Foundations of Cryptoeconomic Systems

Kajetan Olas

28 Feb 2024
Foundations of Cryptoeconomic Systems

The significance of cryptoeconomic systems extends beyond the mere functioning of cryptocurrencies like Bitcoin or Ethereum. These systems underpin the entire blockchain technology, enabling not just financial transactions but also the creation and execution of smart contracts, the development of decentralized applications (DApps), and the realization of complex governance models. By ensuring the integrity, security, and continuity of decentralized networks, cryptoeconomics not only challenges traditional financial systems but also paves the way for a new era of digital economy.

Understanding Cryptoeconomic Systems

What Are Cryptoeconomic Systems?

Cryptoeconomic systems blend cryptographic security with economic incentives to sustain decentralized networks. These systems enable secure, decentralized transactions and operations without central oversight. They achieve this by leveraging cryptography for security and economic principles to align participant incentives.

The Intersection of Cryptography and Economics

  • Cryptography in cryptoeconomic systems secures transactions and data. It involves digital signatures for identity verification and hash functions for ledger integrity, ensuring that transactions are both authentic and immutable. This security mechanism is vital for preventing fraud and maintaining trust among participants in a decentralized environment.
  • Economic incentives play a crucial role in motivating participants to maintain and secure the network. Tokens or cryptocurrencies are awarded for validating transactions or contributing resources, aligning participant actions with the network's health. This incentive structure is designed to encourage honest participation, securing the network against attacks and ensuring its longevity.

Together, cryptography and economic incentives create a self-sustaining system where security and participant cooperation are intrinsic. This synergy not only eliminates the need for central intermediaries but also introduces a more resilient and transparent way of conducting transactions.

Complexity of Cryptoeconomic Systems

There are however challenges in designing and managing decentralized systems. While these systems are engineered to incentivize positive contributions, their complexity can lead to unpredictable outcomes. Such property is called emergence.

Navigating Complexity

To mitigate the risks associated with complexity and emergence, developers and participants in blockchain systems must employ rigorous testing, continuous monitoring, and adaptive governance mechanisms. This includes:

The Design Principles of Cryptoeconomic Systems

Cryptoeconomic systems are distinguished by their reliance on principles that combine cryptographic security with economic incentives, directing the behavior of decentralized networks. This section examines the role of reversed game theory and decentralization, with a focus on how emergence and feedback mechanisms influence the design and functionality of these systems.

Reversed Game Theory in Cryptoeconomic Systems

Reversed game theory is pivotal in constructing cryptoeconomic systems, emphasizing the creation of mechanisms that guide participant behavior towards desired network outcomes. This approach contrasts with traditional game theory by prioritizing the design of rules and incentives to induce cooperative and honest behaviors, rather than merely predicting outcomes based on existing strategies.

Consensus algorithms like Proof of Work (PoW) and Proof of Stake (PoS) are practical applications of reversed game theory. They align individual incentives with the collective goal of network security. There are many more consensus protocols, with different trade-offs, so when designing a blockchain its good to examine pros and cons of each one.

Emergence and Feedback Loops

The complex interactions within cryptoeconomic systems can lead to emergent behavior, where collective outcomes arise that are not directly predictable from individual actions.
Well-designed Feedback loops are critical in this context, as they allow the system to adjust to emergent behaviors, enhancing resilience.
For instance, automatic difficulty adjustments in mining algorithms respond to changes in network participation. This maintains consistent block creation times despite fluctuating levels of computational power


While designing a cryptoeconomic system, creators make a set of assumptions on how rational participants will act in different situations. Based on these assumptions, they identify possible risks, and implement safeguard mechanisms. Even though this fosters network’s resilience, it’s often not enough. Reason is that developers can foresee only a certain number of interactions, and emergent behaviors may still disrupt the system. Luckily there are more reliable testing options. Studies have shown that probabilistic methods can be used with good success to detect unexpected risks. 

Decentralization: Trade-offs and Benefits

Decentralization distributes network control across multiple participants, reducing reliance on central authorities and increasing system robustness. This principle significantly influences the design and operation of blockchain systems. It introduces many structural benefits and challenges, coming from the lack of central power.



