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 blockchain ecosystem, their role in the project, and how they are designed to incentivise certain behaviours. There are many ways that crypto tokens can be designed for use within an ecosystem. For example, they can be designed to have a fixed supply so that there is no inflation or deflation in the system. Founding teams can also create tokens that provide voting or governance rights to holders, thereby incentivising them to hold onto their tokens rather than sell them on exchanges. They can also be used simply to pay fees. The range of options that founding teams have when designing token economies often leaves them with more questions than answers. Even deciding whether the token economy design is robust can be a challenge. Furthermore, a blockchain project not only has to convince its founders but its prospective investors. As a result, innovative crypto-projects often create for themselves interesting narratives, but they are not always viable. 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 (https://bankx.io/), by the author of this paper. The paper first discusses in general the different methods and mechanisms that a tokenomics auditor can employ 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.