The blockchain and cryptocurrency space has grown incredibly, with new projects and tokens popping up daily. While this growth is exciting, it also poses risks for investors and users. One of the most significant risks is the need for more transparency in tokenomics, which refers to the economic system underlying a token or cryptocurrency.
Tokenomics is a complex concept that includes everything from the token distribution and supply to the incentives for various stakeholders, such as developers, users, and investors. Transparency in tokenomics means that all these aspects are clearly defined, communicated, and available to the public.
Why projects need to be clear about their tokenomics
Transparency in tokenomics is the degree to which information about the mechanics of a cryptocurrency or token is open and accessible. This includes details about the token’s issuance, supply, distribution, and use within the network.
According to the first results collected through Trust Army, a research and educational platform by Hacken to make Web3 analysis and crypto DYOR, the situation could be better. Trust Army found three groups after reviewing the tokenomics of the first 100 EVM-compatible projects in the first product’s version. The obtained data is interim and will be complemented with the following reports within the fully launched 1.0 version.
First, some projects share information about how their tokens are distributed openly, even when it could be better. These companies list all of their recipients in public, use individual wallets, and use smart contracts to lock tokens.
The second group is made up of companies that, on purpose or by accident, hide where their tokens come from. Either they need whitepapers on their websites or leave out the part of their paperwork about token sharing. And finally, the third group shows how their tokens are divided in a way that is hard 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 conceal their whitepapers.
- 34% of projects hide their tokenomics.
- Only 50% of projects got a smart contract audit.
- 33% of projects have whales holding 1%+ tokens of the total supply in their wallets.
- 39% of projects have 10%+ of total tokens supply in just 1–3 wallets.
Having transparent tokenomics promotes confidence in the blockchain sector by allowing investors and users to better grasp the token’s value proposition, economic incentives, and network use.
One of the key advantages of transparent tokenomics is that it enables users and investors to check that the token is not being abused or used fraudulently. As a result, insiders are less likely to be able to manipulate the token’s price or exploit it for immoral purposes if all relevant information is made publicly accessible. In contrast, if tokenomics are opaque or unclear, it can be challenging to determine whether the token has any intrinsic value or whether its price is being artificially inflated or suppressed by insiders.
Transparency in tokenomics can also ensure that token issuers are held accountable for their actions. This is because investors and users will be better able to keep tabs on the token issuer’s actions if they are open about what they are doing. As a result, token issuers will have greater duty and accountability, which may boost confidence in the network and attract more users and investors.
Another benefit of transparency in tokenomics is that it can help prevent misunderstandings and confusion among investors and users. By providing clear and open information about how a 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 remain committed to the network if they clearly understand how it operates.
The Benefits of Transparency in Tokenomics
Transparency in tokenomics offers several benefits crucial for a project’s success and sustainability. First, it increases investor trust by providing a clear and comprehensive understanding of the project’s goals, value proposition, and token distribution. As a result, investors can evaluate the project’s potential and risks, leading to better investment decisions. This, in turn, creates a more stable and loyal investor base, which is vital for the project’s success.
Transparent tokenomics also helps to avoid fraud and scams by enabling investors to identify suspicious activities or questionable tokenomics. This information can alert investors to potential risks and help them avoid scams, leading to a safer and more secure investment environment.
Additionally, transparency encourages long-term investments by providing investors with a clear roadmap and project development timeline. This allows investors to assess the project’s potential growth and make informed decisions regarding their investment strategies. As a result, investors are more likely to hold onto their tokens for the long term, which is essential for a project’s sustainability.
Finally, transparency supports community involvement and engagement by providing information about the project’s development, milestones, and achievements. This creates a sense of ownership among investors and encourages community participation in decision-making processes. This, in turn, leads to a more engaged and supportive community that is committed to the project’s success.
Transparency is essential in tokenomics as it fosters investor trust, avoids fraud and scams, encourages long-term investments, and supports community involvement and engagement.
For example, Hacken rolled out a clear roadmap for the future of HAI and the Hacken.AI ecosystem, to set new standards for transparency and incentivization. In the new tokenomics model, $HAI was converted into a Work-2-Earn, governance, and product-utility token. It will also include products to assist in establishing trust in Web3, such as Trust Army, which enables users to learn Web3 research skills which may help in building a transparent Web3 ecosystem.
The Risks of Lack of Transparency in Tokenomics
The lack of transparency in tokenomics can have significant risks and negative impacts on the success and sustainability of a project.
Firstly, a lack of transparency can decrease investor trust as investors cannot assess the project’s value proposition, token distribution, and overall potential. This lack of information creates uncertainty, leading to decreased investor confidence and a reluctance to invest in the project.
Secondly, a lack of transparency can increase the risk of fraud and scams as investors cannot evaluate the project’s legitimacy or identify potential warning signs. This creates a dangerous investment environment where investors are more likely to fall victim to scams or unethical practices.
Thirdly, a lack of transparency can lead to a short-term investment mentality as investors cannot assess the project’s long-term potential. This can lead to focusing on short-term gains rather than long-term growth, which is essential for a project’s sustainability.
Finally, a lack of transparency can result in a lack of community involvement and engagement, as investors are unaware of the project’s development or milestones. This can lead to a disengaged and uncommitted community, detrimental to the project’s success and sustainability.
The lack of transparency in tokenomics creates several risks and negative impacts, including decreased investor trust, increased risk of fraud and scams, a short-term investment mentality, and a lack of community involvement and engagement. These risks can significantly impact a project’s success and sustainability, highlighting the critical role of transparency in tokenomics.
Best Practices for Ensuring Transparency in Tokenomics
Ensuring transparency in tokenomics is crucial for the success and sustainability of a project. To achieve transparency, there are several best practices that projects can adopt.
Firstly, clear communication of tokenomics to investors is important. Projects should provide comprehensive and easily understandable information about the project’s goals, value proposition, token distribution, and allocation. This enables investors to evaluate the project’s potential and make informed decisions regarding their investment strategies.
The publication of relevant data and metrics is also essential. Projects should 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 project’s potential and progress, leading to a more engaged and loyal investor base.
According to the Trust Army, uncovering information on token issuances and distribution is possible even if tokenomics are concealed. The team shared some tips on getting official links to distribution documents in the initiative’s official Twitter thread. In addition, Trust Army advises checking third-party sites, such as Wayback Machine, GitHub, etc.
Independent audits and third-party verification can help too. Projects should conduct regular audits of their tokenomics and financials by reputable third-party auditors. This creates a sense of accountability and transparency and assures investors that the project’s practices are ethical and responsible.
Community involvement and engagement are also essential for ensuring transparency in tokenomics. 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 project’s success, leading to a more committed and supportive community.
Ensuring transparency in tokenomics requires clear communication, publication of relevant data and metrics, independent audits and third-party verification, and community involvement and engagement. These best practices enable projects to build trust, credibility, and accountability, leading to a more stable and sustainable investment environment.
Conclusion
In conclusion, transparency in tokenomics is essential for 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 evolves, projects must prioritize transparency in their economic model and make all the necessary details available to the public.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
