Auditing Tokenomics: A Case Study and Lessons from Auditing a Stablecoin Project

Abstract

Tokenomics is a vital part of any blockchain project. It is the study of how crypto tokens are used within the ecosystem, their role in the project, and how they are designed to incentivize certain behaviors. There are many ways that crypto tokens can be designed for use within an ecosystem. For example, they can be designed with a fixed supply so that there is no inflation or deflation in the system. Founding teams can also also create tokens which provide voting rights or governance rights to holders in order to give them more incentive to hold onto their tokens instead of selling them on exchanges. Or they can be used to simply pay for fees. The plethora of options that projects have on how they design their token economies, often leaves them with more questions than answers. Deciding on whether the token economy design is robust or not is challenging. Furthermore, a blockchain project not only has to convince themselves, but also those who are going to invest in the project. Innovative crypto-projects often come up with interesting narratives, but they do not always hold. For that reason, a recent trend in the industry is “the tokenomics audit”. The goal of a tokenomics audit is similar to an audit in any other industry (e.g. accounting). The auditor has to assess the viability of a project, while also suggesting potential improvements. The end goal is to provide an independent view on whether a token economy is viable or not. This paper discusses general principles that can be followed when running a tokenomics audit. The paper uses as a case study a recent tokenomics audit, conducted for the BankX stablecoin , by the author of this paper. The paper first discusses general different methods and mechanisms that a tokenomics auditor can employ in order to audit a project. The paper then proceeds to demonstrate how these methods were used in the audit of the BankX project. Tokenomic auditing is still a new area, and there is no set of established methods to conduct an audit. By reviewing this case study, this paper helps provide some lessons to the community, upon which future research can improve. Disclaimer: Nothing in this paper can be interpreted as constituting financial advice. This paper was written for academic purposes only.