Roderick McKinley on a CFO's Guide for Tokenomics

[00:00:00] Umar: Welcome to the Accountant Quits, brought to you by the Web3CFO Club, a community by Request Finance, with a curated community of web3 CFOs from companies like Aave, The Sandbox, Binance, Consensys, Ledger, and many more, joining this club will allow you to network and learn best practices on web3 financial operations.

[00:00:24] Umar: On The Accountant Quits podcast, we discuss how blockchain will impact the accounting professions and how accountants should prepare themselves for the future of work. My name is Umar, your host, and even if some might refer to me as the accountant gone rogue, my job is to provide you with the blockchain knowledge that you need that will be relevant for the accounting industry as a whole.

[00:00:47] Umar: Welcome to Episode 64. The token economics is the catch all of the elements that make a particular crypto project particularly valuable and interesting to investors. That includes everything from its initial minting process, the token supply, and what utility it has. 

[00:01:06] Umar: Understanding token economics is crucial for making informed investment decisions. A project with well-designed incentives for buying and holding tokens is more likely to thrive and endure than one that lacks a robust ecosystem around its token. While the founding team of a project will be responsible for designing the token economics of a project, for this episode today, I'd like to go through the CFO's guide for Token Economics.

[00:01:37] Umar: Today, I have the pleasure to have Roderick McKinley, a Token Economics Expert who has helped projects raise over a hundred million dollars by structuring their token sale offers and designing their token economies. Some of his clients include Parallel Chain, Ternoa, Paid Ignition Launchpad and ShopX.

[00:02:00] Umar: Roderick is also a prolific content creator and on his YouTube channel Token Design, he spends time educating others about the opportunities being unlocked by blockchain. Recently, Roderick joined the Token Engineering Academy. to teach a course on On-Chain Analytics using Dune and ChatGPT. In this episode today, you will learn the value accrual concept and what drives token utility, a checklist for a successful token launch, best practices for projecting future financial performance with tokens, managing token distributions, becoming a token engineer as a career field and much more.

[00:02:45] Umar: Roderick, welcome. And thanks for making the time to be here. 

[00:02:49] Roderick: And thank you so much for having me on here, Umar. It's a pleasure. 

[00:02:52] Umar: To start our episode, Roderick, can you share a little bit more about your background, how you became interested with blockchain and how ultimately you started to focus on token design?

[00:03:04] Roderick: Sure. So at university, I decided to take up my studies in economics because I was mission and impact motivated. I wanted to understand why the world is an economically unjust place. Why are we doing such a bad job coexisting with the natural world and managing our own resources? And what could we actually do about all of that?

[00:03:24] Roderick: And these studies led me to work initially in renewable energy first as a Market Analyst for Bloomberg. Then eventually working with private equity principles on project finance transactions to help fund renewable energy projects and portfolios valued at hundreds of millions to a billion dollars in scale.

[00:03:41] Roderick: I then went freelance so that I could enjoy sleeping more than four hours a day. And live a remote work lifestyle around the world. This was pre COVID during that time, Bitcoin obviously had made the news several times, but I had a pretty sort of general skeptical stance towards it as a trained finance professional.

[00:04:00] Roderick: You know, this is not backed by anything. It's just tulip mania all over again, et cetera, et cetera. And then what happened was the pandemic happened and that stranded me on an island with a bunch of blockchain entrepreneurs. They saw that I had this skillset in strong, critical thinking, financial modeling, and they enlisted me to help them run a token sale in 2020.

[00:04:24] Roderick: They did well. And lots more clients came after them. And initially all of these briefs were focused on, structuring token sale offers and tweaking them until they got over the line. But gradually breeze started changing and people started asking me more about issues relating to token economics, token utility design.

[00:04:45] Roderick: And this brought me right back to my university studies and the earliest motivations I had, because this technology gives you a completely new tool chest to work with. And one that has the potential to address several deep, longstanding issues in economics. And I'm lucky to just find all of that deeply fascinating.

[00:05:09] Roderick: So I decided to double down and make this my new career, even though the bear market's been tough and I've definitely been doubting my choices more than once. And in that time I started the YouTube channel, which you so generously referenced at Token Design, where I use that as a way to develop and refine my thinking, contribute to shared discussions.

[00:05:30] Roderick: And, and that's turned into a great way of building a professional network in this space. And it's, it's thanks to that, that we're having this conversation here today. So that's, that's my background. 

[00:05:40] Umar: So the episode today is titled a CFO's guide for token economics. And I thought, why not start with the basics?

[00:05:47] Umar: So how would you define token economics? I know that there's no consensus definition of this term yet. 

[00:05:54] Roderick: Yeah. So I don't think the right approach here is for me to say tokenomics is this. It's more appropriate to recognize the way that people are using the term in practice and from what I see uses cluster around what I term a narrow concept of tokenomics and a broader concept.

[00:06:15] Roderick: Now the narrow concept is, is what most of the people think about when they first hear the term. It's centered on supply characteristics, how many tokens there are, who gets them, how quickly, when, and this sort of version of tokenomics is strongly associated with those stereotypical pie and fan charts that you see included in investor decks, in ICO type offerings.

[00:06:39] Roderick: And that narrow focus actually lines up with the fact that the first crypto assets were designed as monetary instruments, right? And in for that use case, controlling scarcity and preserving sound accounting are some of the economic considerations that you have to hand. But what has happened since obviously is that blockchains have become much more openly and richly programmable.

[00:07:03] Roderick: So we have this opportunity now to build much more than just simple digital currencies. And this is where a broader notion of token economics or tokenomics comes into play, because we're now dealing with systems where it's not just the supply of tokens that matters. But what actors are taking part in your ecosystem?

