Two tokenomics experts, Yan Liberman, co-founder of Delphi Digital, and Viktor Bunin, protocol specialist at Coinbase Cloud, discuss their experiences building tokens, their thoughts on the recent ENS/PSP airdrops, and what “fair” token distribution looks like. Show highlights:

  • the definition of tokenomics
  • what factors (such as utility, fairness, liquidity, security, etc.) token designers are incentivizing for
  • what Yan learned from helping design Astroport tokenomics
  • what Vikor learned from helping design Threshold, the token that was built to facilitate the merge of NuCypher and Keep
  • how the EIP 1559 burn has changed Ethereum’s tokenomics
  • how EIP 1559 has improved investor outlook for Ethereum
  • why Viktor is worried about people actually using Ethereum going forward
  • what Viktor and Yan think about how the ENS airdrop farming issue was handled
  • what Viktor and Yan think about ParaSwap’s PSP airdrop and why Viktor thinks ParaSwap made a “mistake”
  • how Viktor and Yan would go about airdropping a token to good actors instead of bad actors
  • how improvements in on-chain identity could help future airdrops 
  • fair launch tokens versus VC-backed tokens
  • what the definition of fair is in terms of tokenomics
  • why Viktor thinks a token’s distribution is more important than a token’s launch
  • what could be the optimal way to distribute liquidity mining rewards
  • how community affects tokenomics
  • how to incentivize NFT-based tokens, like the forthcoming Bored Ape Yacht Club token, for the right goals 

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Yan Liberman — co founder at Delphi Digital

Viktor Bunin — protocol specialist at Coinbase (Bison Trails)

Tokenomics 101 Primers:

Recent Airdrops + Airdrop farming

Airdrop Farming

Topics Mentioned


Other Fun Topics 


Laura Shin:

Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto six years ago and as a senior editor at Forbes was the first mainstream media reporter to cover cryptocurrency full-time. This is the November 23rd, 2021 episode of Unchained.

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Today’s topic is tokenomics, AKA crypto-economics. Here to discuss are Yan Liberman, co-founder of Delphi Digital, and Viktor Bunin, protocol specialist at Coinbase Cloud, formerly known as Bison Trails. Welcome, Yan and Victor.

Viktor Bunin:

Thanks for having me.

Laura Shin:

Token designs are getting more diverse and more creative, but before we dive into the meat of the episode, let’s just make sure everybody even really understands what we’re talking about. Why don’t each of you say what you think the definition of tokenomics is and why it’s important. Victor, why don’t we start with you?

Viktor Bunin:

The way that I think about economics is the ability to use incentive design to set the behaviors that you want and consistently accomplish them. Normally this includes the use of a token, but it doesn’t always have to. There’s a lot of social pressures and other responsibilities and ethics and other cultural norms that also play into it

Laura Shin:

And Yan, what about you?

Yan Liberman:

Yeah, not to restate too much what Victor mentioned, but the idea is a token is a kind of a mechanism to organize a set of individuals where if you assume that they all act in their own best interest or in a way that’s most logical for them, how do you kind of organize that and combine that in a positive-sum way to create value or accomplish what you wanted to accomplish.

Laura Shin:

And so when people are designing these incentive mechanisms and tokens, what types of factors are they considering? Whether it’s things like fairness or liquidity or security or the developer ecosystem, or I’m sure there’s plenty of other considerations. But what do you find that people are thinking about and tend to value? For some of the different choices, like maybe you could give some examples of how that either affects the community or affects the value of the token.

Viktor Bunin:

I think one of the most important things is for protocol teams or communities to first figure out what it is that they’re trying to accomplish and what their token specifically will be used for. For a lot of work token models like KEEP, NuCypher, or The Graph, the token is used to provide a service — the token is serving as a tax medallion. And so there’s an element of security there, but there’s also an element of, I am following the rules of the protocol and providing a service to specific specifications. And I want to be able to do that in a consistent way, but also punish folks that are breaking the rules of the protocol or not providing that service in a consistent way. And so that’s going to be one of the first things that you think about is like, how does the token actually accomplish the goals of providing this useful work to an ecosystem of participants? 

And then all the other things get factored in afterwards. Such as governance. Like, what are we actually making decisions on and who are the right people to make that decision. Then how do you incentivize the right people to actually participate in the protocol in a way that scales beyond the protocol team, but it encompasses everybody else that should be part of it. I’ll pause here because I think Yan has done so much incredible work with protocol and token design that I’d love for him to chime in.

Yan Liberman:

I largely agree with everything you’re kind of describing. It’s about figuring out what you are trying to realistically accomplish and how do you accomplish this. You basically start at the primitive of what is the goal? How do you get there? And so you start incentivizing certain elements of behavior around achieving this goal. And then afterwards, it becomes kind of this very iterative process of understanding, all right, you can accomplish a goal this way, but with crypto, there’s a lot of very savvy actors. And so there’s always going to be kind of exploits. The whole idea is, yes, it’s fairly easy to get someone to do something, but the difficult part is how to prevent all the other kinds of potential negative actors or kind of value extractive actors. Just because you reward somebody for doing something and you get them to do something that doesn’t necessarily mean that this is a sustainable model or one that that’s kind of full-proof.

It’s figuring out what you want them to do. And then kind of figuring out how to prevent everyone else from extracting value in a way that doesn’t necessarily go in line with what you’re doing. And at the same time, there’s a lot of importance with the community and the stickiness component. With crypto, unlike in other places, forks are very prevalent. We see it mostly in DeFi, and that’s part of the issue, there’s a lot of kind of mercenary capital and mercenary behavior that can exist. And so you take a step back and think, all right, not only do I need to figure out how to incentivize them to do something and prevent someone else from doing it, but how do I create some kind of stickiness, longevity, community? How do I create actual incentives for them to stick around other than kind of pure tribalism? Which that happens to work in certain communities, but it’s often a by-product of being very early where individuals have made kind of life-changing money and now they’re tribalistic with it. 

