and attract more users and investors.
Another benefit of transparency in Tokennomics is that it can help prevent misunderstandings and confusion between investors and users. By providing clear and open information on how the token works, investors and users can decide whether to invest in the token and participate in the network. This can help create a more trustworthy and sustainable blockchain ecosystem, as investors and users are more likely to commit to a network if they clearly understand how it works.
Benefits of Transparency in Tokennomics
Transparency in Tokennomics provides a number of benefits critical to the success and sustainability of a project. Firstly, it increases investor confidence by providing a clear and comprehensive understanding of the project’s goals, value proposition and token distribution. As a result, investors can evaluate the potential and risks of a project, which can lead to better investment decisions. This, in turn, creates a more stable and loyal investor base, which is vital to the success of the project.
Transparent Tokens also helps investors avoid fraud and scams by enabling them to identify suspicious activities or questionable token economics. This information can alert investors to potential risks and help them avoid scams, creating a safer and more secure investment environment.
Additionally, transparency encourages long-term investment by providing investors with a clear roadmap and project development timeline. This allows investors to assess the potential growth of the project and make informed decisions regarding their investment strategies. As a result, investors are more likely to hold their tokens for the long term, which is essential for the sustainability of a project.
Finally, transparency supports community participation and engagement by providing information on project development, milestones and achievements. It creates a sense of ownership among investors and encourages community participation in the decision-making process. This, in turn, leads to a more engaged and supportive community that is committed to the success of the project.
Transparency is essential in Tokennomics because it fosters investor confidence, protects against fraud and scams, encourages long-term investment, and supports community participation and engagement.
For example, Hacken laid out a clear roadmap for the future of HAI and the Hacken.AI ecosystem to set new standards for transparency and incentives. In the new Tokonomics model, $HAI was transformed into a work-2-earn, governance and product-utility token. It will also include products to help build trust in Web3, such as Trust Army, which enables users to learn Web3 research skills that can help build a transparent Web3 ecosystem.
The Risks of a Lack of Transparency in Tokenomics
A lack of transparency in Tokennomics can have significant risks and negative effects on the success and sustainability of a project.
Firstly, the lack of transparency can reduce investor confidence as investors cannot assess the value proposition, token distribution and overall potential of the project. This lack of information creates uncertainty, which leads to low investor confidence and reluctance to invest in the project.
Second, a lack of transparency can increase the risk of fraud and scams because investors cannot evaluate the legitimacy of a project or identify potential warning signs. This creates a dangerous investment environment where investors are more likely to fall prey to scams or unethical practices.
Third, lack of transparency can lead to a short-term investment mindset as investors cannot assess the long-term potential of the project. This can lead to a focus on short-term profit rather than long-term growth, which is essential to the sustainability of a project.
Finally, a lack of transparency can result in a lack of community participation and engagement, as investors are unaware of project developments or milestones. This can lead to a disgruntled and disenfranchised community, detrimental to the success and stability of the project.
The lack of transparency in Tokennomics creates a number of risks and negative effects, including reduced investor confidence, increased risk of fraud and scams, a short-term investment mindset, and a lack of community participation and engagement. These risks can significantly impact the success and stability of a project, highlighting the important role of transparency in tokennomics.
Best Practices for Ensuring Transparency in Tokennomics
Ensuring transparency in tokenics is critical to the success and sustainability of a project. To achieve transparency, there are several best practices that projects can adopt.
First, clear communication of Tokennomics to investors is critical. Projects must provide comprehensive and easy-to-understand information about project goals, value proposition, token distribution and allocation. This enables investors to evaluate the potential of the project and make informed decisions regarding their investment strategies.
Publication of relevant data and metrics is also required. Projects must provide regular updates about their progress and achievements, including key performance indicators such as user growth, token supply, and market capitalization. This information lets investors assess the potential and progress of the project, leading to a more engaged and loyal investor base.
According to Trust Army, it is possible to uncover information about the issuance and distribution of tokens, even if tokennomics is obscured. The team shared some tips on getting official links to delivery documents in the initiative’s official Twitter thread. In addition, the Trust Army recommends checking third-party sites, such as the Wayback Machine, GitHub, etc.
“It is important to double-check the official information to get the full details. Binance Research, for one, is one of the most commonly used sources, which often has discrepancies. I would recommend looking at where the data comes from. Proceed with caution about it: for example, if a project participated in the Binance Launchpad event, it means that the information comes directly from its team,” commented Oleg Bevz, Marketing Director at Hacken.
Independent audits and third party verification can also help. Projects should conduct regular audits of their tokens and financials by reputable third-party auditors. This creates a sense of accountability and transparency and reassures investors that the project’s practices are ethical and responsible.
Community participation and engagement is also necessary to ensure transparency in token science. Projects should actively engage with their community, provide opportunities for feedback and participation, and foster an open and inclusive environment. This makes investors feel invested in the success of the project, which leads to a more committed and supportive community.
Tokennomics requires clear communication, publication of relevant data and metrics, independent audits and third-party verification, and community participation and engagement to ensure transparency. These best practices enable projects to build trust, credibility and accountability, creating a more stable and sustainable investment climate.
Ultimately, transparency in tokennomics is essential to the success and sustainability of any blockchain project. It builds trust, prevents scams, ensures fairness, enables informed decision making and promotes long-term sustainability. As the blockchain industry develops, projects should prioritize transparency in their economic models and make all necessary details available to the public.
The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.