Supply and Demand in Crypto Markets

Kajetan Olas

01 Mar 2024
Supply and Demand in Crypto Markets

From the creators' perspective, we steer supply and demand in crypto markets to incentivize (disincentivize) certain behaviors in a way that benefits the project. 

Often, a project’s best interest is seen as equivalent to a high token price. For that reason, tokenomics often incentivizes participating in pyramid schemes that give an illusion of growth and value appreciation.  Here we explore how to design sustainable tokenomics that will help your project thrive in the long run.

Price Swing Effects

As an entrepreneur, the valuation of your digital asset often determines if you're seen as a visionary or an impostor. Consequently, many teams prioritize strategies aimed at boosting their token's value, frequently through methods like offering exorbitantly high annual percentage yields for token staking. Other tactics include token destruction or repurchase schemes, financed by means other than actual earnings. While these strategies may temporarily elevate excitement and price, they fail to enhance the intrinsic worth of the platform. This leads to significant price instability and diminishes the platform's ability to withstand hostile actions or negative market trends. Paradoxically, the pursuit of elevated prices typically backfires. Instead, the focus should be on reducing price volatility, which supports steady and long-term development.

Price per Token

The Initial price of a token unit should reflect the utility it provides. That price depends on the total value of the project divided by quantity of tokens in circulation. Theoretically, the nominal value of tokens shouldn’t matter. 100$ worth of tokens corresponds to the same share in market cap, regardless of whether we have 100 tokens worth 1$ each, or 1 token worth 100$. But just like in traditional markets - human psychology plays a big role. Market participants show a preference for tokens priced between 10$ and 100$. Such tokens statistically perform slightly better on the market. For this reason, we suggest choosing a supply quantity, that will cause the price per token to oscillate in the 10$-100$ range.

On the opposite end - tokens with prices below 0.01 are shown to underperform and be more volatile.


Supply-side of tokenomics relates to all the mechanisms that affect the number of tokens in circulation and its allocation structure.

While supply is important for tokenomics design it’s not as significant as people think. In 99% cases, project’s value relies mostly on demand. This means product adoption by users and the ability to generate and capture value.

Initial and maximum supply

How many tokens do we want to initially distribute, and what’s the maximum number of tokens? This relates to the maximum inflation rate - the total dilution of tokens' value over the lifespan of a project. The maximum inflation rate can be calculated through dividing maximum supply by initial supply.

It doesn’t matter if the circulating supply makes 20% or 80% of the maximum supply. In fact, you can be successful even without a capped maximum supply. Many of the 100 projects with the largest capitalization have no capped supply, with Ethereum being the prime example. 

Interestingly supply increases don’t matter that much in the short term. On a month-month basis correlation between token emissions rate and price is less than 5%. For that reason, you shouldn’t worry too much about the dilution of value. As long as the annualized inflation rate is below 100% your project will be stable. 


A typical allocation structure that’s often considered to be industry’s best practice is oscillating in the following ranges:

  • Team: 10% - 20%
  • Venture Capital: 10% - 20%
  • Advisors: 3% - 5%
  • Treasury: 15% - 30%
  • Protocol emissions (e.g. staking reward): 30% - 50%
  • Airdrops (optional): 3% - 7%


Vesting relates to the process of locking a portion of tokens for a chosen amount of time and gradually releasing them. It’s a concept taken from the world of startups. Traditionally these companies would vest equity allocated to founders so that they can’t abandon the project early. That’s because if these entrepreneurs would be able to sell their equity in the early stages then they might lose motivation to keep working on the project. In DeFi, on top of aligning incentives, vesting reduces volatility and big price dumps in the early stages.

Vesting usually applies to institutional investors, advisors, and founders. Industry standard is setting its length between 2 and 5 years.


Demand-side concerns people’s subjective willingness to buy the tokens. Reasons can be different. It may be due to the utility of your tokens, speculation, or economic incentives provided by your protocol. Sometimes people act irrationally, so token demand has to be considered in the context of behavioral economics.


Your product should provide real value to the customer, and be able to capture some of it. If the price of your token increases for any reason not related to its utility, then it’s due to speculation on utility in the future.

Expected Utility

If you’re looking to fund your project before developing an MVP then you base on investors’  trust in your ability to deliver utility in the future.  A key way to increase this trust, and be more successful with an ICO, is through having a strong founding team, and an innovative idea. You should show people, that you’re likely to deliver something that will have a lot of value to a lot of users.


There are also cases when demand comes from pure hype. While this euphoria may be pleasant in the short-term, it's worth remembering that in the long term, a crash will follow.


Supply and Demand are key concepts in the crypto space just like in real economy. Though the equilibrium is after all set by the market forces, we can influence it by various adaptive mechanisms. It’s key to remember, they can only work if your product provides actual value to customers. That’s because customer-driven demand is the only sustainable way of increasing project’s value.

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.


How to know what portion of demand can be attributed to speculation?

  • Fear and Greed Index is often used to measure market sentiments in that regard.

Can supply and demand mechanisms be manipulated in crypto markets?

  • Yes, it’s not uncommon for big investors to engage in speculative attacks.

How does supply affect the tokenomics of a project?

  • There are many ways in which supply affects tokenomics. Key things to consider are emissions rate and allocation.

Most viewed

Never miss a story

Stay updated about Nextrope news as it happens.

You are subscribed

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.