Exercises: Token Economics

Exercise 26.1 — Token Standard Selection (Apply)

For each of the following use cases, identify which token standard (ERC-20, ERC-721, ERC-1155, or ERC-4626) is most appropriate. Justify your choice and explain why the other standards are less suitable.

1. A carbon credit marketplace where each credit represents one metric ton of CO2 offset, and credits from the same project and vintage year are interchangeable.
2. A play-to-earn game with 50 different item types, some unique legendaries (supply of 1), and some common consumables (supply of 100,000 each).
3. A decentralized lending protocol that needs to issue receipt tokens representing users' deposits plus accrued interest.
4. A digital concert ticket system where each ticket grants access to one specific event at a specific venue and seat, and tickets should not be transferable after purchase.
5. A protocol governance token used exclusively for voting on proposals and has no other utility.

Expected depth: 2-3 sentences per use case, naming the standard and explaining your reasoning.

Exercise 26.2 — Supply Model Analysis (Analyze)

Consider a hypothetical decentralized social media protocol called "OpenPost" that is designing its token economics. The protocol needs its token for three purposes: (a) paying content creators based on engagement, (b) staking by moderators who curate content, and (c) governance voting.

Part A: Evaluate the following three supply models for OpenPost's token. For each, identify at least two advantages and two risks: - Fixed supply of 1 billion tokens - 5% annual inflation distributed to creators and moderators - Dual-token model with a fixed-supply governance token and an inflationary creator-reward token

Part B: Which model would you recommend? Write a one-paragraph justification that addresses the velocity problem, the needs of all three user types, and long-term sustainability.

Part C: For your recommended model, sketch a token allocation table (similar to the one in Section 26.4) with at least five categories. Justify each allocation percentage.

Exercise 26.3 — Howey Test Application (Evaluate)

Apply the four prongs of the Howey Test to each of the following tokens. For each prong, provide specific reasoning about whether it is likely satisfied.

Token A: A protocol issues a token that is required to pay gas fees on its Layer 2 network. The token was distributed via a fair launch with no pre-mine. The protocol is governed by a DAO, and the original development team has dissolved. The token has no staking rewards and its only function is paying transaction fees.

Token B: A startup sells tokens in a private sale to venture capitalists at $0.50 each, promising that the team will build a decentralized video platform over the next 18 months. The tokens will eventually be used to tip creators and unlock premium content. The team holds 25% of the supply with a 2-year vesting schedule.

Token C: A DAO distributes governance tokens via retroactive airdrop to anyone who used the protocol in the past year. The token's only function is voting on protocol parameters. The token is freely tradeable on decentralized exchanges and has appreciated 500% since the airdrop.

For each token, provide: - A prong-by-prong analysis (investment of money, common enterprise, expectation of profits, efforts of others) - Your overall assessment: likely a security, likely not a security, or ambiguous - One design change that would strengthen the "not a security" argument

Exercise 26.4 — Vesting Schedule Design (Create)

A new DeFi protocol is launching with the following parameters: - Total supply: 500,000,000 tokens - Team: 8 people (3 co-founders, 5 engineers) - Seed investors: 4 firms that invested a total of $4 million at a $20 million fully diluted valuation - Strategic partners: 3 protocols that will integrate the token - Community: thousands of early users

Part A: Design a complete token allocation and vesting schedule. Your design must include: - Allocation percentages for at least 5 categories - Vesting schedule (cliff and duration) for each category - A justification for why you chose each cliff and duration

Part B: Calculate the circulating supply at each of the following points: - Token generation event (day 0) - 6 months post-launch - 12 months post-launch (first cliff) - 24 months post-launch - 48 months post-launch

Part C: Identify the three dates with the largest single-day increase in circulating supply. Explain why these "unlock events" create selling pressure and propose one modification to your schedule that would reduce the impact.

Exercise 26.5 — Incentive Engineering Critique (Evaluate)

Read the following tokenomics proposal for a hypothetical decentralized ride-sharing protocol called "RideDAO":

RideDAO issues RIDE tokens with the following mechanics: - Riders pay for rides in RIDE tokens - Drivers earn RIDE tokens for completing rides, plus a 20% bonus from protocol emissions - RIDE tokens can be staked for 15% APY - Governance votes are weighted by staked RIDE balance - New RIDE tokens are minted each month to fund the staking rewards and driver bonuses - There is no token burn mechanism

Part A: Identify at least four potential problems with this design. For each problem, explain the mechanism by which it would manifest (i.e., do not just say "inflation is bad" — explain specifically what the inflation would cause in this system).