But realistically, you have to assume most are going to be mercenary -esque to some extent, obviously there’s a spectrum there. It’s realizing on top of that, how do I kind of prevent individuals from accomplishing what I want them to accomplish, but then not kind of redoing that cycle elsewhere, because it’s so easy to kind of fork what’s been designed. That’s been a fun learning process and just observational process with DeFi in particular, especially in over the past two years or so.

Laura Shin:

In a way it actually reminds me of kind of like a really basic thing that maybe parents sometimes deal with where they’re like, oh, should I try to incentivize my children to do chores or get good grades or eat healthy, by either paying them or rewarding them with like sweets or whatever it might be. But then it’s like, well, what’s better is that you want them to intrinsically want to do those things — rather than trying to game the system in order to get the reward. What you’re describing just reminds me of. 

Both of you have helped design or redesign various tokens. I thought it might be fun for each of you to just pick one example that you would like to describe of a team that you helped. Maybe it was like they had a particular problem they were trying to solve. Just walk us through why you all made the choices that you made. And either one of you can go first. Maybe, I don’t know if Yan you want to, cause I know Delphi is sort of known for this.

Yan Liberman:

I’d say like a popular one is Axie, but I think cause that one’s been really overly discussed now, it would be marching to kind of talk about so Astroport is a project that we’re incubating heavily through Delphi Labs. And so it’s a decentralized exchange that’s on the LUNA ecosystem. We’ve worked a lot on various DeFi protocols, both in terms of a consultant capacity, and just done plenty of research on them. You see a decent amount of iteration. 

There’s kind of multiple innovation layers with DEXs, whether it’s just the actual AMMs, the automated market maker type, like a Uniswap, where it started with this simple X*Y=K model and over time those have evolved, but there hasn’t necessarily been as much evolution on the token design front.

We saw the first instances of the value of a token when the SushiSwapvampire attack happened, right. Where Uniswap was the dominant decentralized exchange. And then SushiSwap basically was a fork of Uniswap and they were able to incentivize a token on top. The whole idea was to come to our exchange and use it and we’ll give you tokens and rewards for providing liquidity. And the idea is if you provide the liquidity there, you kind of start the virtual cycle of liquidity begets gets volume, which generates fees, which creates more liquidity. And so that exists, but SushiSwap has had its own issues where the disconnect there was, and this is where the introduction of kind of like very mercenary capital happened, where there was a disconnect between the users of the platform and the token itself.

So with SushiSwap, as a token holder, you benefit from the fees on the platform where basically by staking SushiSwap, you take a sixth of the fees that are generated on the platform. The issue there was, you kind of have this dichotomy where the users of the platform, you have the traders and/or the liquidity providers. There’s no real reason for them to hold the token. And then you have the people that own the token and they’re just pure speculators that can benefit from upside there. The loose agreement to some extent was basically, as SushiSwap price appreciated, the value in terms of the rewards that they can use to incentivize behavior that would be valuable to the platform increases, right? If I can give away one SushiSwap, if it’s worth $1 versus $10, there’s, it goes a longer way than being at $10.

That was the dynamic. It’s very reflexive on the way up, but it also can be very reflective on the way down. Whereas price goes down, your ability to incentivize behavior diminishes and so then volume is less and liquidity kind of disappears, and so on and so forth. And so the gap there is you had this disconnect between the users that are participating using the platform and those that are holding the token. 

And so with Astroport, we’re kind of trying to tackle that and we’re taking some tips. So Curve has an interesting model where you can use the token and lock it up to basically vote on rewards towards your pool. You are kind of seeing this with like Tokemak, as well, where owning the token, you can stake the token and direct rewards to a pool. And so we’re kind of combining a lot of elements there where basically the design here is you have similar components where with SushiSwap. You take SUSHI, you stake it into a pool, you get xSUSHI, which is a claim on that pool. And the idea is over time, the fees from the platform are used to buy back SUSHI, deposit it into the pool, and your xSUSHI over time is worth more SUSHI. So you deposit one SUSHI, you have one xSUSHI, and then over time, you can withdraw that. Like you can kind of redeem that xSUSHI for more than one. And so that’s how the value accrual exists. 

We kind of take it a step further and basically allow you to take that xSUSHI, which is xASTRO, and deposit it into a voting contract. And the amount you vote is a function of how much you stake and how long you stake it for. And the idea there is, okay, what are you actually voting on? 

So with the fee structure, there’s usually like a 30 BIPs fee capture. So users pay 30 basis points. Typically 25 would go to the liquidity providers and five goes to the protocol. So we’re kind of lowering that a bit and doing 20 basis points to liquidity providers. Then 10 goes to the protocol. Five goes to that similar xSUSHI/xASTRO equivalent. Then kind of combining the Curve thought process, basically, you can then stake your xASTRO and you get this locked voting share. So the benefit there is as a community, if you’re a fan of a certain token and you have liquidity on Astro, the benefit now is the community hold holders want to be token holders because they can vote basically to direct a certain level of rewards to their individual pools.

So basically if you’re a liquidity provider on Astroport, it’s in your best interest to also be an ASTRO token holder, because you can direct a certain amount of vote towards your pool. And then like, kind of taking that a step further. If you have, let’s say 15 pools, there’s obviously be a lot more, but let’s say you have 15 pools that want to participate. In order of voting rank, if you’re number nine versus number ten, so the idea is your share of rewards is a function of your share of the vote. If you’re a ninth-place or tenth place, there’s no real incentive to participate. Like there’s no additional incentive to participate. It’s just like a very micro-level vote.

We’ve introduced kind of like a list that gradually expands. And so if you don’t make the cut, you’re missing out on the rewards. But if you’re in this like top eight list, so basically you’re always going to have a lot of competition at the high end, because the very popular pools are always going to be they’re going to have larger communities.

But the smaller communities that are often forgotten, but here, you’re kind of creating a lot of incentive for them to participate because coming in eighth means — so eighth in a scenario where all fifteen participate, you’re getting a lot less. Eight in a scenario where only the top eight participate, you’re getting a lot more. And also, going from eight to nine is a massive drop-off because you don’t actually participate in any of the kind of rewards. And then there’s a lot of additional attack vectors that exist with convex and like hijacking of governance. And so I don’t want to kind of hog up the entire conversation.

