Token Utility: Balancing Supply, Demand, and Velocity

Kajetan Olas

14 Mar 2024
Token Utility: Balancing Supply, Demand, and Velocity

This article embarks on a journey through the multifaceted landscape of token utility. It dissects the influence of supply, demand, and velocity. We include practical information that can be utilized during the process of crypto assets valuation.

The Supply Side: Scarcity and Abundance

The concept of scarcity as a value driver is deeply rooted in human psychology; it's what transforms simple metals into precious commodities. In the realm of cryptocurrencies, this principle has been adopted with fervor, giving rise to the "digital gold" narrative. Let's delve into how supply shapes the world of token utility and the broader implications it holds.

Fixed Supply and Deflationary Models

  • The Allure of Limitation: Crypto-architects often imbue their tokens with a fixed supply, aiming to mimic the scarcity of resources like gold. This artificial scarcity is designed to create a deflationary environment. It holds the premise that as demand escalates, so too will the value for the lucky holders.
  • Scarcity and Value: The perceived value of supply-limited tokens is based on a simple market principle. When an item is rare, and demand outstrips supply, prices should theoretically rise. This underpins the investment cases for many cryptocurrencies.

Token Sinks and Their Limitations

  • Combatting Inflation: Token sinks, such as burning and staking, are strategic maneuvers employed to curtail supply actively. The logic is straightforward: decrease supply to bolster value.
  • A Closer Inspection: While reducing the token count through sinks may initially drive up value, it's not a panacea. Such tactics provide only temporary relief in the face of absent or low token utility.
  • Sustainable Scarcity: Tokens should have intrinsic value. There must be a reason for users to hold it beyond the mere expectation of appreciation due to scarcity. Without real-world utility or a compelling use case, scarcity alone may not sustain the long-term value of a token.

In the still-maturing world of blockchain economies, the supply of tokens is but one piece of the puzzle. In the subsequent sections, we'll explore how demand and velocity interact to form the complete picture of tokenomics.

Creating and Sustaining Demand

The true test for any cryptocurrency is not just its scarcity but the demand for it in the market. Demand is the engine that drives the token's acceptance and value.

Utility-Driven Demand

  • Beyond Speculation: While speculative trading can inflate prices temporarily, lasting demand is fueled by a token's utility. This includes its use in transactions, its role in governance, or its ability to grant access to certain services or rewards within its ecosystem.
  • Real-World Applications: The more a token can be used for real-world purposes, the more essential it becomes. Tokens that solve genuine problems or enhance the user experience in noticeable ways tend to cultivate more sustainable demand.

Understanding Velocity in the Token Economy

The concept of velocity in token economics often remains underappreciated, yet it is a vital factor in the valuation and stability of a cryptocurrency.

The Relationship Between Velocity and Value

  • Defining Velocity: Velocity is the rate at which a token changes hands in an economy. A high velocity means the token is frequently traded, which can suggest a thriving economy or, conversely, indicate a lack of incentive to hold the token long-term.
  • Impact on Token Value: While traditional economies aim for a balanced velocity of money, the crypto economy faces unique challenges that can make high velocity a sign of instability.

The Misapplication of MV = PQ in Crypto Valuations

  • Classical Economics Meets Crypto: The MV = PQ equation, while a mainstay in traditional economics, doesn't neatly apply to the decentralized and often speculative nature of cryptocurrencies.

When velocity is too high, it indicates that tokens are not held onto, which can suggest a lack of compelling reasons to keep the token for long-term value. On the other hand, extremely low velocity can signal a stagnant market or hoarding behavior, where tokens are not being used for their intended purpose, thus hindering the ecosystem's activity and growth.

To manage velocity effectively, developers can introduce features like time-locked contracts to reward longer holds or implement burn-and-mint mechanisms that adjust the token supply relative to its use in transactions. Also, by aligning token utility with the platform's growth—such as through loyalty programs or tiered services—users are encouraged to engage with the token economically, increasing its velocity in a controlled and beneficial manner.

Balancing the Three Pillars

Creating a successful token requires more than just technical prowess; it necessitates a nuanced understanding of economic principles and market behavior. Achieving an equilibrium between supply, demand, and velocity is akin to finding the perfect pitch in a complex symphony.

Designing for Sustainability

Strategic planning is the bedrock of sustainable token design. It involves implementing adaptive supply mechanisms that respond to the natural ebb and flow of the market. These mechanisms must discourage harmful practices like hoarding during bull runs or panic selling during downturns, which can create swings in token velocity. A great example of a blockchain with adaptive governance is Ethereum.

Utility must be at the forefront of a token's design — it must offer something of real value. Whether it's through enabling seamless transactions, allowing holders to participate in governance, or providing access to exclusive services, utility ensures that a token remains in demand.

A supportive and engaged community is also a hallmark of a balanced token economy. When token holders feel they are part of the project's journey, they're more likely to use the token as intended rather than speculate on its price. This sentiment can help stabilize the velocity, as the community-driven use of the token creates a steady stream of transactions.


Token utility is not just a buzzword; it's the heartbeat of any cryptocurrency's value proposition. It stands as the crucial element in balancing the triad of supply, demand, and velocity. In this exploration, we've uncovered that while scarcity can bolster value, it is the token's real-world use and the economic incentives it creates that sustain demand and manage velocity. 

Cryptocurrency is not a static field; it's an ever-shifting landscape that requires agility and foresight. As we continue to push the boundaries of what blockchain can achieve, we also continue to learn, adapt, and grow. Token utility, when deeply integrated and thoughtfully executed, remains the linchpin of this vibrant and burgeoning economy.


How to manage token supply?

  • Employ scarcity tactics like burning tokens to reduce supply and staking mechanisms to lock tokens temporarily, balancing the supply to increase value.

How to address velocity's impact?

  • Mitigate high velocity's potential to decrease value by incentivizing longer holding periods or creating utilities that encourage users to circulate tokens more slowly.

What's the most important pillar?

  • All are important, but in our opinion, the demand has the biggest influence over the project's success.

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.