Part B: For each problem you identified, propose a specific modification to the tokenomics that would mitigate it. Your modifications should be compatible with each other (i.e., they should work as a coherent system, not contradict each other).

Part C: Model the steady state of your modified system. Assume the protocol processes 10,000 rides per month at an average fare of 50 RIDE tokens. What is the monthly token flow (tokens earned by drivers, tokens spent by riders, tokens burned, tokens minted)? Is the system inflationary or deflationary?

Exercise 26.6 — Airdrop Design (Create)

You are designing a retroactive airdrop for a decentralized exchange that has been operating for 18 months. The exchange has: - 50,000 unique addresses that have made at least one swap - 5,000 addresses that have provided liquidity - 500 addresses that have provided liquidity for more than 6 months - 1,000 addresses suspected to be Sybil wallets (farming via minimal activity across many addresses)

Part A: Design an airdrop allocation formula that: - Rewards genuine, active users more than one-time users - Rewards liquidity providers more than pure traders - Penalizes or excludes likely Sybil wallets - Includes at least three tiers of allocation

Document your formula, including the specific criteria for each tier and the token amounts.

Part B: Your airdrop snapshot date was two weeks ago, but the airdrop has not been announced yet. Yesterday, a team member's wallet made an unusual number of small transactions across 200 new addresses. How should this be handled? Discuss both the ethical and practical dimensions.

Part C: After the airdrop, data shows that 60% of recipients sold within the first week. Does this indicate the airdrop was unsuccessful? Argue both sides, referencing the Uniswap airdrop precedent.

Exercise 26.7 — Dual-Token Model Design (Create)

Design a dual-token model for a decentralized cloud computing marketplace (similar to Akash Network or Render Network) where: - Users rent GPU time for AI model training - Providers supply GPU hardware and earn revenue - The protocol needs governance and long-term alignment

Your design must specify: 1. Token A: name, purpose, supply model (fixed/inflationary/deflationary), distribution 2. Token B: name, purpose, supply model, distribution 3. The relationship between Token A and Token B (how do they interact?) 4. Token sinks for each token (what removes them from circulation?) 5. At least one mechanism that prevents a death spiral if demand drops suddenly

Deliverable: A one-page tokenomics summary document with the five elements above, plus a diagram showing token flows between users, providers, the treasury, and the open market.

Exercise 26.8 — Comparative Tokenomics Analysis (Analyze)

Choose two real-world tokens from the following pairs and compare their tokenomics: - Pair A: Uniswap (UNI) vs. Curve (CRV) - Pair B: Ethereum (ETH) vs. Solana (SOL) - Pair C: MakerDAO (MKR) vs. Aave (AAVE)

For your chosen pair, compare: 1. Total supply and supply model 2. Token distribution (team, investors, community percentages) 3. Token utility (what can you do with the token?) 4. Value accrual mechanism (how does protocol revenue flow to token holders?) 5. Governance structure (one-token-one-vote vs. other models)

Conclude with: Which tokenomics design is superior for long-term sustainability? Defend your answer with specific economic reasoning.

Exercise 26.9 — Solidity Implementation (Create)

Implement a simple ERC-20 token with the following features: - Fixed supply minted to the deployer at construction - A burn function that allows any holder to permanently destroy their tokens - A snapshot function (owner-only) that records the balance of every holder at the current block, which could be used for airdrop eligibility - An event emitted for every burn, including the burner's address and amount

Test your implementation mentally or in Remix. Describe at least three edge cases that your implementation must handle correctly.

Bonus: Extend your token with a simple fee-on-transfer mechanism where 1% of every transfer is automatically burned. What complications does this introduce for DeFi integrations?

Exercise 26.10 — Progressive Project Reflection (Evaluate)

Review the VotingToken distribution plan from Section 26.10 (40% community, 20% treasury, 15% team, 15% contributors, 10% ecosystem).

Part A: Critique this distribution using the frameworks from this chapter. Is 40% community allocation sufficient for "sufficient decentralization"? Is 15% team allocation competitive enough to attract top talent? Could the 10% ecosystem allocation create mercenary capital problems?

Part B: Modify the distribution to optimize for a different priority: maximum decentralization. How would you change the percentages, and what trade-offs would you accept?

Part C: Now modify for a different priority: maximum development velocity (the team needs to move fast and make decisions quickly). How does this distribution differ from Part B?

Part D: Which of the three distributions (original, max decentralization, max velocity) is most likely to survive a Howey Test challenge? Explain your reasoning.