[00:07:26] Roderick: What are their motivations? Are they different? What actions can you perform with smart contracts? And how do they affect the behavior participants, or what happens to resources in that system? All this invites, you know, much broader and diverse economic considerations when we look at how this system is put together, how people participate within it and and what happens to the resources flowing through that system.

[00:07:53] Roderick: So that's what I would say characterizes the narrow supply focus definition and the broader notion, which still includes supply, but expands to consider all these other economic factors as well. 

[00:08:05] Umar: Perfect. Next, I want to go through the value accrual concept and what actually drives the economic value of a token.

[00:08:12] Umar: From what we've seen, it could be through usage fees that particular protocol, or let's say blockchain charges its users or the general market demand it has for its tokens. So web3 projects, they need to establish a method by which their tokens will accrue value that does not entirely depend on the effort of the project's team.

[00:08:35] Umar: Now, simply increasing the fees charged by the protocol doesn't necessarily lead to a rise in token value, even if the protocol, I mean, if the protocol doesn't distribute any of the captured value back to the token holders. I want to ask you if you can provide some examples of different web3 projects and how they accrue value for their token.

[00:08:58] Roderick: So I think, you were kind enough to send me these questions in advance. And this was the one that I felt like, gosh, okay. How this is a, this is like a super important issue. And, and I think it needs a few pieces to be explained first. So I'll do my best where you start off is by asking what drives demand here.

[00:09:17] Roderick: Why do people want this token? And as you just pointed out. You know, sometimes the demand originates from markets and sometimes it's created by demand for the utility features of this token. And I think when you're starting out in a blockchain context, it's very helpful to force this strong binary distinction between these two sources of demand.

[00:09:40] Roderick: Because it gets you to really look at your token and say, if we, if we took trading away, why would people want this thing? And many times projects don't have a compelling answer to that. And the way you create sort of utilities for this token that may attract demand is by linking that token to some, some kind of benefit, right?

[00:10:01] Roderick: So this might be the ability to pay fees on a platform, the ability to receive some share of fees collected by that platform. The ability to participate in a governance process, the ability to unlock different service experiences within that economy. All of these things create demand, but the only way that you capture that value within the token itself is if you create a link between the token and that benefit so that, and, and that link becomes stronger on account of two things, how exclusively the token gates access to that benefit and 

[00:10:35] Roderick: how reliably the token holder can cash in on that benefit. 

[00:10:39] Roderick: So this linkage is, what I think is important component of, of value capture. And when we talk about value accrual, I think we're really talking about a special case of value capture, where the mechanics of value capture are engineered or operated in such a way.

[00:10:56] Roderick: As to try and progressively build greater amounts of value in the token over time and do that in a way so that it ends up showing up in exchange markets with the token gradually increasing in its price over time. 

[00:11:11] Roderick: So let's see, you mentioned a point there about whether, you know, this happens due to the actions of a team or whether it's all regulated by smart contracts.

[00:11:20] Roderick: I think that will necessarily depend on the kind of project at stake, the kind of project involved. In some game economies, you may need a lot of things sort of managed by a team off chain. In some simple DEXs, obviously almost everything happens on chain, but it's important that whether the mediation is happening automatically with a smart contract or the team, that there's this clear link established between the benefit and the token.

[00:11:45] Roderick: So in terms of projects that sort of, that we can look at, for examples of value capture and value accrual, the canonical sort of case study here is Uniswap, which originally launched this governance token and a governance token, it had no other utilities or features. It just allowed users to have a stake in how the protocols governed.

[00:12:07] Roderick: And the value of governance is the financial value of governance is really hard to define unless you have a clear line of sight to how those governance rights might translate it to some kind of financial benefit. So for a while, Uniswap was under competitive threat from, from entrants like SushiSwap, which basically just cloned the protocol, but said that, hey, you know what, we're not just going to make this a governance token, we're going to allow all the token holders to get a cut of the fees as well.

[00:12:34] Roderick: So now this token not only allows you to, you know, tweak the rules of the system, but you, you get a cut of, of the underlying business. Yet somehow whether there's always a bit of luck involved, but, but Uniswap definitely managed itself really well. It managed to stay top dog and beat off this competition and the promise, you know, investors were aware that Uniswap was routing all the ginormous amounts of value.

[00:13:00] Roderick: I forgot to look up the exact amount, but it's, it's huge. And they understood that governance in this particular context had value. And that was priced into the token. If you look at other tokens that might've been in a similar situation, they did not capture value from the protocol. So they had poor value accrual and that wasn't supported in the market.

[00:13:20] Roderick: But Uniswap was the exception. And where we've gone to now is that there's been a vote to actually route some of the fees collected into the hands of token holders. So that now strengthens or, or rather offers a more secure mechanism for the value of accrual of this token. Value accrual was delivered just in virtue of Uniswap's tremendous success as a project.

[00:13:42] Roderick: It still managed to accrue value through its governance utility, but now that is really being backed in a much more secure way by routing fees through it. 

[00:13:50] Roderick: So, you know, another project which has great value accrual, Ethereum, you value capture secured here by the fact that, you know, you can only pay for smart contract execution and transfers in ETH itself.

[00:14:03] Roderick: You also need to stake ETH to deliver validation services on the network and be rewarded for those validation services. Both of these are examples of the way that the token is exclusively creating an exclusive gate for the access to either participate as a provider in that economy or as a consumer of services in that economy.

[00:14:24] Roderick: The value accrual of this setup has been strengthened since Ethereum migrated to a proof of stake consensus mechanism, which also included a revision that burns tokens in proportion to how much they are demanded, how much of them are paid over in transaction fees. And what's interesting is that in this case, you are the value accrual translates into an increasing price, but this increasing price in this particular context is not there just to make the investors and speculators happy, but it actually serves a core economic function on the protocol, because now that Ethereum is proof of stake, the security of that network depends on how expensive it is to buy stake and buy a controlling amount of stake on the network. 

