Before You Invest: Tokenomics Red Flags

Red flaaaaag. https://youtu.be/HKk91x0Yg7Q

1) A Money Printer without Revenue

This first one has two embedded questions: 1) Is the project printing a shit ton of their token from thin air? And 2) does this project have any/enough revenue to support this printing?

Personal Example

Fresh off an exploit, Polygon’s Iron Finance relaunched their new yield farming platform and distributed their new ICE token as a reward with staggering APRs.

2) Only Token Use Case = “Future Governance”

This red flag is commonly seen in projects that still haven’t figured out what they want to do (or can do) with their token. This is mainly seen in protocols that are providing an actual service of some kind (lending/borrowing for example).

Personal Example

As I was digging into some yield farms on Raydium, I came across a freshly-launched lending-borrowing protocol called Larix. In their protocol, users could lend and borrow various assets and receive the Larix token as a reward for either action.

3) Low Entry Barrier on Play-to-Earn Tokenomics

Play-to-Earn tokenomics are almost always broken. This is because there are larger groups of people out there in certain parts of the world that are willing and capable of dedicating entire days to “farming” and playing the system. They are trying to earn an actual living, whereas the casual investor might be looking for something simple to earn a few dollars here and there with a “game.”

Personal Example

Somehow, somewhere, someone told me about a BSC play-to-earn game called Plants vs Zombies…or wait, no, Plants vs Undead was the name.

4) Hyper-Inflationary “Currency Reserves”

Just don’t.

Personal Example

Invictus, SnowBank, TIME, Euphoria, Klima…only the 1st one on this list didn’t leave me in total rektedness (because I came in late enough).

5) Mismatching Docs

This red flag is short and simple. Check the tokenomics in the platform’s gitbook*. If there are broken links, empty addresses or just general “unintelligibility”, at the very least you should enter the project with some amount of skepticism and caution.

Personal Example

SMRTr Coin was supposed to be new and improved version of SMRT Coin (a protocol included in the next red flag). Using a “selling” tax system, they were supposed to be implementing “amazing buyback and burns” of their hyper-inflationary SMRTr token.

6) “CRAZY NEW INNOVATIVE REVOLUTIONARY AND AAAWEEESOME AND CRAZY!”

Any of these kinds of tokenomics — if they use a lot of these words, plus a bunch of CAPS and EXCLAMATION POINTS!!, hold off.

Personal Example

I have a few that fit this one. As I mentioned before SMRT Coin had this “crazy” mechanic that would double the APR every time the TVL doubled. It was supposed to be a “ponzi scheme on steroids” where people could pump out thousands per day in yields as long as people kept buying in. For a few it worked, for most it didn’t.

So, in the end,

I have probably haven’t done all of these “red flags” justice or been 100% technical or correct, but it’s just how I see them.

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KJ DeFi

KJ DeFi

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A place for quiet reflection on all my DeFi experiences.