But that’s one area where what we like to do is basically observe what works, read about it, figure out why it doesn’t work, and then try and kind of iterate and combine different facets and potentially introduce some of our own. And that’s kind of like the thought process behind a lot of the token design that we work on.

Laura Shin:

It sounds super interesting. And wait, when is this gonna launch?

Yan Liberman:

We can talk about it here as well, but the launch mechanism is one we’re really excited about as well, because it kind of addresses some of the issues with distribution. I can take a pause before going into that, but so that’s going to launch the first part, it’s a three-stage process, but it’ll start on December 6.

Laura Shin:

We’ll circle back to that about the launch. One other thing that I meant to say a while back was earlier, when you just described Uniswap as X*Y=K, for people who maybe are new or don’t understand, that’s just like the equation that is used to kind of maintain the price in each liquidity poll. So the price of each token should always equal this constant K when you multiply the two of them. 

All right. So it was super interesting and yeah I think there’s plenty we can unpack from there, but Victor, why don’t you pick one token design that you want to walk us through?

Viktor Bunin:

I had the pleasure of actually working on the first decentralized protocol merge between NuCypher and Keep network. At Bison Trails, we are essentially just a blockchain infrastructure provider, and we support both of those protocols. They both provide cryptographic services for folks that are interacting with them. 

And the fascinating thing there is that they started off with different use cases. NuCypher started off with encryption and Keep network started off with a random number generator and some other services as well. And what we saw is that they were increasingly going to go and compete against one another in specific use cases. Because I was very close to both of the teams, we were able to start having conversations on what could potential merger look like.

I ended up being one of the leads of the proposals that actually went through governance and was voted on and accepted for how to merge the two protocols and the two communities into a single community and a single protocol. One of the interesting things there is that there’s no playbook or roadmap. It is incredibly, incredibly hard to do a merger of equals, because of all of the different places that each protocol is in, different token distributions, different incentive designs that they have, and different considerations around inflation, and whatnot. 

Two of the things that were a big priority for me. The first bit was around how do you design for what the network will look like in its ultimate state? That was crucial because, when we talked about earlier about work token models, is that they’re providing services. And the nice thing about cryptographic services is that you can provide them in a modular fashion. Now you say, okay, here’s the building block and what this does is proxy encryption here. And this does some zero-knowledge stuff. You can actually opt into these services and you can provide some or all of them, depending on what your preferences are as a node operator. One of the important things of the incentive model is you want to be able to direct incentives to encourage node operators to provide certain services that you think are important for that the network to do. 

As a really specific example, soon that the new network is going to be called Threshold. It’s actually launching, I believe sometime next month, which is gonna be really exciting. On it is going to launch something called TBTC, which is version two of it. And you obviously want this to be TBTC, which is a decentralized Bitcoin, you want people to adopt it, and you want people to support it and provide that service. And so that’s going to be probably one of the things that the community is going to vote to incentivize. And so you have a bunch of these nodes, like, hey guys, we need a lot of nodes to make this successful. We need it to be super decentralized. We need for there to be a lot of support for it. And therefore, we’re going to direct more of the rewards towards that use case rather than other ones, for example, that are less of a priority for the ecosystem. So that’s like the first thing around, how do you make sure that the actual work itself gets done and is incentivized.

The second part and this is quite challenging, is that when you have these two token amounts and two communities and two whatever, how do you actually get them to use a single token? Like what is a fair way to do it, right? Is it based on the value of each token? Is it based off the quantities and whatnot? And if you say, okay, the NuCypher team will get 60% because the market cap is larger than the Keep side. And they only get 40%. They’re not going to be happy, right? Like they KEEP talking holders are going to hold a grudge. We were very fortunate that the market caps were fairly close to the other, the stages of the life cycle are fairly close together, and therefore we could have done it, and we did do it, as a merger of equals where each token holder base got exactly half of the token distribution. And then you can map that using token factors essentially to convert from one to the other. 

For the future, when there’s going to be token mergers, I think a lot of them are going to look like acquisitions more than mergers. And there’s going to be greater disparities between the teams, and it’s going to be less of a merger of equals and more of one team consuming the other. One of the nice things about Threshold is now it sets it up that new teams can actually join the network. Ethereum is the only protocol out there that has multiple clients that are in active development. 

Threshold is going to be one of the only work token models that are also going to have multiple client teams and the ability to add more client teams, as other folks want a come and add modular cryptographic services and then petition the community to say, hey, like you should adopt this and you should fund it and you should direct incentive rewards to go towards the service that we’re providing, so that node operator adopted and provided to the community. So it was really cool to work on it. And I’m excited to see more mergers in the near future amongst other protocols.

Laura Shin:

I think that will become a bigger thing. And obviously, we did see in terms of one involving two protocols that were maybe less equal, which was obviously the Polygon and Hermez deal.

Let’s now talk about a big change in tokenomics that happened for Ethereum, which obviously is the second biggest protocol, which I’m sure everybody knows. 

So in April Ethereum adopted EIP 1559, which started burning the base fee. We’ve seen that this has now led to ETH being deflationary at times — sometimes like for kind of a decent amount of time, which is fascinating. That’s being driven by things like NFTs and stuff like that. But I was curious for your opinion on kind of those changes and how well you think that design has played out and will continue to play out for Ethereum, especially as it transitions to the final merge for Ethereum 2.0.

Viktor Bunin:

I took a look at this yesterday, so I have some really, really fresh metrics on it. So thus far the EIP 1559 has reduced the net Ethereum issuance by about two-thirds, which is a really significant cut. And while Ethereum is still inflationary from that perspective, if Ethereum were to switch over to the merge today, it would actually be fairly significantly deflationary. I think that it has actually a couple of really, really interesting impacts. Some of them that are shorter-term and some of them that are longer-term. 

In the shorter term, EIP 1559 is like catnip to institutional investors. Because Ethereum makes a lot of sense to them. They say, okay, this is a thing that you can build on. And it has use cases and applications and yada yada, yada. Also, before people would say, well, how is ETH going to capture any of this upside? It has no mechanism. And folks that have been around in the industry for a long time, realize that if something is useful, it’s going to be valuable. And that’s what happened with Ethereum. But as new folks, and especially institutions, enter the space, and now they can say, okay, well, we can actually model the cash flows and the impact of these activities and what this does to the supply of it and how that could potentially impact price. That becomes like a really attractive narrative for them to latch onto. 