[00:15:10] Roderick: So in this particular context, we have a deep economic motivation for value accrual and continuing value accrual to be in the core economic interests of the system and not just something that, that satisfies investors.

[00:15:23] Roderick: Aave in terms of sort of like exclusive utilities, Aave holders get discounts on, on loan rates. If they help fund the kind of reserve that acts as a risk absorber in their system, they earn an APY for that. They can also use Aave to contribute a portion of the collateral that's required when they take out a loan.

[00:15:42] Roderick: So again, these are all benefits that are being exclusively gated by the token and which can be reliably accessed. And then Aave once again is burning tokens. It's reducing supply to provide some ongoing sort of value accrual, a gradual increase of price over time. 

[00:15:59] Roderick: But I think it's worth just adding here that it may not, we're so used to thinking of these tokens as, and evaluating them on their performance as financial investments. But we, we may not always want to design a token that has a value accrual going on in perpetuity. And the very obvious counter example is stable coins, right? Because they are designed to be stable, to not move around the price. And there's one of the most useful things we've managed to build in blockchain.

[00:16:28] Roderick: So hopefully that's not too long winded an answer to the topic of value accrual. 

[00:16:34] Umar: I want to follow up by asking you if every web3 project needs a token. We often hear that the core tenet of a web3 project is a token and web3 is all about ownership. Now, sometimes projects may have other motivations and those motivations could be only fundraising.

[00:16:55] Umar: So I want to ask you if every web3 project needs to offer a token and when should it offer a token? 

[00:17:04] Roderick: I mean, there's a definitional issue there. Are you a web3 project if you don't have a token, but I understand the spirit of your questions. Like does, does every project need a token? Will a token make every project better?

[00:17:16] Roderick: And as in, will it actually make its business better? Let's put aside the fact that this is basically also an instrument, which allows you to fundraise much more in the right market conditions, much more competitively and with fewer regulatory obligations, at least it has been, will the token actually make your business run better?

[00:17:35] Roderick: And the short and obvious answer that I'm setting up to there is no. Many businesses will not need a token to be run successfully and will run worse as a business as a result of them trying to tokenize an interface with this technology. However, even, even if that's the case, I think that you can still say that there is a good reason to tokenize. And even if it's, even if you anticipate that it won't be the most economically efficient, this may be a means to penetrate a new market. Like blockchains are like another region of the internet. You can think of it as being like in another country, it's a new market. And if you have a presence in a new market, maybe you aren't doing so great when you start off, but you now have a claim in that territory.

[00:18:18] Roderick: You, you get to learn about how things work there. You learn about your customers, you learn about what it means to do business. So, you know, you may be running at a loss or, or less efficiently than you might be doing otherwise, but you're learning something and that can have benefits for you down the line.

[00:18:33] Roderick: Now, when we get to ownership, ownership I think is, is really interesting. There's a lot in, in blockchain and web3 that is incredibly ideological. When we live in this world surrounded by all of these professionals, I think it's very easy to drink the Kool Aid and get out of touch with what regular, regular Joes think and feel.

[00:18:53] Roderick: And personally, I'm not that convinced that ownership really, really, really matters to people in the deep way that motivates, you know, people overcoming all of these frictions that come with the technology. I remember when I was collecting DVDs, CDs. And how they were really mine. And today I'm just like totally comfortable renting all my media from Spotify and Netflix.

[00:19:17] Roderick: And that's not just me. Everybody's doing this. We, we don't care that we don't own it. That would change if they were like regular outages to the service. And I don't know when I turn on my computer, if I'm going to have all my music there. Then I care about ownership. But these private services are being delivered to such a high standard that it never really crosses our mind.

[00:19:40] Roderick: It's not a real concern. And, and I think that is probably the way that most people feel about these things. I don't think they'd feel strongly motivated by ownership in the way that we might think they would. You know, a lot of us don't buy, ownership maybe becomes more significant. If we, if we're making a purchase.

[00:19:59] Roderick: Paying attention to its resale value. But the majority of our acquisitions in normal economic life are not, are not done with that mindset, with that intention. We're not, you know, I'm not buying a Beatles album, you know, because I'm thinking about its resale value when I'm bored of listening to it.

[00:20:15] Roderick: There are just tons of purchases and acquisitions, which, which are just not done in that way. When it comes to very large transactions, like a house, we think of its resale value, or if we're dealing with, products that are clearly sort of financial instruments of one kind or another, these things become relevant.

[00:20:31] Roderick: So I'm a little skeptical of, of this narrative and, and there is a little bit of tension as well about, you know, what, what kind of communities are served in gaming, a lot of gamers are just like, I think the line to paraphrase someone, some random anonymous person on the internet, like. I already have a normal job to go to.

[00:20:50] Roderick: Why do I want to go and play a video game to sign on another one? And that's a sort of like critique of the inherent inescapable financialization that, you know, web3 build brings to, to some of the games where it's no longer about the fun. And it's about sort of like, you know, Yeah, I've tried trying to make money.

[00:21:07] Roderick: So anyway, so that's a slightly rambly response to, to ownership. I think it's going to be relevant in specific cases where security of that ownership is otherwise uncertain or where you're dealing with very large transactions. I'm not sure it's going to be a broadly relevant or motivating consideration for a lot of consumers.

[00:21:26] Umar: Before we continue, we'll take a quick commercial break from our sponsor. Working in web3 can transform your career, be financially rewarding, and surround you with a vibrant community. But as you're very much aware, this space requires rethinking a lot of the old models of how we work. For example, as the leader in a web3 organization, it's up to you to figure out the most cost effective way to offramp the company's crypto, Or what's the most efficient setup to mass pay your contractors in crypto?