Design of cryptoeconomic systems is deeply influenced by game theory and the principles of decentralization, with special consideration given to the roles of emergence. These elements collectively ensure that systems are secure, transparent, and adaptable, capable of responding to unexpected behaviors and evolving network requirements. Addressing the inherent trade-offs in these designs is crucial for the continued development and success.


The exploration of cryptoeconomic systems reveals a fascinating intersection between cryptography, and economy, creating a framework for decentralized networks. Consensus protocols are result of interedisciplinary research, and they allow cryptoeconomic systems to achieve their core functionality. This functionality is to store and process transactions in secure, and censorship-resistant fashion. They also enable the development of custom decentralized applications. Cryptoeconomic systems come with both benefits and challenges, so it's best to tailor technology that's used to individual's needs.

If you're looking to design or test a blockchain-based system, please reach out to Our team is ready to help you create a system that aligns with your project's long-term growth and market resilience.


In simple words - what are cryptoeconomic systems?

  • They are protocols combining cryptography and economic incentives to secure decentralized networks.

Are there challenges associated with the complexity of these systems?

  • Yes, complexity necessitates testing and adaptive governance for stability.

What future developments can be expected in the field?

  • Currently, research focuses on improving scalability, without the loss of decentralization.

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Token Engineering Process

Kajetan Olas

13 Apr 2024
Token Engineering Process

Token Engineering is an emerging field that addresses the systematic design and engineering of blockchain-based tokens. It applies rigorous mathematical methods from the Complex Systems Engineering discipline to tokenomics design.

In this article, we will walk through the Token Engineering Process and break it down into three key stages. Discovery Phase, Design Phase, and Deployment Phase.

Discovery Phase of Token Engineering Process

The first stage of the token engineering process is the Discovery Phase. It focuses on constructing high-level business plans, defining objectives, and identifying problems to be solved. That phase is also the time when token engineers first define key stakeholders in the project.

Defining the Problem

This may seem counterintuitive. Why would we start with the problem when designing tokenomics? Shouldn’t we start with more down-to-earth matters like token supply? The answer is No. Tokens are a medium for creating and exchanging value within a project’s ecosystem. Since crypto projects draw their value from solving problems that can’t be solved through TradFi mechanisms, their tokenomics should reflect that. 

The industry standard, developed by McKinsey & Co. and adapted to token engineering purposes by Outlier Ventures, is structuring the problem through a logic tree, following MECE.
MECE stands for Mutually Exclusive, Collectively Exhaustive. Mutually Exclusive means that problems in the tree should not overlap. Collectively Exhaustive means that the tree should cover all issues.

In practice, the “Problem” should be replaced by a whole problem statement worksheet. The same will hold for some of the boxes.
A commonly used tool for designing these kinds of diagrams is the Miro whiteboard.

Identifying Stakeholders and Value Flows in Token Engineering

This part is about identifying all relevant actors in the ecosystem and how value flows between them. To illustrate what we mean let’s consider an example of NFT marketplace. In its case, relevant actors might be sellers, buyers, NFT creators, and a marketplace owner. Possible value flow when conducting a transaction might be: buyer gets rid of his tokens, seller gets some of them, marketplace owner gets some of them as fees, and NFT creators get some of them as royalties.

Incentive Mechanisms Canvas

The last part of what we consider to be in the Discovery Phase is filling the Incentive Mechanisms Canvas. After successfully identifying value flows in the previous stage, token engineers search for frictions to desired behaviors and point out the undesired behaviors. For example, friction to activity on an NFT marketplace might be respecting royalty fees by marketplace owners since it reduces value flowing to the seller.


Design Phase of Token Engineering Process

The second stage of the Token Engineering Process is the Design Phase in which you make use of high-level descriptions from the previous step to come up with a specific design of the project. This will include everything that can be usually found in crypto whitepapers (e.g. governance mechanisms, incentive mechanisms, token supply, etc). After finishing the design, token engineers should represent the whole value flow and transactional logic on detailed visual diagrams. These diagrams will be a basis for creating mathematical models in the Deployment Phase. 

