Cryptoeconomics vs Token Engineering: Are They the Same?

Kajetan Olas

07 Mar 2024
Cryptoeconomics vs Token Engineering: Are They the Same?

In the dynamic realm of blockchain technology, two terms are increasingly gaining traction: cryptoeconomics and token engineering. As the blockchain landscape evolves, these concepts are becoming crucial for the development of robust and efficient decentralized systems. While they are often used interchangeably, cryptoeconomics and token engineering actually have different meanings. Cryptoeconomics lays the theoretical groundwork, posing the vital questions that guide the creation of decentralized networks. Token engineering, on the other hand, is the practical application, the methodology used to answer these questions and solve the problems that arise. This article aims to explore the relationship between the two.

Understanding Cryptoeconomics

Cryptoeconomics: The 'Why' Behind Decentralized Systems

Cryptoeconomics is not just a branch of economics; it is a multidisciplinary field that blends cryptographic techniques with economic incentives. At its core, cryptoeconomics is about understanding and designing the incentives and economic mechanisms that encourage desired behaviors in decentralized networks. It is a theoretical science that delves deep into the 'why' – why participants in a decentralized system will act in a way that ensures the network's functionality, security, and prosperity.

  • Economic Models and Incentive Structures: The economic models in cryptoeconomics are designed to align the interests of diverse network participants. By leveraging token incentives and penalties, these models ensure that every participant, from miners to end-users, acts in a way that is beneficial to the network's overall health and security.
  • Security and Trust: Cryptoeconomics is crucial for establishing trust in a trustless environment – the blockchain. It underpins the security models that protect decentralized networks from malicious actors. The economic cost of attacking the network is designed to be so high that it becomes infeasible.
  • Governance and Network Maintenance: It also involves the governance of decentralized systems, determining how decisions are made and how the network can evolve over time. This includes the creation of policies for the distribution of new tokens, transaction validation processes, and consensus mechanisms.

In conclusion, cryptoeconomics serves as the backbone of blockchain technology, posing fundamental questions about the structure and sustainability of decentralized systems. By understanding what needs to be optimized and why, cryptoeconomics provides a guiding light for the entire blockchain industry. However, identifying the optimal economic model is just the beginning. The implementation of these models – the 'how' – is where token engineering comes into play, bridging the gap between theory and practice.

Delving into Token Engineering

Token Engineering: Crafting the 'How' of Tokenized Ecosystems

While cryptoeconomics provides the theoretical scaffolding, token engineering is the discipline that brings theory to life through design and implementation. It is the engineering of digital tokens, applying systematic tools and methods to create functional and resilient token-based systems. Token engineering focuses on the 'how', utilizing a methodological toolkit to construct the mechanisms that guide interactions within the system.

  • Design and Functionality: At the heart of token engineering is the design process. It involves defining the token's purpose, features, and utility within the ecosystem. It's a meticulous process that requires a profound understanding of the desired outcomes and behaviors that need to be incentivized.
  • System Analysis and Modeling: Token engineers employ various models to predict how tokens will perform in different scenarios. This includes simulating economic models, stress-testing the system, and ensuring that the token behaves as intended under various conditions.
  • Interdisciplinary Approach: The field of token engineering is inherently interdisciplinary, drawing from areas such as game theory, computer science, and behavioral economics. This convergence of knowledge is essential to address the complex challenges that arise in token economies.

Token engineering is thus a comprehensive approach to ensuring that the 'what' identified by cryptoeconomics is achieved efficiently in practice. With the right tools and methodologies, token engineers strive to optimize tokenized systems, ensuring their functionality, scalability, and security.

Comparing and Contrasting

While cryptoeconomics and token engineering are interdependent, they have distinct roles and methodologies within the broader blockchain landscape.

Common Grounds

Both disciplines share a common goal: to optimize and ensure the integrity of decentralized systems. Cryptoeconomics and token engineering converge in their reliance on economic theory and principles to design systems that can operate securely.

  • Interdisciplinary Foundations: They both draw from a similar pool of interdisciplinary knowledge, integrating insights from behavioral economics, game theory, and computer science.
  • Focus on Optimization: Optimization is a shared objective, whether it's about determining the optimal incentive structure in cryptoeconomics or fine-tuning the individual components within a token system in token engineering.