And this is happening at the same time the merge is occurring, with the ability to stake Ethereum. And so now you have ETH that is this revenue-generating quote-unquote asset that you’re able to provide security with, earn rewards on, and you’re able to see how the supply of it will change over time. And you can like model all that against your income as a validator. And so I think from that perspective in the short term, that is why I think a lot of enterprises, institutions, and funds are extremely excited about Ethereum and why we’ve seen such inflows into the ecosystem from that perspective.

In the long term though, I’m a little bit concerned. I think that the nice thing about Ethereum is that you want people to spend it. You want people to use it. I don’t think it’s meant to be something that you just sit on and wait for it to appreciate. And when you have something that’s deflationary, one of the core characteristics of it is that you’re expecting for it to go up in value. But if you’re expecting something to go up in value, you have less desire to spend it. And while that may be great for currencies like Bitcoin, I don’t think that’s the right framework for something that is meant to be used and is meant to pay for gas and is meant to fuel this economy, which ETH’s role. 

And so from that perspective, I’m super bullish on EIP 1559 in terms of its impact on Ethereum. But I think long-term, one of the things we’re going to come to, is to figure out like where that inflationary versus deflationary kind of like direction has to end up in order for us to accomplish our goals of making something that’s really useful for people.

Yan Liberman:

I think those are all really good points. So crypto is probably about the most like reflexive thing I’ve really ever come across. If you look at the net issuance or net inflation relative to the change, it’s not that seismic, right. If you think about it in terms of the amount that’s being burned relative to the size of the entire kind of the entire protocol. But the narrative is very, very strong, like Victor mentioned. It’s very, very digestible for people who are used to seeing buybacks and it’s like, ah, I can think of it akin to this. And so it becomes very digestible and familiar. And so that’s very massive. 

And then the other thing is if you go to this like kind of net deflationary narrative, then it goes from all right, this just becomes something that I can kind of use as a random currency that I’m not really looking to sit on, to all right, I’m happy using this as a form of collateral to borrow against, or kind of holding this as some form of store value. 

With Bitcoin part of what contributes to a store of value narrative is this finite supply. And so I think realistically, Ethereum, pre-being deflationary, still could have been easily considered a store value because the incremental difference in that issuance or burn isn’t that massive, it’s only really seen over the course of many, many years. But this net deflationary kind of component, that’s where the reflectivity comes in. It’s like, okay, this isn’t that net deflationary. We think there’s going to be more adoption. So we think this will only be increasingly more net deflationary. So I’m very comfortable using this as a store value. Oh man, others are using this as a store value. So I will as well. And so it’s like this small shift that just kind of loops and loops and it reverberates through the communities holders and investor mindset. 

Obviously the concern of people not wanting to spend something. That’s why I don’t think Bitcoin will ever be this global currency, at least in my opinion. 

The interesting thing with ETH is that I think the net spend on gas for most people is negligible. What else are you really spending it on? No one’s really going out and buying cars with ether, you’re buying other things in the crypto community with ETH, like NFTs. NFTs are a big thing as like a massive sub-sector, whether it’s in games or just art, but most of those things ended up being priced in ETH as well. And so to that respect, most people are getting comfortable spending it because you’re still kind of exposed to it. But the gas component is obviously an interesting one in terms of spending, but in bull markets, people are clearly comfortable spending just obnoxious amounts on it, as evidenced by the burns that we see during these NFT events and things along those lines.

Laura Shin:

I mean, it’s going to be a really fascinating thing to see play out. I think your point that against the total supply, the burn is small, which might be what will offset that desire to HODL rather than spend. But I think we won’t really know until it happens. I guess the one thing that I like about EIP 1559 is it does just tie together so much more closely usage and demand with the price, which just seems intuitively how it should be. If something is being widely used, it should be valuable. And then therefore that should cause the price to go up. But you’re right, then it kind of has these other knock-on effects. We’ll just have to see how that plays out.

Yan Liberman:

Just even to that, it kind of like shifts the value from value flowing to miners, to value flowing a bit more to the protocol as a whole. Whereas before it was pocketed by them and now it kind of just reduces the supply, which is more kind of socializing the benefit.

Laura Shin:

It widens that. I love that actually. That totally makes sense. So in a moment, we’re going to talk about all kinds of other issues and problems that come up due to token design, but first, a quick word from the sponsors who make this show possible.

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Back to my conversation with Yan and Victor. So we did see a couple of issues recently with a couple of popular airdrops. One was ENS, the Ethereum Name Service, airdrop. People, I think this happens all the time, but again, people were gaming the system. So do you want to kind of describe what happened there, what the problem was, and then how you guys think maybe it could have been resolved differently or better?

Viktor Bunin:

One of the challenges there was that somebody had either leaked or figured out or somehow optimized their bot to spin up a whole bunch of new Ethereum addresses, put some ETH in them, register ENS names, and make sure they set all the parameters correctly. Either through inside knowledge, or some sort of blocker determination, they managed to secure themselves what would have been a very sizeable a mountain of ENS tokens because they met all the eligible eligibility criteria in order to maximize that. It’s one of those things where the community spotted it early and they gave feedback to the team that these addresses were engaged in this behavior. The team reviewed the behavior of those accounts and also other accounts as part of the a list of accounts that were going to be receiving the airdrop.

ENS banned maybe about 1,500 addresses from the list. So they blacklisted them. And so those addresses did not receive any token airdrops. Some folks have different opinions about it. I think that what it kind of boils down to is, and I think a lot of things actually tie indirectly back to whether or not you think code is law and whether or not you’re supposed to apply it equally to absolutely everybody, regardless of whether or not they’re a good actor or a bad actor. 

