Economics of Ethereum – Analysis

Kajetan Olas

05 Mar 2024
Economics of Ethereum – Analysis

Ethereum Economics is a comprehensive term that encapsulates the economic principles and mechanisms guiding the Ethereum network, touching on everything from its currency, Ether, to its role in facilitating decentralized applications and smart contracts. 

Understanding Ethereum Economics

Ethereum's economic framework is designed to balance scalability, security, and decentralization, often referred to as the blockchain trilemma. The network's native cryptocurrency, ETH, is not just a medium of exchange but also a vital component of Ethereum's security protocol, especially with the transition to proof of stake (PoS) in Ethereum 2.0. Ethereum Economics also encompasses the platform's approach to transaction fees (gas fees), its monetary policy, and the mechanisms for issuing new ETH into the system, which together influence the network's liquidity, usability, and overall value.

Supply and Demand Dynamics

The supply and demand dynamics within Ethereum Economics are crucial for understanding its market value and the incentives for participation in the network.

Supply Aspects:

  • Ether Issuance: The total supply of ETH is influenced by the network's issuance rate, which has evolved over time. Unlike Bitcoin, Ethereum does not have a hard cap on the total supply of ETH, but various upgrades (notably the London Hard Fork and EIP-1559) have introduced mechanisms to moderate the growth of the supply.
  • Ethereum 2.0 and Staking: The transition to Ethereum 2.0 introduces staking, where validators lock up ETH as a security deposit to participate in network consensus. This shift from proof of work (PoW) to proof of stake (PoS) not only changes the security model but also influences the circulating supply of ETH by encouraging the locking up of Ether in staking contracts.

Demand Aspects

  • Smart Contracts and dApps: Ethereum's utility as a platform for deploying smart contracts and dApps creates a fundamental demand for ETH, as it is required to pay for transaction fees and computational services.
  • Decentralized Finance (DeFi) and NFTs: The explosive growth of DeFi and the NFT market on the Ethereum platform has significantly increased the demand for ETH. These applications require ETH for transaction fees, collateral, and sometimes as a medium of exchange within their ecosystems.

The interplay between supply and demand is further nuanced by factors such as network upgrades, changes in transaction fees, and the overall adoption rate of Ethereum-based applications. As Ethereum continues to evolve, particularly with the full implementation of Ethereum 2.0, these dynamics are likely to shift, presenting new economic considerations and opportunities for users, investors, and developers alike.

Ethereum's Monetary Policy

Ethereum's monetary policy is a critical aspect of its economic model. It focuses on managing the supply of Ether (ETH) to ensure network security and incentivize balanced participation. Unlike traditional monetary systems or even other cryptocurrencies with a fixed supply cap, Ethereum adopts a more dynamic approach.

Transaction Fees

EIP-1559, implemented as part of the London Hard Fork in 2021, significantly altered Ethereum's monetary policy. It introduced new mechanisms in regard to charging transaction fees. Specifically it divided fee into 2 parts. The Base Fee and Priority Fee. 

Base Fee

Base Fee is dynamically determined based on network congestion and burned. It increases are based on two factors: how congested the network is, and for how long it’s been congested. This means that the base fee will keep increasing until activity on the network goes back to targeted average level. Because that base fee is burned it also means that ETH is deflationary when the network’s activity is high.

Priority Fee

Priority Fee is an additional fee which serves as a tip for validators. It’s set by a user, to encourage validators to process his transaction. Higher fee means that transaction will be validated before other transactions. Priority fee should be above 0, because validators must have some incentive to include transaction in a block.

Transaction fees over time, accesed 05.03.2024,

Staking and Ethereum 2.0 

The transition to Ethereum 2.0 and its proof of stake (PoS) consensus mechanism introduces staking rewards as a new form of issuance. Validators stake a minimum of 32 ETH to participate in the network's security and consensus mechanism. High entry barrier contributes to a fact that only 26% of total supply is staked. This is lower value than in some other blockchains like Cardano (64% staked).


Ethereum ensures that validators act in the best interest of the network by introducing a set of penalties.


Slashing is a penalty for violating protocol’s rules and engaging in dishonest behavior. Portion of validator’s ETH is taken away if he tries to

  • Propose two different blocks
  • Attesting conflicting versions of the blockchain (attesting means voting in favor of validator’s view of the chain.

Inactivity Leaks

If validator is inactive and doesn’t participate in e.g. block attestations, he gradually loses some of his ETH. This ensures that stakers actively participate in securing the network. This prevent a situation when a number of validators would regularly ignore their duties, and contribute to destabilizing the nework.


The exploration of Ethereum Economics makes one appreciate it’s complexity. It’s impressive how precise Ethereum developers had to be. They found parameters that balance its ecosystem very well (e.g. how did they choose that staking precisely 32ETH is better than 28ETH). Besides quantitative parameters the logic behind the fees structure, penalties, and others is interesting as well. All this, makes Ethereum Economics an excellent case study for token engineers and blockchain developers. 

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


What role does Ether (ETH) play in Ethereum's economy?

  • ETH is not only a medium of exchange but it's also crucial for the network's security. In PoS model what prevents validators from harming the network is the fact that they might lose their ETH stake.

How did EIP-1559 change Ethereum's fee market?

  • EIP-1559 introduced a two-part fee structure with a base fee and priority fee. Base fee gets burned, contributing to Ethereum being potentially deflationary under high activity. Priority fee incentivizes miners to include transactions in a block.

What is Ethereum's strategy for scaling and addressing network congestion?

  • Ethereum’s strategy is to make use of Layer 2 Solutions, with Ethereum blockchain serving as a secure settlement layer.

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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.