Advanced Web3 Tokenomics Design — Part 3: Active Treasury Management, Minting, & Burning

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16 Mar 2024

nearly all the crypto-assets currently launched by web3 companies suffer horrible tokenomics design. In this blog post, I will be discussing the importance of managing token supply dynamically and ideally implementing active treasury management into tokenomics design as a part 3 of a complete series. This work is a follow up to a previous blog post “How to Design Web3 Tokenomics”. Web3 founders are the main target, but crypto investors in general might find the content interesting to help them make investment decisions.

Active Treasury Management

Compared to most tech companies that raise funding to cover their burn rate for the next 12 to 18 months, crypto companies often raise for their entire lifecycle. If they keep all this cash in a bank account, inflation will significantly hurt their ability to operate down the line, meanwhile if they keep all this money in crypto and a market crash happens, they can lose a significant portion of their capital. Active treasury management is the act of investing the money raised in a way that generates passive income, sort of like an endowment fund for a charitable organization. If the investment returns are generating enough to cover the monthly burn rate, this means the organization can sustain forever in theory.
There are additional risks associated with active treasury management, but in my personal opinion, these risks are much lower than the 90% risk of failures of tech companies. Money & Asset Managers, pension plans have been generating returns for many decades, the real danger here is to find the right asset manager to handle your active treasury management without taking excessive risk. As an Asset Manager myself, I know it is achievable, and I plan on operating all my future ventures on the back of active treasury management since I ran out of funding too many times in the past with previous ventures.
Nowadays, we have access to copy trading, grid bots, yield farming, peer-to-peer lending, all of which can generate returns on capital and if set properly can have lower risk levels than you would think. The real trick like in everything is to diversify the investment portfolio.

Treasury Over-Collateralization

Overall, assuming we have some revenue streams integrated into our tokenomics model, we do not have to pay out all the revenue to our community or to our royalties payments. We can keep a portion into our treasury which in turns is invested through active treasury management. In turns, this hopefully means the token economy can be over-collateralized in comparison to the in-circulation supply. Just like stablecoins aim at being collateralized 1–1 to prevent a bank run, our token can have the necessary liquidity to fight off market manipulators trying to induce a collapse of our project economy. Bank runs have been in the news lately with the recent banking collapse of 2023 (Silvergate Bank, Silicon Valley Bank, Signature Bank, and Credit Suisse). Bank runs are not strictly a crypto-related event, but nearly all crypto projects are usually more at risk given their reliance only on pure tokenomics combined with small liquidity pools available on crypto exchanges. Unlike banks, governments are not going to protect collapsed crypto ventures.

Minting & Burning Mechanisms

The requirement to ensure a web3 token is over-collateralized is to prevent excessive growth of the token price. For example, if the token grows 100% a year because of market adoption but our treasury is growing only 50% per year, we could end up in a problem that leads to under-collateralization and eventual bank run. For these reasons, a trading bot could be utilized by the web3 ventures to mint or use a reserve of token supply to sell the token on the exchanges to prevent excessive growth. While selling the token, the bot will receive an equivalent amount of the paired token (usually USDT or some other stablecoins) that will then become part of the treasury. When market participants start cashing out on their gains, or sell the token for whatever reasons, the inflated treasury can be used to buy back the token from the market and prevent excessive decrease of price, and even potentially push the price growth sustainably. In this case, when the trading bot buys back the token from the market, those tokens can be either re-incorporated into the treasury supply, or burned.
Ideally, for a sustainable economy, the sell/buy mechanism should allow growth that is below the returns of the active treasury management and revenue stream being fueled into the token economy.
If web3 entrepreneurs chose to adopt such a model of dynamic supply management, they should ensure to explain transparently how it works in order to avoid market manipulation charges by the SEC or other regulatory agencies. After all, on the stock market, companies are allowed to issue new stocks, and to perform buy back transactions as long as they are transparent about it and inform their investors. In the case of crypto, these transactions could be occurring every day in small amounts based on programmable behaviors. The question comes, does your community prefer to value token growth of 10,000% per year, or sustained growth over the long term. If your community wants to get rich quick, sadly to say they are likely to be the wrong community for your venture. I personally avoid pump and dumps and aim for long term growth with real utility.

Dynamic Supply Management Drawback

The problem with dynamic supply management described previously, is that without 10,000% growth, headlines from the press often don’t occur. People want to hear about insane success stories or failures. As such, projects with a sustained 30% growth year over year are likely to get unnoticed. With that said, I still personally prefer sustained growth. In a world where inflation is reaching new heights, finding a safe and stable store of value is very difficult. Web3 economies where as a user I can financially be part of the success of the products and services I use every day seems like a good way to preserve the value of my hard earned money.

Stablegrowth Tokens

With the combination of active treasury management, dynamic supply management and revenue streams on top of the tokenomics model, I believe it is now possible to build stablegrowth tokens which are the ultimate missing piece of value for the crypto-industry. Once stablegrowth tokens (low volatility, stable growth) that offset inflation have been demonstrated, it will finally be possible for thousands of businesses worldwide to transition their bank deposits (treasury) into Decentralized Finance (DeFi). With $180T USD worldwide currently sitting in bank accounts and suffering from devaluation of government-backed currency, the crypto-industry could reach massive widespread adoption and close the loop on a circular economy that would further significantly reduce volatility of the entire industry. Companies will never be attracted to high growth crypto currencies, they will never risks their treasury that is needed to pay their employees and suppliers in the months to come in the off chance that their crypto will grow, especially that we often see 30% volatility month over month for even the largest most solid crypto currencies such as Bitcoin or Ethereum.

Conclusion

I explained the importance of active treasury management and dynamic supply management for sustainable tokenomics. In the next blog post of this series on Advanced Web3 Tokenomics Design, we will cover the topic of “Staking” to help web3 builders in designing better economies for themselves and their community.
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