I fundamentally disagree with that. In circumstances like this, nobody’s entitled to an airdrop. Nobody’s entitled to receive not only free money but also a say in how the network is going to govern itself and spend its funds and otherwise incentivize adoption and so on. And so I think it’s actually, it’s not only optional. I think it’s the responsibility of every protocol team considering during an airdrop to be thoughtful about who they’re dropping the tokens and to intentionally comb through the list of accounts and see are these real users? Are these people that are going to be contributing? Or are these people that are malicious? Or that are vultures? Or that are value extractive? 

When we think about it, you don’t start a company, or a family, or a school, based off of whoever’s around, right? You don’t do it through this random chance of like whoever shows up, right. You’re intentional about it. Why? Because if you’re bringing in people that are bad actors, not only does it unfairly benefit them, but it also hurts the good actors. And they see that people that are bad actors are getting money and they’re getting benefits. They’re doing that in a way that is making people that are good actors that do try to like play by the rules, feel really negatively about it. 

So I’m a hundred percent in support of what the ENS team did. And I look forward to other teams doing that and also much more to make sure that they are dropping tokens in a way that’s very targeted and very intentional and truly accomplishes the goals that they set out to do.

Laura Shin:

Before Yan weighs in, I mean something kind of similar happened with ParaSwap, and I just wondered in general, because what ENS did to resolve it was a retroactive solution. But I wondered also if you guys had ideas on how airdrops could be designed ahead of time to not fall victim to these bots that are trying to farm the airdrop. Because with ParaSwap, their estimate was that some people were deploying literally tens of thousands of bots, and that’s a lot. So I don’t know if you have thoughts on that.

Viktor Bunin:

I have a quick thought and then I’d love to pass it over to Yan. I think one of the things, and this may be like important to comment on, is that just like we were talking about with token design earlier, with airdrop design, you have to have a specific goal in mind of what you’re trying to do. There’s a couple of high-level goals that people should try to accomplish or probably are trying to accomplish. One of them is going to be give folks skin in the game. Target the people that you actually want to continue to stay part of the ecosystem that have been providing value and being active. The other bit is you want to obviously incentivize early users and people that have helped you get to where you are. And the third thing is that you want to think about how do you treat those as a customer acquisition cost — not only to acquire your existing customers, but also to continue acquiring customers long into the future, so you’re not turning people off by saying only a small subsection of people will get it and other people won’t. 

And so I think that with folks like ParaSwap they did I think a generally good job generally on their airdrop in that they were super targeted and they knew exactly who they wanted to get in there. And they got those people in. But the mistake that they made was that it wouldn’t have cost them a lot to get all the other users that aren’t bots and just to give them a little bit of skin in the game and give them a quick thank you.

You don’t have to make those people very rich, but you should acknowledge that they helped you get to where you are, in a way that doesn’t then make them salty about not having received anything at all. I think that was one of the mistakes that they made. 

When you think about like what ultimately drives good airdrop design, I think more and more of it is going to come to identity and that identity can be done in like a super reputation based way in your activities and whatever. But honestly, I think identity is going to be done the identity way of saying, okay, how do we tie back like real-world identifiers to ENS or one of these other things. Cause what you want, ultimately is you want a proof of uniqueness, a proof of identity or proof of humanness.

And then when you have that, in some variation, you’re able to be much more intentional about, okay, this is a person that’s super active and they do all this governance and all this activity. And therefore we want them to be participating in governance activity on our protocol as well. And like, boom, you can do that. Or this person is a whale, but they’re a longterm whale versus a short-term whale. And so you started being able to be really granular about getting the right people in the door. So I think we’re getting there. There’s decentralized efforts obviously. But I think centralized ones will always also get us like part of the way there. So we’ll just see which one of those like takes off first and actually gets adoption by enough users to make it worthwhile to use as a target.

Yan Liberman:

I couldn’t agree more with basically everything Victor said. The issue of the parasitic participants there, it’s a double whammy, right. Not only are they extracting value, but they’re making the value that you gave to everyone else also worse. They’re kind of hitting on both ends where they shouldn’t be getting it, and now those that got it are worse off than if the, the people that shouldn’t be getting it, even got it in the first place. I’s certainly a problem. I very much agree that this identity kind of situation is certainly going to be one that’s going to be more on the forefront.

We’re very bullish on the idea of on-chain identity in that you can provably verify what an individual’s participation has been over the past X amount of time, and you can pretty easily, not easily, but quickly, kind of get a rough, quantifiable idea of how much value they can really provide to your protocol as well. And so you can be a lot more kind of targeted in particular with your airdrops. And so, like one of the things we’re actually working on is this kind of NFT primitive where you’ll be able to effectively kind of customize your NFTs based on rewards you’ve gotten, and those rewards are a function of your participation in various protocols. You can basically combine a shell with different details. Imagine like a PFP iterates and evolves over time based on what you’ve accomplished.

There’s a public site where you can obviously show off like, oh man, this guy was a massive whale here. And he was one of the first LPs here. And so that’s super valuable both in terms of just elevating the status of your PFP, that wasn’t just a function of you spending a bunch or getting lucky with a mint. It’s actually work you’ve done. And at the same time, it’s potentially a way to also identify valuable participants and ecosystem and and then you can realistically you can do this across chains, right? Like if this exists, you can monitor these valuable participants across chains. Now with bridging and kind of how easy it is to move across them, you can bring liquidity, bring users, bring these power users, or really get targeted with these airdrops because otherwise it can be a massive waste in terms of customer acquisition costs.

A poor airdrop just really sets you on poor footing to begin with. It shouldn’t be a disadvantage you need to deal with. There’s a lot of obviously other things that you need to target. Part of a good airdrop is also having good token design going forward where all right, yes, you rewarded a certain user, but then is there a reason for them to actually hold it beyond just being a fan and thinking number go up? Or is there a way for them to use it to actually interact with protocol, whether that’s through governance or through monetary benefits — it really depends on kind of what the protocol does. It all really starts with quality airdrop and then quality kind of integrations afterwards.

Laura Shin:

Just to go back to this identity issue, as I was even just writing the questions for this, I was like, oh gosh, I feel like until we have blockchain based identities, then this is going to be a problem. But I came across a blog post at Delphi about how one resolution would be to link reputation to yield. And is that what you’re talking about? Just like seeing, oh, certain addresses have participated in these various protocols in different ways, is that how he’s defining reputation?

