NoSleep | Counting 11 Token Economic Flaws Cases, SOL, OHM, SLP Make the List

"Your favorite protocol token is so bad." This is how renowned crypto researcher Jon starts his latest article. In the piece titled "Air Freshener for Your Shitcoins," he compiles a series of previously hyped star tokens in the community and points out flaws in their token economics.

This article is a summary of the main points. For any doubts, please refer to the original article.

The Truth About Most Tokens

Jon bluntly points out the problems that current protocol tokens are facing at the beginning of the article. He believes that most tokens are issued by teams to provide liquidity in the market and shift legal responsibility, with decentralization not even being a consideration. In plain terms, these tokens are practically useless, at best serving as a place to discuss various complaints in governance forums or stake them to earn more useless customer service tokens. Criticizing tokens for only having governance functions and lacking real utility.

However, for the protocol side, if issuing tokens can provide more security for the protocol and the market is willing to buy what you are selling, then why not issue them?

But as investors learn their lessons, simple governance tokens can no longer attract the market. Only a more sophisticated "token economy" can disguise the true nature of these trash coins. However, in most cases, they still end up worthless. Jon believes that no matter how excellent or innovative the products of these protocols are, they cannot be equated with the excellence of the tokens.

Here are some classic token economy cases, each with lessons to be learned:

1. Every garbage coin with staking function: The APY of staking tokens has no meaning because these APYs are calculated based on the price of garbage coins, which have no value. For the protocol side, there is no loss, and it can also reduce selling pressure on tokens to stabilize prices. Jon noted that this phenomenon is particularly evident in the Cosmos ecosystem with Juno and Osmosis. Once demand and price start to decline, massive unstaking will cause price retracement, demonstrating the double-edged nature of staking.

2. Every garbage coin with liquidity mining function: Paying people to use the product does help in the early stages, but for liquidity providers, using the product is not because it is useful but to earn profits. When the protocol's money runs out, no one will want to continue using it. Jon mentioned that over 99% of protocols' liquidity mining rewards exceed their income, and these tokens are designed to fall due to continuous selling pressure.

3. SOL: The low circulation of Solana's ecosystem and the large holdings by venture capital allow insiders to hedge through early establishment of sustainable contract positions. Even if the fully diluted valuation FDV is too high, profits can be locked in and dumped on the market.

4. Sushi: Distributing Sushiswap's trading fees to token holders reduces the resources available to the team and undermines the team's ownership of the protocol. In the absence of adequate incentives, the team loses interest in development.

5. OHM: OHM bonds and insane APYs create a monster that impacts the protocol itself, with excessively high valuations surpassing the protocol's treasury assets by multiples, inevitably leading to collapse due to unreasonable token inflation caused by APY.

6. UST's minting, burning mechanism, and Anchor's reserves: There are many articles explaining this part, which can be referred to. In simple terms, pay people to make them willing to use the token within a limited time. If it fails to make the protocol more attractive before the money runs out, be prepared to go to zero.

7. Axie Infinity's in-game token SLP: SLP tokens are infinitely issued, and their price relies on new players entering to support it. When game guilds flood in and mine and sell tokens in large quantities, the price will gradually go to zero.

8. Airdrop tokens: Airdrops initially lead to price surges due to high attention and wide distribution, but free money is ultimately free. People will eventually cash out, causing selling pressure and ugly price charts.

9. PSP: When Paraswap initially airdropped tokens to users under stringent conditions, it sparked strong community dissatisfaction. Over-filtering alienates users and further concentrates the tokens. Token distribution is a great marketing strategy, but if most people cannot get it, it will not generate positive discussions.

10. SOLID: Protocols with higher TVL on Fantom receive more Solidily token distribution shares. This mechanism leads to a TVL battle between 0xDAO and veDAO, both offering extremely high APYs to attract users. After AC's departure, the ve3,3 mechanism did not operate normally and was declared a failure, but SOLID may play out a script similar to OHM, where unreasonable APY leads to the collapse of inflationary tokens.

11. LINK: To provide funding for charity, the Chainlink team publicly sold off their tokens, a foolish act that naturally led to price collapse.

Conclusion

Jon's examples above succinctly outline common issues in token economies. While there are many tokens worth studying and successful ones, overall, as long as tokens continue to be diluted and cannot improve profitability, their prices will inevitably trend towards zero.

However, failure is the mother of success, and continuous innovative reforms in token economies will eventually bear fruit. But before that, it's still an old saying: Not all protocols need tokens!