April 2024

Decentraland is a blockchain project that separates itself from DeFi. Rather than building a decentralized financial application, Decentraland created a decentralized virtual reality world. Instead of investing, users come to socialize and create experiences. For this, tokens are not digital assets used to earn interest; instead tokens are used to power the ecosystem. What follows is an examination of Decentraland’s tokenomics, focusing on the design, valuation and governance and a comparison to Sandbox’s token design. 

Token Design

Decentraland is a virtual world that runs on the Ethereum platform. Inside the world, users can play, explore, and interact with different games and activities. There are three total tokens; MANA, LAND and ESTATE. MANA is an ERC-20 utility token, and is the primary currency. Players use MANA to purchase avatar outfits and accessories, to attend virtual events and to buy land. The core feature of Decentraland is the opportunity to own virtual land. The world is made up of ninety thousand unique LAND tokens. LAND is an ERC-721 token that comes with specific coordinates that constitute ownership of a virtual real estate parcel. These LANDs can be bought, sold or rented. They can also be combined to form community districts and neighborhoods. 

An ESTATE is an ERC-721 token that represents multiple parcels of land that are adjacent to each other. These three tokens for Decentraland are transacted by their own smart contracts; 

• MANAtoken contract

• LANDregistry contract

• EstateRegistry contract.  

MANA fuels the economy, and LAND and ESTATE ownership motivate users to create and develop content and services.

Valuation - Scarcity + Deflation

When the team behind Decentraland held an Initial Coin Offering (ICO), they set the total supply of MANA tokens to 2.6 billion. The initial plan was to have an 8% inflation rate each year, but after putting it to a community vote, it was decided against (NFT Plazas). Instead of being inflationary, MANA became a deflationary token. For every transaction in the marketplace, a fee of 2.5% is charged and burned, thus permanently removing it from the total supply. New MANA cannot be mined however players can earn it through gameplay. By decreasing the total supply of MANAs, they become more scarce and therefore the value of the tokens increase. Deflation also helps to prevent market volatility dips by maintaining a stable and more predictable value. There will never be more MANAs introduced into the supply, so users can feel more confident about their value being more sturdy. 

The demand for MANA comes from users needing it for participation. The supply slowly diminishes as MANA gets burned in transaction fees, particularly with LAND purchases. Like the fixed supply of MANA, there is also a fixed amount of LAND. And like MANA, LAND's scarcity also adds to its appeal. As the platform grows, more users buy parcels, districts and neighborhoods and begin to build community themes. Parcels in good neighborhoods or with popular games, services, experiences, such as the Vegas style gambling district, become more sought after. So not only are there supply and demand elements designed into the tokens, they also gain value through user participation. 

Like many other digital assets, and even traditional assets, speculation plays a part in valuation. When Decentraland was first available and the excitement was at its highest, major brands such as Adidas, Samsung and Atari rushed in to buy land and build shops to advertise. This in turn, drove up the price of land as companies have larger budgets and needed more land parcels to put businesses on.

Governance - Power in the Community

MANA, LAND and ESTATE aren’t just utility tokens, they’re also governance tokens. Token holders participate in Decentraland's governance through a Decentraland DAO. Any changes to any part of the world, requires voting and an agreed consensus first. This is one of it’s greatest features; power in the community. That’s because every token holder is also a stakeholder in the governance process. Voting power is directly tied to the amount of tokens one possesses, with LAND and ESTATE tokens giving users more votes. The platform’s survivability is thus directly tied to its users' participation and engagement. Since the voting power is tied to how many tokens are held by the voter, it can mean that users with larger wallets have more influence over how the platform evolves. At the same time, those who have more stake in the system have greater concern for the success of the system. 

In order for any democracy to function, it needs special committees to carry out actions on behalf of the needs of the community. For this, Dentraland has a few special teams.  There is a Security Advisory Board (SAB), which is composed of 5 Solidity experts, selected by the development team to perform any modifications to contracts. Updates must first be unanimously supported and confirmed before they can be implemented by SAB. The DAO committee is 3 individuals that take action on the measures/grants that were voted on and approved. There is a Wearables Committee that approves wearables and finally a Revocation Committee that handles cases that have been escalated and are in need of  resolution (How the DAO works 2024). 

Decentraland’s governance model is designed for transparency and accountability by safeguarding itself against the risks that come with a central authority. MANA, LAND and ESTATES are controlled through smart contracts, which anyone can see on the blockchain. The total supply of tokens is capped and users ultimately control its fate.   

Decentraland's isn’t the only metaverse platform using a blockchain. The Sandbox is another frontrunner in this area.

Decentraland vs Sandbox

Both platforms have a fixed amount of LAND available to users. They both operate with a native ERC-20 token; Decentraland has MANA and The Sandbox’s ‘mana’ is SAND. Both metaverses depend on the players to create and contribute to the virtual world. There are some major differences though. 

Governance

For one, Decentraland is powered by the community. The Sandbox on the other hand, was founded by Animoca Brands, and they have ultimate control and direction over the platform. They have said that they plan to create a DAO in the next 5 years. 

