Can tokenomics save crypto’s flaws?
The recent BIS working paper #1201 by Rodney Garratt and Maarten R.C. van Oordt offers a thorough and insightful examination of crypto exchange tokens, with a special focus on the risks and inefficiencies associated with buyback pledges. The analysis sheds light on vulnerabilities, market manipulation risks, and high capital costs. But what if we could go a step further?
The paper hits the nail on the head: buyback pledges face many challenges. They are an expensive way for exchanges to raise funds, often because the additional funds from buybacks are less than the discounted cost of the buybacks themselves. Market manipulation is another aspect to consider, where large investors could exploit these buyback mechanisms to artificially inflate token prices- forcing exchanges into an progressively costly cycle of repurchasing.
But here there is an opportunity to expand the discussion by exploring how advanced tokenomic strategies and practical solutions could mitigate these risks. And, what else can be done to create a more resilient and efficient token economy.
One solution is implementing vesting schedules and lock-up periods for token holders, especially large investors. This approach, common in Decentralized Autonomous Organizations (DAOs), helps release tokens gradually, avoiding sudden sell-offs and manipulative supply squeezes. By stabilizing the token release, exchanges could create a more predictable and secure market environment.
Another idea is implementing dynamic buyback mechanisms. Instead of committing to fixed schedules, buybacks could adjust based on market conditions like liquidity levels, price volatility, or trading volume. This unpredictability makes it harder for manipulators to predict and exploit buyback activities and game the system.
Anti-whale mechanisms can add an extra layer of protection. By limiting the influence of large holders, these measures could help prevent market manipulation. While the authors suggest limiting buyback pledges to no more than half of the tokens, setting a cap on the number of tokens any one investor can hold or trade within a set period can help balance the market. This would dilute the power of large investors to sway the market and promote fairer token ownership distribution.
Decentralizing buyback decisions through DAO or community governance is also worth considering. Shared decision-making among a broader group of stakeholders reduces manipulation risks, and aligns buybacks with community interests. Exchanges could commit to publishing detailed reports on their buyback activities and circulating supply. Regular transparency reports and third-party audits can further boost trust and make it harder for manipulators to operate undetected.
But what’s the ultimate goal here? Design tokenomics that drive utility over speculation. When tokens provide real, intrinsic value – like access to services, discounts, or ecosystem participation -they attract a stable user base that values the tokens for their practical uses rather than just their price appreciation potential. Such demand diminishes the volatility and susceptibility to manipulation that purely speculative tokens often face.
As the crypto industry continues to mature, identifying problems is just the first step. At PixelPai, we’re focused on innovating solutions and creating a balanced and inclusive environment as we continue to grow. To build a stable, trustworthy, and valuable token economy, we need equity, but we also need community and the token effect.
