What is a Token Economy? An Introduction to Token Economy (Tokenomics)

Kajetan Olas

01 Mar 2024
What is a Token Economy? An Introduction to Token Economy (Tokenomics)

Token Economy is often defined as the study of determining and evaluating the economic characteristics of a cryptographic token.

Today most blockchain projects fund their operations through the sale of tokens. For that reason, founders need to have a good understanding of the tokenomics design process. Surprisingly, studies show that in most cases tokenomics design is unsound and based on intuition. In this article, we approach the topic from a perspective that’s backed by empirical data and shown to work.

Key Tokenomics Considerations

Optimal Tokenomics depends on the specifics of the project. Part of them is deciding what behaviors you want to incentivize (disincentivize) in a way that aligns with the projects’ interests. That’s a tricky task since you need to identify every relevant user behavior and corresponding incentive. You also need to pick quantitative parameters that will ensure the right balance. In the case of DeFi protocols, systemic risk is especially high. Arbitrary parameters and assumptions often lead to death spirals and vulnerability to attacks. For that reason, all tokenomics systems should be stress-tested and validated before release.

Key Principles

There are many good practices that founders should follow when designing tokenomics for their project. We’ll briefly cover the most important ones.

Utility is The Key

This one seems obvious, but let me explain... What matters in the context of tokenomics is the utility of your token - that’s not the same as the utility of your product. Demand for blockchain products doesn’t automatically translate to demand for their native tokens! While users’ adoption of your product is important, it’s not enough. You need to tie the value of your token to the success of the product. This can be done through different Value Capture mechanisms e.g. redistributing profits among holders.

(PS. Governance Rights and Staking are most definitely not enough!)

Look at comparable projects

When designing tokenomics it's good to look for projects similar to the one you’re creating. The more similar, the better. Read their whitepapers, study their tokenomics, and look at key metrics. Then ask yourself - what are the things they did well, and what are their mistakes? You’re guaranteed to find some inspiration. A key metric you can use when deciding upon the initial valuation of your project is Total Value Locked/market capitalization

Minimize Volatility

As a founder the key metric that will determine whether people call you a genius or a fraud is the price of your token. For that reason, many teams optimize tokenomics for high token price above everything else. This is often done by offering unsustainable APY in exchange for stacking tokens. Other common choices include burning, or buyback programs funded by anything other than revenue. While these mechanisms may be able to drive the hype and price up, they don’t increase the value of the protocol itself. The result is high volatility and a lack of resilience to malicious attacks and adverse market conditions. Ironically, optimizing for high prices usually results in the opposite effect. What you should do instead is focus on minimizing volatility, as it fosters sustainable growth.

Overview of Supply-Side

Supply-side 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. Mechanisms like staking or burning should be designed to support the use of products and aren’t utilities on their own.

Capped or Uncapped Supply

Founders put a lot of attention into choosing between a capped or uncapped supply of the token. It’s a common belief that capping supply at some maximum level increases the value of currently circulating tokens. Research shows that it doesn’t really matter, but tokens without capped supply, statistically perform slightly better.

Inflation Rate

Projects should aim for low, stable inflation. Unless the annualized inflation rate is above 100%, there’s very little correlation between the rate of supply changes and the price of token. For that reason, it’s recommended to adjust token emissions in a way that fosters activity on the network. A reasonable inflation rate that won't affect the price is between 1-5% monthly.



The industry standards are more or less like the following.


Overview of Demand-Side

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.

Role of incentives

The primary incentive that drives the demand for your token should be its utility. Utility is its real-world application or a way in which it captures value generated by the use of your product. Staking, liquidity providing, deflationary policy, and other supply-control mechanisms may support tokens’ value accrual. A common way to do that is through revenue-funded buybacks. Projects may use collected fees to buy their tokens on DEXs. Then burn them, or put them into a treasury fund.

How to design incentives?

  • Make them tangible. If you want to promote desired behaviors within the ecosystem you need to provide real rewards. People don’t care about governance rights, because these rights don’t translate to any monetary value. On the other hand, they care about staking rewards, which can be sold for profits.
  • Make them easy to understand. If you want to incentivize or disincentivize user behavior, then you should make it clear how the mechanism works. Users often have no time to dive into your whitepaper. If they don’t understand how your product works then they won’t use it.
  • Test, test, test. If you don’t test how different incentives balance the tokenomy of your product, then you’re setting yourself up for a terra-luna style collapse.


Proper design of projects’ tokenomics is not easy. Even though it may seem like choosing different parameters and incentives intuitively will work, it’s a reason why the value of projects’ tokens often goes to 0. There are however sound and tested design practices. Stick with us, and get to know them!

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.


What is a token economy?

  • A token economy refers to the study and analysis of a cryptographic token's economic characteristics, crucial for blockchain projects' funding and success.

What are the key principles of designing a token economy?

  • Essential principles include ensuring the utility of tokens, analyzing comparable projects, and aiming to minimize volatility to foster sustainable growth.

How does supply and demand affect token economy?

  • The supply side involves mechanisms like capping token supply or adjusting inflation rates, while the demand side focuses on creating genuine utility and incentives for token holders.

What are the common pitfalls in designing a token economy?

  • The most common problems occur when token’s main function is the transfer of value, rather than supporting the creation of value. (e.g. you can stake useless token to get more of that useless token)

How can token economies be tested and validated before launch?

  • Tokenomics can be tested by constructing a mathematical model and running a large number of randomized simulations.

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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


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.


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.