SNS Tokenization Considerations
Tokenizing and decentralising an application via an SNS requires planning and consideration for tokenomics and governance. The following steps can be used by a developer or founder to better prepare for the launch of a token.
Step 1: Identify The Tokenization Goal
The first step of a tokenization strategy is identifying the goal of launching a token. The act of tokenizing an application is an intentional decision by a developer or founder to sacrifice ownership and control over their application. The tokenization goal should provide justification for that sacrifice. Application owners will choose to tokenize for many different reasons, including:
- To raise funds for further development or growth
- To attract additional developers to the application
- To increase the user base of the application
- To align the company to a specific mission
- To serve as a utility token within the application
Tokenomic decisions will present many trade-offs and it is difficult to optimize to multiple goals. Identifying the main goal of launching a token will help the developer or founder in further steps.
Step 2: Identify and Plan the Token Audience
Once a tokenomic goal is identified, identifying the target audience for owning the token is next. Think through the type of person or entity who would best achieve the identified goal from step 1. Consider whether the intended audience should have a skill set, a specific resource or contain certain knowledge that will align with the goal of tokenization. Consider also the intended breadth of the token ownership, including whether the strategic goal is more achievable with few token holders or with thousands or millions of holders.
Next, plan a communication strategy for how your target audience will become informed about the token. How will they know about the token launch?
Consider what their goals will be in owning the token and craft the communications to highlight them. Understanding the goals of your intended audience and the best methods to communicate with them is necessary planning to have a successful token launch.
Step 3: Determine Level of Ownership and Control
The act of tokenizing an application is an act of giving some percentage of ownership and control over the application. The founder or developer should consider how much ownership and control to give up. This decision will directly impact the initial token distribution. Some considerations that should factor into this decision include:
- How aligned are the initial token holders to the core mission of the application?
- Is there a limit in scope of control that the token holders should have?
- What is the optimal long term ownership and control structure for the application?
- Who will make future contributions to the application's code base?
The more control and ownership a token is provided, the more valuable that token will be. However, more ownership and control provided to the initial token distribution also leads to increased risks to the application's mission, development and engagement.
Step 4: Design the Tokenomic Inflation
Most tokens have an established token inflation rate and the SNS allows the token designers to set the initial inflation rate, the final inflation rate and the time to achieve that final inflation rate. The configuration of these parameters should be used to drive intended behavior by the token holders. Some considerations include:
- Higher inflation rates will encourage more staking of the token. This is advantageous if the intended purpose of the token is governance over the application. It's disadvantageous if the intended purpose of the token is utility within the application.
- If the purpose of the token is utility within the application or to reward user growth of the application, set the inflation rate to mimic the projected growth trajectory of the application. Periods of higher growth rates for the application should have higher inflation rates to ensure the application ecosystem operates efficiently.
- Higher inflation rates pose more risks to the token value and sustainability of the token.
- Remember that the token holders will be able to adjust the inflation parameters later on.
Step 5: Design the Staking Parameters
The SNS allows the application's developer to set a dissolve delay bonus and age bonus for staked tokens. For both of these configurations, setting higher parameter values will result in more long-term staking. This is valuable if the purpose of the token is primarily for governance of the application and the expected lifetime of the application is many years or decades. The downside of configuring higher dissolve delay and age bonuses is that it could result in more tokens locked long term, which may impact the ecosystem if the token is used for utility or other rewards.
The launch of a token for an application is not just a technical challenge. It requires an overall strategy, including a clear goal and communication strategy.