[00:21:57] Umar: Getting your organization to run on crypto is daunting if you're alone. That's why Request Finance, the industry leader in crypto invoicing, payroll and expenses, has curated a community of web3 CFOs to share best practices around web3 financial operations. 

[00:22:14] Umar: With CFOs from leading projects like Aave, The Sandbox, Binance, Consensys and many more, joining this community will allow you to network and fast track, getting your organization compliant in crypto. And you know what, I'm also responsible for accepting new members and growing the Web3CFO club. So if you're a web3 business founder, CEO, CFO, or in charge of financial operations, you can join this exclusive community today by filling up an application form at theaccountantquits.com/web3cfo. 

[00:22:50] Umar: Subject to a screening check, you will then start interacting with high profile web3 CFOs, get access to members only benefits like webinars, resources, and invitations to physical meetups. Join the club today and let's win with three financial operations together. 

[00:23:08] Umar: Now I'd like to help the CFO listening, how to get ready to launch a token.

[00:23:16] Umar: Maybe go through a high level checklist on how to launch a token. We spoke of the value accrual concept and token utility. So, some of the areas I have in mind right now would include the initial token minting and the distribution, speaking to a legal advisor, of course, to assess the need for a token SPV and let's say the different legal structures to put in place, determining the token cap table.

[00:23:44] Umar: So in terms of the strategic and operational challenges, could you paint us, let's say a high level picture on how a CFO should set up a plan for success when launching a token. 

[00:23:55] Roderick: So forgive me, but I'm going to plug my wares here for a second. I created a teaching course very much on these issues. It's called token sale mastery.

[00:24:03] Roderick: If you type that into Google, it should be the first result that you get, but let's cover some of the key points there. I think the very most important thing to get right is your budget, everything begins from there. And these early private fundraising rounds are actually when you have some of the most control over the amount of capital you get.

[00:24:21] Roderick: After that, you're relying on thin and fickle crypto markets. And if you want more cash from private investors, you're going to have to prove that you've achieved something with the capital that's already been given to you. Okay. So it's crucial that you draw up a budget. That gives you enough runway to deliver results for the next funding round.

[00:24:40] Roderick: And to not, you know, come up with a runway that's reliant on fantasy scenarios of, of how markets work or your token going to the moon within those first months of trading. I've seen a lot of, I saw a lot of projects who were basically hoping to have their runways padded out by trading in the markets.

[00:24:57] Roderick: They didn't understand how decentralized exchanges work. They didn't understand that the price of the token is not how much liquidity is available for your token to be traded. And they messed up, they, they disappeared. Anyway so setting a realistic budget that's informed by, you know, the real constraints of public markets and private markets is the first step.

[00:25:16] Roderick: Once you set a realistic budget, this really drives forward a lot of the token supply distribution, investing, and that's really going to be influenced as well by market conditions. Unfortunately, investors strong arm, a lot of the terms there, and they're going to favor a deal that allows them to enjoy a handsome early exit.

[00:25:35] Roderick: The tokens perform. If your token happens to perform well in markets. What you need to do with your, your token budget set is look at the valuations of the private market. Because the price of the offer of the round that you sell each private investors multiplied by your market cap gives a fully diluted valuation of that round.

[00:25:54] Roderick: And you basically don't want to be setting that too high for what the valuations for the valuations that are currently being priced in in the current market. How you then divide up that token supply can actually be a bit cosmetic and PR driven rather than something that reflects the deep economic needs of the project.

[00:26:11] Roderick: The same goes for vesting. You'll find that vesting terms are short when the market's hot and they get longer when, when it's cool. But do these decisions actually reflect how quickly a project is able to grow fundamentally? No, they don't. But, but these are the ways that things are being negotiated at present.

[00:26:29] Roderick: Unless you've opted for a warrant style agreement, in which case, what this allows you to do is, is defer when the tokens are handed over to private investors and set the terms. So like, okay, you know, once we've scaled, if our next round manages to close at this kind of valuation, we offer you the option to buy these tokens at this price.

[00:26:53] Roderick: This kind of information then allows you to sort of judge things a little bit better. You can. Look out forward over the token supply curve and judge whether that token price hands over a certain amount of tokens that can be absorbed by markets when your projects reach that scale in a way that's going to enable their liquidations to be less disruptive to your community, to your project.

[00:27:15] Roderick: So. I think that token warrants are definitely really interesting way forward with this. And then actually a really big part of your challenge here is finding a good market making partner. So when he's got a good reputation, increasingly you split that load between two market makers so that neither one of them has too much power.

[00:27:32] Roderick: And you also need to do some work to manage this relationship in a way that really serves the long term financial interests of your business, communicating clearly what your long term financial goals are and getting the right information back from them to incorporate that into your planning. For the legal matters, that, that is not my area of expertise.

[00:27:51] Roderick: Yes, you absolutely need to get legal advice involved and, and the considerations are going to be specific to your jurisdiction and where you are going to be active or distributing tokens. So yes please consult an expert on those matters. Not me. 

[00:28:07] Umar: Perfect. Now I want to speak of financial modeling, and this is a concept that CFO's accountants listening will be familiar with.

[00:28:15] Umar: Now, of course, I've googled what financial modeling could mean, and I got that financial modeling is a representation in numbers of a company's operations in the past, present, and the forecasted future. Now, if we extrapolate some of these same mathematical models that we know of to allow CFOs to make better informed decisions in web3, what are some of the best practices to project the future financial future performance with tokens. You might have touched on a few of them already. 

[00:28:45] Roderick: No, this is definitely new territory. And I'm sorry to say that it's, my answer here is it depends. And it really depends on the nature of the business or, or project application at hand. Now, financial modeling is my bread and butter.

