*This is a chapter from Tokenomics for Builders: The Practitioner’s Guide to Token Design.

This document and all resources, threads, models, and materials linked to within are for informational purposes only. None of this document’s contents, nor the contents linked to within, should be construed as legal advice, financial advice, technical advice, investment advice, accounting advice, or representations in any way regarding legal, technical, financial, investment, or accounting matters by the author. The author is not a lawyer or financial advisor in any jurisdiction, and highly encourages readers to engage with registered professionals to ensure compliance with any and all relevant laws and regulations.*

Introduction

Why is modeling useful?

The most common answer you’ll hear is: “Modeling is useful for predicting token price.”

Wrong. Wrong on two fronts.

https://twitter.com/MehdiFarooq2/status/1673968770048720896?s=20

First, modeling goes well beyond prices. The design choices you make as a builder can, and should, be tested ahead of time in simulations and scenario analysis modeling.

Modeling can be used to make informed decisions about emission rates, system architecture, parameter settings, risk controls, balanced incentives, and much, much more:

• What should the parameters for Maker DAO’s collateral pools be to maximize DAI adoption?
• How should liquidity be distributed along the curve in Curve’s stablecoin pool?
• How many ETH should be required as collateral to run a node in proof-of-stake Ethereum?
• Will increasing or decreasing emissions lead to more organic product usage for Looksrare?
• What is the most effective feedback mechanism architecture for RAI to maintain a stable price?
• What is the ideal fee for Uniswap to adopt if they turn on the ‘fee-switch’?
• What rate of redemptions can UST/LUNA handle before becoming unstable, and how likely is this to occur based on observed variances in redemptions?