Tokenomics

Another difference is tokenomics. Decentraland’s MANA token is set up for deflation. The fixed amount makes MANA scarce and as the supply is reduced, the value increases. As tokens become more valuable however, holders may be more inclined to save them rather than spend them. This behavior can reduce the amount of tokens that circulate in the economy. The value of MANA is therefore also reliant on growth and user engagement, to ensure that tokens are regularly changing hands.

The Sandbox’s SAND also has a total cap, set at 3 billion SANDs. The token has taken an inflationary role because more tokens are released into circulation over time. In the beginning, only 1.2 billion SANDs were in supply and the rest was locked according to a schedule. Every 6 months for 5 years, a % of SAND is unlocked into circulation. About a month before an unlock is about to occur, whale investors begin selling large quantities of their SAND, anticipating the unlock and increase in supply is going to bring the price down. Then after the coins are unlocked, the coin holders (investors etc) begin selling off their tokens, bringing the price down even more (Waris 2023). This was particularly evident on February 15, one day after 12% of the overall total supply of tokens were released, sell orders constituted 55% of all trades for its most liquid USDT pairings. On the other hand, The Sandbox has been a marketing powerhouse and has over 47 big name brand investors from brands like SQUARE, SoftBank, Samsung, to name a few (Hamilton 2024). 

While Decentraland and The Sandbox both use a form of tokenomics, their approaches and the effects are quite different. Decentraland relies on its community to guide its direction, providing users with more control over the platform. This approach can make the tokens more valuable over time as they become scarcer. On the other hand, The Sandbox is managed more centrally by its founding company, Animoca Brands, and tends to experience more significant price fluctuations due to its inflationary token policy. This makes The Sandbox potentially more volatile but also faster to adapt and grow because of strong corporate backing.

Future Trends

As blockchain technology evolves, the ways in which tokens are valued is evolving too. Traditional valuation methods for tokens have focused on market speculation. But as tokens become more tied to blockchain platforms, the ways that tokens are valued are changing. 

Projects have begun adopting multi-token models, where tokens serve different purposes, i.e. governance, utility, and liability. This allows for different ways to manage activities within the project. For example, some tokens will grant privileges, like access to services or features. Tokens are also being used for staking, where token holders lock up their tokens to help maintain security or earn rewards (Forbes 2024).

Many blockchain projects are also trying to implement strategies to reduce speculative trading, which causes volatility and price swings. To deter this kind of volatility, some projects are trying locking periods for tokens after the ICO, and having lengthy vesting schedules for developers and investors. Another method becoming more common is to limit transferability of tokens at the early stages. These rules ensure that token holders are tied to the long-term success of the project, rather than short-term price gains (Coindesk 2022).

Regulatory developments are also shaping tokenomics and blockchain technology. There is a need to invest in regulatory compliance to navigate the  complex and fragmented regulatory landscape. This can mean hiring staff to focus on security, data privacy and anti-money laundering (AML) practices. Platforms should account for spending on legal expertise about which markets to enter and how to structure projects to comply with local laws.

By looking at how Decentraland uses tokenomics, we can see how important planning and community involvement are to making a blockchain project work well. Their approach of letting token holders have a say in decisions and making tokens scarcer over time helps keep the platform stable and valuable. What we learn from Decentraland could help other projects as they try to find the best ways to manage their tokens and keep users involved. Other platforms like The Sandbox take a different approach, but they also show how diverse strategies can be in the world of blockchain.

Sources:

"NFT Plazas." Decentraland Cryptocurrency, NFT Plazas, https://nftplazas.com/decentraland/decentraland-cryptocurrency/.

Ajibade, Ibrahim. "The Sandbox (SAND) Faces Price Threat With $133 Million Token Unlock." BeInCrypto, 5 August 2023. https://beincrypto.com/sandbox-token-unlock-threatens-price/.

"Decentraland (MANA)? A Virtual World Built on Ethereum." Plisio Blog, 30 November 2023. https://plisio.net/blog/decentraland-mana-a-virtual-world-built-on-ethereum.

Cryptopedia Staff. "Decentraland (MANA): A Virtual World Built on Ethereum." Gemini Cryptopedia, updated November 1, 2023. https://www.gemini.com/cryptopedia/decentraland-defi-ethereum-based.

Rodeck, David. "Crypto Staking Basics." Forbes Advisor, 20 February 2024. https://www.forbes.com/advisor/investing/cryptocurrency/crypto-staking-basics/.

Canny, Will. "BofA: Don’t Tarnish Blockchain Technology With Speculative Crypto Trading." CoinDesk, 18 November 2022. https://www.coindesk.com/business/2022/11/18/bofa-dont-tarnish-blockchain-technology-with-speculative-crypto-trading/.

https://docs.decentraland.org/player/general/dao/overview/how-does-the-dao-work/

Waris, Saman. "How has The Sandbox [SAND] Fared a Week After Unlock? Unravelling…" AMBCrypto, 23 Feb. 2023, https://ambcrypto.com/how-has-the-sandbox-sand-fared-a-week-after-unlock-unravelling/.