[00:28:59] Roderick: I am talking about financial modeling. That's like the way you're trained in investment banking, private equity, which very much uses the language of accounting to express a forecast and review the history of business activities for an entity, all of that written in the language of accounting, right? 

[00:29:17] Roderick: And this is the tool and framework that a lot of CFOs are intimately familiar with to, to assess where they are and where they're going, if you're a web3 or blockchain business, resembles a familiar business in the sense that it is centrally directed and controlled by management and involves dealing with having one or more independent relationships with clients who buy your services and you are collecting fees in a stable asset like a stablecoin.

[00:29:48] Roderick: If all those things are true, you can absolutely capture all the key features of your business to evaluate it and plan forward with it within the traditional financial modeling framework. And, as that explanation suggests, those things aren't always true in web3. Many blockchain projects do not operate in this way.

[00:30:07] Roderick: The, the kind of mini value chain that's at work in creating some sort of a service in a blockchain project may involve several independent processes or agents who are not under central control, the simple, the most familiar example would be a decentralized exchange where the liquidity providers are independent of the swappers and they need independent incentives in order to come together into a unified system.

[00:30:35] Roderick: Whereas if you are a company, you just employ all the people you want and they're under contract to do what you tell them to. So this is a really important difference, this independence and autonomy of agents in certain arrangements. Secondly, there may be feedback effects that change how the system performs if, you know, the way that clients or customers use the service ends up changing how we're able to deliver that service in the first place.

[00:30:59] Roderick: This can create effects that are very hard to capture within a spreadsheet model. And, you know, you may not be able to see all the risks or see all the sort of problems that arise within a spreadsheet framework. And then finally, the final big difference is that if your liquid cash flows in many web3 projects are not in the form of cash, but in the form of some native token, and that exposes you to all kinds of market and liquidity risks in when you want to try and transform that asset into, into a safe liquid, you know, a true cash like asset.

[00:31:30] Roderick: So depending on how different your business or your project is and on those sort of like, dimensions on those points, you may want to, you may need to engage with a modeling framework outside of a spreadsheet. Maybe you'll be using something that's built into python. You will need to make use of off chain and on chain analytics that monitor the health and status of the exchange markets of your token and of markets in general.

[00:31:55] Roderick: You may want to, depending on your project, you may want to keep track who has how many tokens, all these different stakeholders and, and what roles they're playing in the system. Since those differing distributions may impact on how your system operates. So, and then finally, I think risk modeling is essential, be it building awareness of where the vulnerabilities are.

[00:32:15] Roderick: Perhaps budgeting risk capital to cushion against them. I think only the best capitalized projects are doing that sort of work rigorously, but I think it, it has to become, there has to become some sort of minimally accepted good practice in that area, if you want to design and operate these systems successfully, safely, and sustainably, because at the very least, you know, you're exposing yourself to open markets.

[00:32:37] Roderick: You have to have some risk management in house. I think it's, it's problematic to just rely on the market makers to do, to do all of that for you.

[00:32:45] Umar: All right. So before we speak a little bit more about these different financial and risk modeling strategies that you help these web3 projects with, there's one more topic that I'm going to go through, which is token distribution.

[00:32:58] Umar: And while writing this question, I was thinking to myself, this could be an episode on itself. So maybe first for the investors, what are some of the good practices with regards to token lockups, or a SAFT let's say, so a simple agreement for future tokens and token warrants. 

[00:33:17] Roderick: I don't think the investors are the ones who need coaching here.

[00:33:21] Roderick: They've been in this game longest. They're often the ones dictating the turns because they have the leverage, you know, holding the purse strings of the capital that, that will help you get started. And they will set the vesting where they think it should be to offer them an attractive exit opportunity given their market outlook should the project do well.

[00:33:40] Roderick: There was a shift away from tokens, token investing into equity investing when the bear market set in. You do get stronger rights if you're an equity investor. And as I said earlier, I think that warrants are a great way to reduce little clear and manageable conditions about how tokens transfer into investor hands at a later date.

[00:33:59] Roderick: And so, you know, I think the reasoning, the general reasoning around investor vesting is that, you know, if you are earlier, you know, or if you're providing some sort of strategic services that gives you some kind of privilege in terms of the price or the discount to the eventual public price that the cheaper you buy generally, the longer you get and the longer you have to wait, but that's, that's sort of like compensated by the incredible uplift you get when you finally make it onto the market because you know, it's not an even, it really isn't an even playing field in that sense.

[00:34:31] Roderick: So yeah, sometimes investors can just make a return simply by selling at the public price, even if there's been no appreciation for the public. So anyway, they know how to do it. Your responsibility as a project is, is to check what they are doing and compare it to other offers in the market to make sure that they're not being overly greedy for in terms of what the market's going, , doing at the moment.

[00:34:52] Roderick: In terms of how vesting is set up for, for employees, the incentives there are different, right? So investors have provided their capital up front. I think it's reasonable for them to expect a return sooner, whereas project team members are engaged in building a project over a long time and the fruits of their contribution are going to take longer to arrive.

[00:35:14] Roderick: So in that context, it makes sense for them and their vesting to see a longer lockup and maybe a longer vesting period as well. So that's, that's sort of like tends to be the the priority and arrangement that's accepted, but how long the lockup and how long the vesting select expands and shrinks with a level of temperature in the markets.

[00:35:32] Umar: Perfect now. So I think it's time to speak a little bit more about what you do, Roderick. So can you share with the listeners, some of the services that you provide around token design, tokenization, token flow modeling, and if possible, mention a few project examples you've worked with so far and not necessarily mentioning their names, but just an example of on what these projects aim to do.