Yan Liberman:

To some extent, I think you can have more objective metrics as black and white as did you participate and to what extent, and you can quantify that without any real subjectivity. The reputation component is a really interesting one because when your thinking about like token design it’s all about how do I really keep someone incentivize through participation? Or like, how do I create some level of stickiness? And in the early days, it’s always financial, and that’s tough because it’s, that’s often zero-sum in the sense that if I’m giving you extra financial benefits, it usually comes at the expense of someone else or the protocol or something like that. Whereas with reputation, that can be its own community-based kind of element in the sense that reputation can be granted by others, to others within the community.

And so you have this natural filter of the people who know the most are actually able to distribute the most reputation, but obviously there’s ways to gamify that. And so you constantly have to kind of think through these loops and really ensure that there aren’t really these attack factors.Because as good as design can be, if there’s a way to exploit it and it breaks, it really diminishes all the value that’s been built up previously. We’re very bullish on the idea of kind of reputation with endows within ecosystems to allow those who are actually knowledgeable or really contributing a lot to kind of rise to the top. Then it becomes healthier for all participants. I think w with DAOs, especially if they get really large, you’re going to have this free-rider problem and that can be very parasitic. To be able to really incentivize and reward the people that are actually delivering the most value ends up being very useful for everyone involved.

Viktor Bunin:

Going back to your point earlier about kids having extrinsic and intrinsic motivation, I think one of the inclusions that we’re gonna have to come to as an industry is that right now we’re trying very hard to make things as extrinsic as possible in that everything’s happening on-chain — it’s on-chain reputation, on-chain contributions, and you look at your activity. But I think the reality is that as, especially as like these DAOs and organizations need to scale, you’re going to have a lot of soft reputation. You’re gonna have a lot of intrinsic motivations. You’re gonna have like a lot of the stuff that happens off-chain, because you’re ultimately dealing with humans coordinating with other humans. So it seems like right now, one of the things that we’re doing is we’re saying, okay, how far can we push it in the direction of everything on-chain? Everything intrinsic. And then from there, you kind of walk it back and you say, okay, you can’t have everything be on-chain and extrinsic, which parts of it need to have the off-chain and intrinsic and a little bit softer.

Laura Shin:

Probably in, in a way, there’s, there’s going to be like a big mix of designs. But that also now takes me, cause we’ve been talking about these airdrops where like the protocol already launched, but they’re kind of like retroactively rewarding users. And I wanted to ask about launching coins. As I’m sure you’re well aware, there’s this tension between the fare launch coins and the VC coins. And that goes back to this question that has been going on for forever in crypto, even like before I started covering this six years ago, which is the issue of pre-mine or no pre-mine. And of course now that also raises questions for like vesting and lockups. And I’m wondering if you guys have an opinion on all that. Like if you think it’s always better to just try to do the fair launch thing? Or whether you think a premine ever could make sense and if so, how that should be designed?

Yan Liberman:

Fair launch versus VC investors as someone who is a VC investor. Naturally, I guess there would be some inherent bias, but realistically we’re always trying to think of what’s the best approach here. And I think, the biggest issue is that thinking that it has to be binary. I think having VCs that are actually builders and helping contribute to what you’re designing can be very useful versus I think what what we sometimes see is just in the same way you have mercenary capital in these launch strategies. You also have mercenary kind of VCs that are just investing in a bunch of places and don’t really have the capacity to add value besides just the capital they provide.

I do think, like to some extent, having the right investors is more valuable than not. But I get the idea from those that aren’t investing from their perspective that it isn’t fair in terms of what’s being delivered. So ideally the ideas that bringing these investors on board actually ends up being more value creative than not. And so you’re owning a smaller slice of a larger pie is kind of the idea. And so with that, I think the idea of fair launches is massively important.

You always want it to be fair. And it’s like what is the definition of fair? To some, I think it started with a bit with YFI and the idea is fair is it has to start with zero and everyone kind of mines. But at the same time, is it fair that the people that found out about it in the first 24, 48 hours are going to just out like farm you by a larger extent and then does it really become fair? And so I think we’ve seen the definition of fair kind of gradually evolve. 

I think fair ends up being a very public pre-announced distribution plan where you explain each component, why everyone has the ability to participate, and their participation actually adds value to what you’re trying to build, or what token you’re trying to design. So I think fair has shifted where previously it was just zero investors, the first people in are starting to get it, to all right, it’s fair in the sense that you’re not gonna have people who can code snipe out the initial drop. Fair is now what’s the most equitable way to distribute where certain people aren’t disadvantaged because they’re not as technically savvy or they didn’t hear about it in a small chat first. I think the definition of fair has really evolved and ideally that’s kind of where we sit in terms of that kind of conversation.

Viktor Bunin:

If I can actually maybe push back on the question a little bit. I actually think that’s the wrong question to ask in that, like we’ve seen super decentralized token launches that are from zero, like Yearn or Grin in the layer space. We’ve also seen super centralized token launches where a ton of the supply is held by insiders. And I think one of the things that we’re coming to a conclusion on is that they obviously impact how successful a protocol is going to be, but it is not necessarily resulting in a more or less successful protocol just from that. And what we found is it’s kind of random, right? How successful the protocol will be, whether or not it launched fairly or unfairly quote-unquote.

I think the better question, and this is something that nobody’s been able to answer so far, is how do you continue distributing a token over its lifetime in a way that is fair?

And that I think is a hard part. Like right now, the closest thing that we have is like, okay, you’re going to do liquidity mining, right? And then if you’re a liquidity provider, you will continue to get some tokens. That’s kind of like the V1 of it. But the other question is how do you continue to incentivize people that participate in governance and people that add value and people that are thoughtful. And there are companies that are adopting it or building partnerships or tooling for it or whatever. And so those are the questions that we really need to answer. And right now it’s done in a little bit of a crude way. And now you have a one-off governance proposal. So let’s give this person a grant or let’s fund this marketing effort or whatever. But these are oftentimes like unutilized and they’re kind of crude.

