Read My Lips, No New Taxes: How Taxes Kill Your DeFi Token’s Potential
A lot of web3 founders come up with project ideas that require some way to generate revenue and so ask me: “how much should I tax people to buy and sell my token?” You may be surprised that my answer is “zero or less than 1 percent.” I’m here to tell you why.
I’ve been traveling for work a lot recently and prices for Uber have become absolutely ridiculous so if I need to get around a lot I try to rent a car. I found a deal online that would allow me to rent a car for less $40 per day. I needed it for a week so let’s call it $200. This is still great because just going up the street with Uber seems like it always costs over $20 these days, not to mention that ride going to a from the airport…don’t even get me started.
I get to the counter to pick up the car and sign waivers. Before charging my card, the attendant tells me about all the additional charges: insurance, EZ toll pass (tolls cost $15-$20 now??), [insert some random upcharge], refundable deposit, and of course, taxes. The attendant slid me the total which came to over $800. Even minus the refundable deposit, it was over $500. But I need to rent weekly, so my available credit decreases by $800 while I wait for the 3–5 days it takes to get the hold lifted. For me, maybe $100 spent per day on transportation would have still been worth it over Uber. $160 is not. I ended up buying a used car and park it remotely for $6/night with a free shuttle to the airport when I need to fly.
So why did I tell you this story? The rental car service represents your token. Uber represents your competitor. The parking service represents the utility that your token does not have. Whenever your choose to develop these complex taxation schemes in the interest of incentivizing people to hold instead of sell, what you are actually doing is diminishing your transaction volume, which as I’ve said numerous times before, is one of the most important metrics when it comes to launching and sustaining a successful token.
24-hour transaction volume is a key performance indicator for mass adoption. Generally speaking, the greater the 24-Hour transaction volume, the more widely adopted the token. If the transaction volume is high, this means the project is still very active, and therefore the price is more likely to fluctuate. If 24-Hour transaction volume is low, then this means that the project is likely dead or dying, and therefore the price is more likely to be stagnant. A token’s value will rise and fall over time, but a resilient token has the ability to rebound consistently. This resilience can be directly attributed to the token’s high transaction volume. The token is widely adopted, therefore there are simply more potential buyers willing to “buy the dip” which allows the price to rebound again.
Humans (and bots) make decisions to buy or sell based on risk and reward, and if the return would be worth all the additional overhead it costs to make the transaction (i.e. gas fees, slippage, etc.). If you add buy and sell taxes on top of that, it may be determined that the trade is not even worth it. When enough people make this decision, everyone holds, the token doesn’t move, and the token eventually dies in obscurity.
Ecosystem-Driven Tokenomics
The concept of ecosystem-driven tokenomics comes from the idea that the utility of the token is actually derived from the external, rather than what is internal and dictated by the smart contract itself. For example, it feels nearly impossible to just hold Ethereum because to do anything on its network, gas must be paid in Ethereum. Of course we know that it also costs gas to transfer ETH, but you get the picture. Instead of charging fees simply to buy, sell, or transfer your token, you should be focused on building apps that people need to use and charge fees in your token. I’ve discussed in a previous article why Litecoin is a dominant cryptocurrency with a high transaction volume, despite not receiving much hype. To put it plainly, because Litecoin is a widely accepted option in e-commerce, there are just simply more places and ways to spend it.
Good, sustainable tokenomics does not come from excessive taxation. It comes from innovation and real utility.
TechJD teaches developers how to transition to or start a career in web3. He discusses topics that go beyond just the code, including the business and legal aspects of running a successful web3 startup or being an impactful member of a team. You can learn more about the CryptoCadet Academy here or join the Discord.
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