[00:35:58] Roderick: I get a bit shy when people ask me about projects because, you know, the honest truth is that most of the ones that I worked with in the last bull market did not succeed. And that together with this sort of broader wave of devastation that we saw in 2020 gave me this really strong motivation to spend the bear market deep in, in research and building and strengthening my skills.

[00:36:20] Roderick: But there are some projects that I've worked with that I'm, I'm happy to see are still operating and growing. We have Parallel Chain, a layer one blockchain based out of Singapore. I helped them develop their validator economics for their original design and their token sale offer. And that, that brought them 20 million and help them to secure a line to an additional 50 million in capital.

[00:36:42] Roderick: Then we have a launch pad Paid Ignition, which has now raised a 35 million US dollars in public round capital for over 90 projects. And have helped to broker sums many multiples of that amount from private investors or their same projects. I helped them raise their funds with their token sale, worked on their platform incentives, and also supported some of their financial planning and portfolio management.

[00:37:06] Roderick: And I also modeled and supported the early token sales, which raised the first millions for ShopX, which today has evolved into a business, which offers web3 solutions for brands and Ternoa, which today has evolved into a fully fledged layer one blockchain project. 

[00:37:21] Roderick: In terms of the service offering today, I still work solo and freelance, and that allows me to tailor my offering to specific client needs. On a case by case basis, but generally I'm helping them develop their tokenized business concept. They may say, okay, we want to do something around like creating like an antivirus over an internet, but we want to, I'll be like, okay, well, let's try and why don't we think about building this for retail users?

[00:37:48] Roderick: Because that helps that works better with a tokenized product. That's likely to get a lot of traction, a lot of volume and diversity. If, as opposed to one where we're relying on lumpy B2B sales, or I might be designing their token economy, token utilities, and modeling some of that out quantitatively.

[00:38:07] Roderick: I may be writing up white papers or token economy white papers, obviously it's been saying structuring and managing their token sale offer. I'm beginning to explore opportunities to, in how I can deliver on chain analytics to improve treasury management, planning strategy, financial planning. And enable sort of better visibility and economic management.

[00:38:31] Roderick: So that's a new skill set I'm trialing. And I've also been studying for the FRM certification in financial risk management. I sit in the last exam next week. So I'm also going to be on the lookout for opportunities where I get to apply those skills as well. So these last two are kind of in evolution as I need to sit down with clients and look at what problems they have and see where I can confidently add value in these areas.

[00:38:57] Umar: I had a follow up question on real world tokenization, but maybe I'll get back to this and speak about the skills to become a token engineer. So you've recently teamed up with the Token Engineering Academy, and you are now imminently launching a course on OnChain analytics using Dune and Chat GPT. So becoming a token engineer, it's an emerging field of study. 

[00:39:23] Umar: The Token Engineering Academy they stand out today for someone looking to have a better understanding on designing suitable and effective token ecosystems. Can you tell us a little bit more about what students can expect to learn with this course that you're launching? 

[00:39:40] Roderick: Yeah, so as I was just saying, I've been exploring On-Chain analytics for myself because I think they offer really, really important information that goes beyond, you know, us philosophizing about token economics to actually saying, oh, look, this is this is really what's happening, right?

[00:39:58] Roderick: I think that's a very important piece of the puzzle to contribute. Now, personally, I had some previous experience with analytics work using Power BI, Alteryx, but I hadn't worked with SQL or On-Chain analytics platforms like Dune. So I decided to teach myself. I decided to say, okay, let's see how far I can go with this.

[00:40:17] Roderick: And I, I only did started that in January and I was fully aware at this point that I could use chat GPT to help me with that journey, but I really was totally unprepared. It truly took my breath away. How quickly I was able to make progress with the help of chat GPT. It's, it's just absolutely incredible.

[00:40:37] Roderick: So. This course is actually about refining and distilling the key points of my learning process and sharing it with students so that they can start making their own explorations. And if they have never coded before, maybe they can get over their fears of what this entails and begin to see coding as a task that they can be effective with very early on in their career.

[00:40:58] Roderick: And I will, you know, what they're going to get specifically out of this course is the ability to draw up some simple analytics and charts of trading activity on Uniswap V2 pools. And, and perhaps more importantly, they'll learn the fundamentals of how to continue teaching themselves. Once the course is over, because I'm going to show them how I looked at these data tables and then looked at official Uniswap documentation to understand what was in the data tables and how I and how that allowed me to understand what I needed to do with the data to get the insights or the analytics that I was after.

[00:41:34] Roderick: So yeah, the first lecture begins on May 27th, four days in total, but you will be able to tune in later as it's all recorded. And thanks to Token Engineering Academy's philosophy. Everything's going to be entirely free. Although if you do enroll officially on their platform, you're very welcome to vote my course in for a $10,000 prize.

[00:41:53] Roderick: I will certainly appreciate it. So that's a, that's the course that's coming up. 

[00:41:57] Umar: Perfect. And for the listeners, so Dune is spelled D U N E. And if I, but correct me if I'm wrong, the course is free on Token Engineering Academy, but I believe to mint a certificate would be where students would be required to pay at the end, if they're interested to have like an NFT of that certificate.

[00:42:17] Roderick: No, my understanding is that this version of the course, I'm going to be grading some homework. You know, I'm going to show you how to create one or two charts and then I will, you know, my process and methodology for passing that to Chat GPT and getting results out. And then there'll be a few more that students are invited to do for themselves.

[00:42:34] Roderick: And then I'm just going to grade the homework. And that's for the time being on this sort of run of the course, that's going to be the, the only way to get an NFT. And, and I just, I believe that other than whatever transaction fees may be required on the network, I think that's free as well. I think, I think that's part of the, the run that token engineering academy are offering.