What you want is you want to find a way to continue deploying a treasury, continue deploying inflation, and continue to incentivize people to do value-added things that distribute token more and more widely over time to the right people doing the right things. That’s the part that nobody’s really been able to answer and is also in a lot of ways, independent of whether or not the token was fairly launched or unfairly launched. 

And I think one of the things we’ve seen is that you can have like a pretty small token launch, but then you have quote-unquote, a theoretically unlimited amount of time that these things will be live for, right. They can go on forever. And so based on how you start and then what you do, it really starts to compound, and that’s the area that we need to be focused on.

Laura Shin:

Yeah. Well, so talk about that. What do you think is the optimal way to structure a liquidity mining program. Because as you guys have talked about throughout the episode, you don’t want to attract this mercenary capital that is just going to leave you once the rewards taper off or whatever it is. So what are your thoughts?

Yan Liberman:

It’s a combination of rewarding users that are going to be interacting with your protocol and then also having a way for them to do so. Not pick on SushiSwap here, but just like we were already on the topic. They had an awesome initial kind of distribution situation and it was very successful vampire attack. The idea was for the rewards that you got, one-third, you’d get upfront, and then two thirds would vest over time. And so that, that worked in in two ways where initially it was very reflexive on the way up, very reflexive on the way down where I’m providing liquidity, I’m getting this yield and I can only sell a one-third of it. So I’m seeing a large number come in and I can only really liquidate a smaller portion of it. 

So what happens is a lot of liquidity because now number continues to go up. And so it gets very reflexive. But the subsequent headwind is that after this mercenary capital has realistically left, they farmed it and there’s potentially another farm — that’s kind of the issue with DeFi in general, is it can be very mercenary where, okay, I’ll fork it and now how do I compete on a natural level when somebody else can just fork and then create a new wave of incentives. And so like that kind of happened. And then you started to see the unlocks come in and the unlocks were now given to people who are probably no longer providing liquidity.

So now they’re not adding much value, but they’re contributing to a decent amount of selling. And so, yeah, it ends up being very bullish way up, but very negative on the way down. So the idea is you have to kind of understand — you want to introduce enough supply into the market where it’s enough to reward people, not enough where you’re basically overpaying. Like Victor mentioned, all of this is effectively customer acquisition costs. And so if you’re overpaying, it can considerably weigh down the protocol as a whole, where if you’re over rewarding certain activities that aren’t necessarily as valuable as the rewards you’re giving, it’s a net negative. And so that’s kind of one thing to keep in mind. And then the other is understanding, all right, these are users who once they receive the token, they, in that situation, they can either sell it or stake it with the expectation of number going up, but there aren’t really additional benefits outside of that. But when you kind of start to introduce ways for them to continuously benefit from the ownership of the token. 

You want your customers to also be your token holders, rather than distinguishing the two. And so when you distinguish the two, you have to kind of provide separate incentives to some extent, but if you can overlap them, I think the incentives themselves become much more effective because it’s not purely just cash. It’s actually a valuable asset that they’re getting that they can leverage to receive further benefits. And so it’s really just all kind of boils down to this game of incentive alignment.

Viktor Bunin:

So I don’t know if this is a little bit of a hot take. You guys can be the judge of that. I think we should assume that liquidity providers are always going to be mercenary capital. When we think about who has the most liquidity in the world, it’s always going to be investors and institutions and money managers — like large institutional players. And what are those people care about? They care about yield. And from that perspective, I think it makes sense to think of them as always just optimizing for yield. There will be a component of, oh, I think this network will grow and I think all this stuff. But treat them all as mercenaries.

And so then what does that mean? Well, what it means is that what we currently think of liquidity mining programs in terms of let’s give money to liquidity providers should be flipped on its head. And that really what you want to optimize for is usage. If you have a lot of usage, the fees are being generated by the protocol will be high, which will be the incentive for liquidity providers to come and say, hey, right now it’s paying out 20%. I’m willing to accept a rate of as low as 10%. And so I’m going to put a ton of liquidity into here until the rate hits what I’m willing to accept. 

And so from that perspective, I think that nobody’s really figured out how to do that yet, because one crude way that we’ve seen is you say, okay, I’m going to incentivize to the buys, the borrowing, I’m going to incentivize the trading.

But you can just game that. That’s the whole point. And especially as fees drop on like layer twos or roll-ups or whatnot — it is going to be easier and easier to game it. So the question is, how do you incentivize the unnameable actual adoption and usage of this protocol? Nobody knows yet. And nobody knows how to do that in a decentralized and trustless way. 

One of the shortcuts to it, is you say okay, maybe we form a partnership with Dharma or with Argent, and we’re route all your stuff in here, and we’ll give you some a kickback or it’ll be subscription, or it’ll be something, but that’s obviously in a centralized way. And so there’s not a perfect way. In a perfect world, we’d like to find a decentralized way to do it. And I think that’s going to be like whichever protocol figures out, how to do that, how to incentivize the actual usage and partnerships and collaborations, is going to do really well. And then the liquidity will follow that.

Laura Shin:

So we’re running out of time, and I literally have ditched so many questions cause we can just go so deep on, on any one of these topics. I did want to ask about NFTs and maybe what I’ll do is actually just quickly sneak in this last question that kind of is a take-off what you just said. 

I wonder if more of this will be about kind of like identity and community as time goes on, as we’re kind of seeing the NFT world. And the reason that I say that was, I’m pretty sure that I heard this on an episode of Frank Chapparo’s The Scoop podcast where he was interviewing, but I don’t remember who it was, but I think it was like somebody from like Jump Trading or something like that.

Laura Shin:

They were talking about how like in the traditional financial world, it is all about keeping things close to your vest. Then they were saying that now if for their crypto activities, they are trying to get involved in governance and in the community and being more transparent. The way that he was describing it, sound like they want to create this identity for themselves in this space. 

When you’re watching things like what’s happening with the NFT world with Bored Ape Yacht, where Bored Ape owners have the rights to make derivative works and things like that. And then now we’re seeing like all these new projects coming out of that. I’m wondering if that is how you kind of make it more organic. But I’m curious for your thoughts and any other thoughts you want to say about designing NFTs to incentivize kind of like the value there.