Token Engineering Artonomous Design Diagram
Artonomous design diagram, source: Artonomous GitHub

Objective Function

Every crypto project has some objective. The objective can consist of many goals, such as decentralization or token price. The objective function is a mathematical function assigning weights to different factors that influence the main objective in the order of their importance. This function will be a reference for machine learning algorithms in the next steps. They will try to find quantitative parameters (e.g. network fees) that maximize the output of this function.
Modified Metcalfe’s Law can serve as an inspiration during that step. It’s a framework for valuing crypto projects, but we believe that after adjustments it can also be used in this context.

Deployment Phase of Token Engineering Process

The Deployment Phase is final, but also the most demanding step in the process. It involves the implementation of machine learning algorithms that test our assumptions and optimize quantitative parameters. Token Engineering draws from Nassim Taleb’s concept of Antifragility and extensively uses feedback loops to make a system that gains from arising shocks.

Agent-based Modelling 

In agent-based modeling, we describe a set of behaviors and goals displayed by each agent participating in the system (this is why previous steps focused so much on describing stakeholders). Each agent is controlled by an autonomous AI and continuously optimizes his strategy. He learns from his experience and can mimic the behavior of other agents if he finds it effective (Reinforced Learning). This approach allows for mimicking real users, who adapt their strategies with time. An example adaptive agent would be a cryptocurrency trader, who changes his trading strategy in response to experiencing a loss of money.

Monte Carlo Simulations

Token Engineers use the Monte Carlo method to simulate the consequences of various possible interactions while taking into account the probability of their occurrence. By running a large number of simulations it’s possible to stress-test the project in multiple scenarios and identify emergent risks.

Testnet Deployment

If possible, it's highly beneficial for projects to extend the testing phase even further by letting real users use the network. Idea is the same as in agent-based testing - continuous optimization based on provided metrics. Furthermore, in case the project considers airdropping its tokens, giving them to early users is a great strategy. Even though part of the activity will be disingenuine and airdrop-oriented, such strategy still works better than most.

Time Duration

Token engineering process may take from as little as 2 weeks to as much as 5 months. It depends on the project category (Layer 1 protocol will require more time, than a simple DApp), and security requirements. For example, a bank issuing its digital token will have a very low risk tolerance.

Required Skills for Token Engineering

Token engineering is a multidisciplinary field and requires a great amount of specialized knowledge. Key knowledge areas are:

  • Systems Engineering
  • Machine Learning
  • Market Research
  • Capital Markets
  • Current trends in Web3
  • Blockchain Engineering
  • Statistics


The token engineering process consists of 3 steps: Discovery Phase, Design Phase, and Deployment Phase. It’s utilized mostly by established blockchain projects, and financial institutions like the International Monetary Fund. Even though it’s a very resource-consuming process, we believe it’s worth it. Projects that went through scrupulous design and testing before launch are much more likely to receive VC funding and be in the 10% of crypto projects that survive the bear market. Going through that process also has a symbolic meaning - it shows that the project is long-term oriented.

If you're looking to create a robust tokenomics model and go through institutional-grade testing please reach out to Our team is ready to help you with the token engineering process and ensure your project’s resilience in the long term.


What does token engineering process look like?

  • Token engineering process is conducted in a 3-step methodical fashion. This includes Discovery Phase, Design Phase, and Deployment Phase. Each of these stages should be tailored to the specific needs of a project.

Is token engineering meant only for big projects?

  • We recommend that even small projects go through a simplified design and optimization process. This increases community's trust and makes sure that the tokenomics doesn't have any obvious flaws.

How long does the token engineering process take?

  • It depends on the project and may range from 2 weeks to 5 months.

What is Berachain? 🐻 ⛓️ + Proof-of-Liquidity Explained


18 Mar 2024
What is Berachain? 🐻 ⛓️ + Proof-of-Liquidity Explained

Enter Berachain: a high-performance, EVM-compatible blockchain that is set to redefine the landscape of decentralized applications (dApps) and blockchain services. Built on the innovative Proof-of-Liquidity consensus and leveraging the robust Polaris framework alongside the CometBFT consensus engine, Berachain is poised to offer an unprecedented blend of efficiency, security, and user-centric benefits. Let's dive into what makes it a groundbreaking development in the blockchain ecosystem.