[00:42:55] Umar: Yeah, perfect. Now, Roderick, as someone like yourself, who's very bullish on a future for, for token based economies, what are some of the emerging career path that you see today for people? Because this is something that's still very niche today, universities, as far as I know, they're not really teaching them.

[00:43:16] Roderick: Yeah, I mean, so it's hard to anticipate everything that's coming up. I think I see really interesting opportunities in law. There are going to be very interesting issues in commercial law about how much we can lean into smart contracts or delegate over to smart contracts to a standard that these professions, authorities, corporates and consumers find robust and acceptable. Economics I think has is going to evolve in really interesting ways.

[00:43:41] Roderick: I think this is the first time in the entire history of the field that we can talk with substance about something like economic engineering, where we, we really have the ability to reach in deep and design how a system is, is built to try and create certain economic properties or outcomes. 

[00:44:01] Roderick: This new generation of applied economists will also enjoy being able to work with a broader range of stakeholders. Maybe people who think, Oh, what's it an economist job. I get to work in a bank or I get to work and maybe they don't find that attractive. Maybe they find that sort of stuffy environment, but now they could be working with a video games, like creating, you know, a giant intergalactic republic economy full of, with all kinds of goings on with pirates and stuff.

[00:44:26] Roderick: And maybe people that, that will bring in attract a different sort of person and, and different kind of energy into, into the space or, new ways of helping farmers to, you know, earn good rates for the crops and prove that they've been farmed in organic waste. There are all sorts of really interesting sort of applied economics opportunities are emerging around this technology.

[00:44:46] Roderick: And then obviously data science, analytics, software engineering. I think the considerations involved in these particular kinds of applications, web3, blockchain applications, are going to be niche enough to, to deserve their own sort of trained specializations. In terms of stuff beyond that, you know, new kinds of roles or new professions, your guess is as good as mine.

[00:45:07] Roderick: But within those fields, I see really interesting opportunities for, for careers and new applications of skills. 

[00:45:14] Umar: Now, real world asset tokenization has been a hot topic since last year. I've never covered this on the podcast and I thought, why not have a very short segment on it. So in theory, anything of value can be tokenized and brought on chain.

[00:45:29] Umar: Some examples of the physical and traditional financial assets that the listeners are used to would be commodities, equities, bonds, credit, artwork, real estate, intellectual property. I want to ask you, Roderick, in your network, have you seen an uptick in interest related to real world asset tokenization?

[00:45:50] Umar: Have you worked with any projects so far? And what are some of the hurdles you currently see for these use cases? 

[00:45:57] Roderick: Has there been an uptick of interest? Yes, absolutely. However, one thing's, you know, the commentators and, and the people in the sphere, sort of like talking about it. And the another is who are the people actually doing it?

[00:46:09] Roderick: And one of the things I find fascinating about crypto is how you have all of these different tribes, very different personalities, very different people. And the nature of real world assets. By its very nature makes it extremely sort of like process and compliance heavy, right? Because there's something fundamentally different going on here. 

[00:46:29] Roderick: With, with traditional digital assets, we're, we're talking about claims that are natively digital on some digital event or digital thing. There is no Bitcoin out there in the world that only exists in servers and, and stuff and people sort of like ledgers. All the examples you gave are real world things. You're all too familiar with internet scams to know that just because someone says, here, I promise to pay you something on, in an email, that you're not going to get the thing.

[00:46:55] Roderick: So in order to make real world assets work as a concept, I'm not saying it's, it's rubbish. On the contrary, I mean, getting into the benefits is another, a whole other video, but to make it work, you need to have all of the sort of like secure legal apparatus that ensures that I really do own the thing.

[00:47:13] Roderick: Not just the token, but the thing behind it. And the way those are packaged as well is done pretty conservatively as well. So actually there's less of the sort of creativity that, that you see with, with token economics and, and all these kinds of things, actually everything's done. It's, it's just sort of like doing everything that you would do anyway.

[00:47:33] Roderick: To, to create, you know, an equity share, but just adding the step where you represent it as, as a token. And so the tribe that involved that brings in are all these people who are already in FinTech, already in banking. And it's sort of a very different crowd. So it's only going to be certain actors who are going to be capable of driving this forward.

[00:47:53] Roderick: Then the, the other issue is that. Yeah, I was, I was at a conference in Bangkok recently, and the impression I got is that this is, it's talked about a lot, but actually there are going to be some incredible opportunities at the margins, like individual projects, individual sort of areas of innovation, but it's going to take a long time for this to translate into a broad impact on capital markets and investing more generally.

[00:48:17] Roderick: I think we may be up against the kind of chicken and egg scenario. A lot of the real economic benefits of RWAs essentially hinge on secondary market liquidity, being able, you as an owner of this token, being able to show up at some sort of like regulated decentralized exchange value and being able to trade and get out and get in easily.

[00:48:37] Roderick: But that liquidity is, is going to take some time to build up, right? Because this is such a new niche segment and there's so many controls around identity, KYC. So actually we're also waiting on a wave, a set of technological innovations that are really going to be very important for, for facilitating this, where you have blockchain native or blockchain compatible identity.

[00:49:00] Roderick: Auto KYC, which means that once I've KYC with someone in the same, in one country, I never have to do it ever, ever again. And, but you know, another one of the frictions we then encounter is that each country or each jurisdiction has its own set of rules and laws. So scaling is probably only going to really sort of develop up, up until national level.

[00:49:18] Roderick: And that's going to slow things down. It's going to fragment liquidity at jurisdictional level. And that's something actually we don't see in web3, which is already global and internet scale. Anybody who can, who has an internet connection and can talk to this thing, to the blockchain can do business there, can trade there, can do whatever.