Key Differences

Despite these similarities, cryptoeconomics and token engineering diverge in their focus and application.

  • Macro vs. Micro Perspective: Cryptoeconomics tends to address the broader, macroeconomic questions of blockchain ecosystems, such as overall network incentives and system security. Token engineering, conversely, zooms in on the micro-level details, focusing on the specific design and functionality of individual tokens.
  • Theory vs. Application: Cryptoeconomics is theoretical, concerned with the 'why' behind the economic strategies that govern decentralized systems. Token engineering is practical, addressing the 'how' with a hands-on approach to creating and implementing token systems.
  • Methodological Tools: The methodologies of the two fields also differ. Cryptoeconomics is often concerned with abstract reasoning and theoretical models. Token engineering uses concrete tools and simulations to test and refine token functionality.

Understanding the nuanced differences and connections between cryptoeconomics and token engineering is vital. It ensures that both the theoretical and practical aspects are aligned to create harmonious, resilient, and efficient decentralized ecosystems.

The Future Landscape

The future of blockchain is inextricably linked to the advancements in both cryptoeconomics and token engineering. As these fields mature, their evolution will play a role in the entire digital economy.

  • Advancements in Token Engineering: We can expect to see more sophisticated tools and frameworks emerging within token engineering. They will be aimed at simplifying the design process while enhancing the robustness of tokenized systems. This will likely include the integration of artificial intelligence to automate certain aspects of the engineering process.
  • Cryptoeconomic Research: Research in cryptoeconomics will continue to expand to new economic models that better account for the complexities of decentralized networks. These models will be essential in addressing scalability, privacy, and interoperability challenges.
  • Cross-disciplinary Innovation: The intersection of cryptoeconomics and token engineering with other technological advancements like IoT is expected to generate novel use cases. 
  • Policy and Governance: As these disciplines develop, they will also influence policy-making and governance structures within the digital economy. Regulators may begin to adopt more nuanced and informed approaches to overseeing the token engineering process.

The trajectory of cryptoeconomics and token engineering points towards an era where decentralized systems are more integrated into mainstream applications. The synergy between these fields' theoretical and practical elements will likely fuel the next wave of innovation in blockchain technology.

Conclusion

Cryptoeconomics lays down the theoretical questions of 'why' and 'what to optimize,' setting the stage for the necessary incentive structures and governance models. Token engineering, with its methodological toolkit, addresses the 'how' and 'how to optimize,' turning theory into practical, functioning systems.

Understanding both disciplines' individual contributions and their interplay is crucial for anyone involved in blockchain development. As we move forward, the line between cryptoeconomics and token engineering may blur even further. That’s because each discipline continuously informs and refines the other.

If you're looking to design a sustainable tokenomics model for your DeFi project, please reach out to contact@nextrope.com. Our team is ready to help you create a tokenomics structure that aligns with your project's long-term growth and market resilience.

FAQ

What distinguishes cryptoeconomics from token engineering?

  • Cryptoeconomics is the theoretical framework focused on incentives in decentralized systems. Token engineering applies these theories to build resilient token systems.

How do both fields contribute to blockchain development?

  • Cryptoeconomics provides the incentive models, while token engineering designs and implements these models in real-world applications.

What role do economic models play in cryptoeconomics?

  • They align participant incentives to ensure network health and security.

Does technological advancement affect their interplay?

  • Technological progress shapes the evolution and integration of both fields in the digital economy.

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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.

source: https://www.canva.com/design/DAFDTNKsIJs/8Ky9EoJJI7p98qKLIu2XNw/view#7

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

Summary

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 contact@nextrope.com. Our team is ready to help you with the token engineering process and ensure your project’s resilience in the long term.

FAQ

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

Karolina

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?

Overview

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.

MUST READ: Docs

EVM-Compatible vs EVM-Equivalent

EVM-Compatible

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.

EVM-Equivalent

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.

CometBFT

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.

Conclusion

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.

Resources

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.

FAQ

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.