What is Berachain?


Berachain is an EVM-compatible Layer 1 (L1) blockchain that stands out through its adoption of the Proof-of-Liquidity (PoL) consensus mechanism. Designed to address the critical challenges faced by decentralized networks. It introduces a cutting-edge approach to blockchain governance and operations.

Key Features

  • High-performance Capabilities. Berachain is engineered for speed and scalability, catering to the growing demand for efficient blockchain solutions.
  • EVM Compatibility. It supports all Ethereum tooling, operations, and smart contract languages, making it a seamless transition for developers and projects from the Ethereum ecosystem.
  • Proof-of-Liquidity.This novel consensus mechanism focuses on building liquidity, decentralizing stake, and aligning the interests of validators and protocol developers.


EVM-Compatible vs EVM-Equivalent


EVM compatibility means a blockchain can interact with Ethereum's ecosystem to some extent. It can interact supporting its smart contracts and tools but not replicating the entire EVM environment.


An EVM-equivalent blockchain, on the other hand, aims to fully replicate Ethereum's environment. It ensures complete compatibility and a smooth transition for developers and users alike.

Berachain's Position

Berachain can be considered an "EVM-equivalent-plus" blockchain. It supports all Ethereum operations, tooling, and additional functionalities that optimize for its unique Proof-of-Liquidity and abstracted use cases.

Berachain Modular First Approach

At the heart of Berachain's development philosophy is the Polaris EVM framework. It's a testament to the blockchain's commitment to modularity and flexibility. This approach allows for the easy separation of the EVM runtime layer, ensuring that Berachain can adapt and evolve without compromising on performance or security.

Proof Of Liquidity Overview

High-Level Model Objectives

  • Systemically Build Liquidity. By enhancing trading efficiency, price stability, and network growth, Berachain aims to foster a thriving ecosystem of decentralized applications.
  • Solve Stake Centralization. The PoL consensus works to distribute stake more evenly across the network, preventing monopolization and ensuring a decentralized, secure blockchain.
  • Align Protocols and Validators. Berachain encourages a symbiotic relationship between validators and the broader protocol ecosystem.

Proof-of-Liquidity vs Proof-of-Stake

Unlike traditional Proof of Stake (PoS), which often leads to stake centralization and reduced liquidity, Proof of Liquidity (PoL) introduces mechanisms to incentivize liquidity provision and ensure a fairer, more decentralized network. Berachain separates the governance token (BGT) from the chain's gas token (BERA) and incentives liquidity through BEX pools. Berachain's PoL aims to overcome the limitations of PoS, fostering a more secure and user-centric blockchain.

Berachain EVM and Modular Approach

Polaris EVM

Polaris EVM is the cornerstone of Berachain's EVM compatibility, offering developers an enhanced environment for smart contract execution that includes stateful precompiles and custom modules. This framework ensures that Berachain not only meets but exceeds the capabilities of the traditional Ethereum Virtual Machine.


The CometBFT consensus engine underpins Berachain's network, providing a secure and efficient mechanism for transaction verification and block production. By leveraging the principles of Byzantine fault tolerance (BFT), CometBFT ensures the integrity and resilience of the Berachain blockchain.


Berachain represents a significant leap forward in blockchain technology, combining the best of Ethereum's ecosystem with innovative consensus mechanisms and a modular development approach. As the blockchain landscape continues to evolve, Berachain stands out as a promising platform for developers, users, and validators alike, offering a scalable, efficient, and inclusive environment for decentralized applications and services.


For those interested in exploring further, a wealth of resources is available, including the Berachain documentation, GitHub repository, and community forums. It offers a compelling vision for the future of blockchain technology, marked by efficiency, security, and community-driven innovation.


How is Berachain different?

  • It integrates Proof-of-Liquidity to address stake centralization and enhance liquidity, setting it apart from other blockchains.

Is Berachain EVM-compatible?

  • Yes, it supports Ethereum's tooling and smart contract languages, facilitating easy migration of dApps.

Can it handle high transaction volumes?

  • Yes, thanks to the Polaris framework and CometBFT consensus engine, it's built for scalability and high throughput.