[00:49:33] Roderick: Whereas this stuff is going to be so bound by these jurisdictional requirements that I don't think we'll see quite the same kind of rapid growth. And that is. Going to stymie some of the benefits that would make the assets attractive in the first place. So it is genuinely a promising area, but I think it's going to take a little longer to take off and have a broad impacts than many commentators would expect.

[00:49:55] Umar: Roderick, you're so passionate about what you do and so articulate when you speak that I'm sure the listeners and myself, we could keep listening to you, but I've to be mindful of your time. And so for the remaining time that we have left, I want to touch on an area that, so we spoke a lot about tokenization, token economics.

[00:50:16] Umar: So maybe for the last few minutes that we have, I want to ask you if there are other areas in web3 that you're paying close attention to. And you have an interest in, 

[00:50:27] Roderick: Yeah, so tokenomics is, is, it can be a bit of a misleading word about what's important because it gets us to think that all that matters is the token and that all our attention should be in the token.

[00:50:37] Roderick: But actually, if we, if we dig and, and we look at what, what the real gold is, what the real stuff that, that makes all this work is, is it's rules and protocols and procedures. So I think I'm, I'm actually paying close attention to things that have very little to do with, with tokens. I was just talking about, you know, the importance of creating blockchain native or blockchain compatible identity infrastructure.

[00:51:02] Roderick: That, you know, is able to do cool things like, you know, now if I want to go somewhere and they want to ID me, I have to show them my entire passport or a document that tells them way more than they need to know about me when maybe all they need to know is that I'm a human being, not a robot and that I'm over 25.

[00:51:19] Roderick: Why do they need to, and that could be like, you know, confidentially revealed in a very closed and justly limited way. And all of that being done automatically. Similarly, I think we need more expansive and flexible privacy controls. That's going to be absolutely vital. Corporates to participate in public blockchains.

[00:51:36] Roderick: EY is doing lots of interesting work innovating in this area. Anything that streamlines the user experience that removes frictions around getting a wallet, having to do this, having to understand, you know, we want to get to a point where it's just like using any of the other apps on our phone. And we don't have to say, okay, now I have to do this blockchain thing.

[00:51:54] Roderick: You know? People, the best applications, people are not even going to know that they're using it. So yeah, all of these things, what's going on with regulations, always really important to understand how, how businesses are being supported or what the right way forward is, clarity around that. And one that I think you might care about as an accountant is standardization of data reporting.

[00:52:15] Roderick: You know, we have standard accounting procedures for public companies and it's, it's illegal to misreport them through it, for them to be misreported through gross negligence or, or malfeasance, some kind of, you know, willingly misrepresenting them. But we don't have similar standards for tokens. We even simple things like circulating supply and market cap are not rigorously defined.

[00:52:37] Roderick: It's someone submitting a spreadsheet to CoinGecko and saying, this is how many tokens we have, you know, so there should be ways of embedding this, this kind of data accountability, standardized data reporting into smart contracts or the way that tokens are issued and stuff. So yeah, these like slightly deeper, sort of more infrastructure innovations are, I'm keeping a close eye out for.

[00:53:01] Umar: Wow. It makes me think how far we are yet, right? From, and how early we are, because speaking about token data reporting, I've not seen any form of standardization so far, and it's highly required. 

[00:53:16] Roderick: I'm fully in agreement. 

[00:53:17] Umar: Now, Roderick, thanks a lot for your time coming in today. I've personally learned a lot just preparing this episode and I'm sure the listeners have as well.

[00:53:27] Umar: There's a last question that I like asking to my guests before they leave is, do you have a favorite quote or a maxim that you live by? 

[00:53:36] Roderick: I looked at this and I don't have any such quote like hanging on my wall or one that I keep coming back to or tell in polite company. But I did look around and I found this one that's attributed to Einstein.

[00:53:50] Roderick: You don't know all the time if it's true or not, but, but I feel it, it kind of resonates with this journey I'm on. So like trying to build a new career about something, which sometimes I ask if it's real or not. And what's motivated me through that. And this quote, supposedly by Einstein says, I have no special talent. I am only passionately curious. 

[00:54:09] Umar: Beautiful. And I think a lot of us like, think like that. Personally, I've been trying to reinvent myself as well for the past three years. And it does involve like a relentless sense of curiosity each time, every day. Awesome. Yeah. 

[00:54:24] Roderick: That's, and that's something you see in all the tribes. There's some kind of passion. You have to be a little odd to be committed to this and, and passion and curiosity are, are very often at work. So that's great to see in all our professions, colleagues. Yeah. 

[00:54:41] Umar: Yeah, I completely agree. Roderick, if people want to reach out to you and consult you for services around their token economics, token design, where should they do so?

[00:54:55] Roderick: Reach out to me on LinkedIn, Roderick McKinley. And yeah, I'm also active on my YouTube channel, Token Design, but for professional things that probably reach out to me on LinkedIn, that's, I've also got a website, rmckinley.net. So rmckinley at rmckinley.net, you can email me there. 

[00:55:10] Umar: Perfect. I'll be sharing both in the shownotes of the episode.

[00:55:14] Roderick: Thank you so much, Umar. Pleasure to be here.

[00:55:16] Umar:  Thanks a lot again for coming and we'll stay in touch. I would like to thank everyone for listening to this episode. You will find all the links of the episode, show notes, and transcript on the website of The Accountant Quits at theaccountantquits.com. Please note that this content is for general information purposes only and is not a substitute for consultation with professional advisors. If you do know anyone who could benefit from the episode and you care about them, please do share the episode with them. All the episodes are available on Spotify, Apple Podcasts, and Google Podcasts, and by leaving us a review and rating, you will support the channel and all your fellow accountants.

[00:55:58] Umar: In order to be notified each time we release a new episode, do follow us on Instagram and LinkedIn. We hope to have you with us next time. Bye for now.