Viktor Bunin:

I think that what it boils down to… At Bison Trails, I’m part of maybe like 40 or 50 different protocol communities at this point. And so we’ve seen all the different iterations of going from a tesnet to intensified testnet to main net and how all these different ecosystems come up. And the thing that keeps sticking out in the protocol space, whether I’m looking at layer one or layer two, or interoperate, or NFT, is that community is a the killer feature. It’s that simple. And people try to complicate it, but it’s not complicated. Community is a kill feature. And so when we think about design and when we think about community management, the driving force behind it should be, how do you create a community of leaders that act as owners that have the agency and ability to go and do what they want to do in order to add value?

And there’s a degree of trust there, right? Because if you’re empowering people so much, you’re saying, Hey, we’re trusting you to do the right thing with this power that you have. And a lot of brands are very afraid of that. But what we’re seeing in the Bored Ape Yacht community is that these are folks that are extremely excited to be part of this cohesive community. And they want to do things that not only make the brand better, but they also have a lot of fun doing together. And so from that perspective, I think they’ve done a truly incredible job. I’m a Bored Ape NFT owner myself as well, I guess as a duty of that disclosure. But I also think, having said that, that this is the V1 in that we haven’t seen it go poorly yet.

At some point, somebody is gonna take their ability to do this and do something pretty nefarious with it right away. They’re going to do something that’s very not safe for work or whatever it is. And so it will be up to the community to figure out, like, where are those guard rails and what are we willing to tolerate — both at the like extrinsic level of like what you’re allowed to do or not allowed to do based on the derivatives that you have, but also the intrinsic level of are you a good community member at what are we welcoming as part of a community and what are we not? And so I think the NFT space is probably going to be pushing the DeFi space forward quite a bit in terms of that culture, in terms of community, in terms of intrinsic stuff. And I think ultimately what we’re going to see is that a lot of the DeFI folks have NFTs and a lot of the NFT folks have DeFi. And so I think these designs are going to like really build upon each other to make what is going to be really powerful communities that can withstand shocks and withstand black swans and withstand a lot of stuff and really thrive with powerful community members.

Yan Liberman:

I largely agree that that those two are massively overlapping. Now in terms of just like an ownership basis, but that the functionality still hasn’t really seen as much of an overlap as it certainly will in the coming months and years. That’s kind of part of the thought process behind the kind of the NFT standard that we’re helping design.

One thing you’re actually starting to see is the value of a governance token within these NFT communities. Sometimes you’re starting to see it as basically NFT communities are airdropping tokens. Sometimes for weaker failing ones it is just like a cash grab thing, which it’s inevitable and a function of the space. But in the healthy and thriving ones, it’s just another kind of way to coordinate an organized the community where ou can also leverage reputation on top of that as well, which would be more merit-based than an airdrop, which is just purely based on how many you own or some kind of derivative of that.

And so I think what we’ll start to see is basically some kind of meta-layer of governance that’s orchestrated around a token or reputation that is used to really organize these things. Because I really agree that the community is the hardest thing to build. It can’t be manufactured. It can’t be really incentivized purely. It has to be organic. There has to be some reason why people want to spend their time. I’m not just farming a token. I’m actually contributing my own time and going out of my way. Community is definitely the hardest thing to really build. It’s going to be natural that as these communities grow and in order to really maintain some level of organization, there needs to be something that they can use between them, whether it’s token or a reputation to organize it all. 

Viktor Bunin:

Bored Ape Yacht Club did announce they’re going to do a token. It probably will be airdropped or I dunno if a part of it will be sold, it doesn’t matter. But I think one of the interesting things there is that you have a culture that’s constantly doing things — that’s organizing parties and getting celebrities to do stuff or getting partnerships or sponsors, whatever. Once you have a token, is there going to be a finite amount of it, or will there be some inflationary component. And if there is an inflationary about it, how do you as a community figure out what you want to incentivize? Not only in the types of activities, but also the specific individuals. And there’s a lot there to unpack because you don’t want it to be a popularity contest, but also like people that are going to be doing at work are going to be well-known.

And so how do you do that in a way that people feel is fair and that people are bought into the process, and now you’re starting to get into this really interesting poly-sci, democracy characteristics where you really have to unpack it. And almost like in some ways relearn all the lessons that we’ve learned over designing, like the US democracy, for example, but then figure out, like, how does the crypto component sit there? And how is the game going to be 90% of the same, but like the 10% that is different, how is it going to be different and how are we going to leverage a successfully?

Laura Shin:

One other thing that I was thinking about while you guys were discussing this also was like the FWB token. I was asked to comment on this. Oh, well, I won’t say who it was for in case they don’t want me to reveal, but it was like what do you think the future of money is or whatever. And I think it’s going to get a lot weirder. And it’s going to be a lot more tied to your identity and interests. Because if I look at things like the Bored Ape Yacht Club, you just have this kind of like group that you hang out with. And then you all have this identity for presented by this token. In a way it does end up sort of being like a popularity contest. 

I had so many questions we did not even get to. There’s just like so much we could discuss on this. We should totally redo this at some point later next year, because the rest of my calendar for 2021 is filled out. But this was so fun. Where can people learn more about each of you and your work? And if you have any recommendations on resources for tokenomics, let us know.

Viktor Bunin:

Well, for me, you can just go to the Bison Trails website and follow our blog, we publish a lot of stuff there. Or just follow me on Twitter, @viktorbunin. And my piece of advice is for folks that are interested in the space, make sure you get the basics. And so the Internet of Money volumes one through three by Andreas Antonopoulos is an incredible resource that really lays down the foundation upon which so many of the things that Yan and I talked about are laid. So I highly recommend giving that a read.

Yan Liberman:

You can find our research at We offer a lot of free research and also some paid research. You can follow me on Twitter at @yanliberman. 

Laura Shin:

Perfect. Well, thank you both so much for coming on Unchained.

Viktor Bunin:

Thanks so much for having us. Thank you.

Laura Shin:

Thanks so much for joining us today. To learn more about Yan, Viktor, and tokenomics, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Daniel Nuss, and Mark Murdock. Thanks for listening.