Tokenomics Engineering: The Fundamentals of a Sustainable Token Ecosystem (Ep. 2)

In a recent edition of the Block Consult podcast, Maximilian Gutsche, a prominent figure in the blockchain and tokenomics sphere, took listeners on a captivating journey through his experiences and insights within the industry.

Exploring Blockchain and Tokenomics with Maximilian Gutsche

Gutsche’s intriguing journey into blockchain and tokenomics began with an investment in a cryptocurrency that proved to be less than fruitful. This experience spurred him to investigate why certain cryptocurrencies hold more value than others, leading him to the fascinating field of tokenomics. He explained that tokenomics is the study of incentive mechanisms, pivotal for aligning the interests of different stakeholders within a decentralized project. He emphasized that tokenomics is instrumental in coordinating participants to drive towards a common outcome through tailored incentives.

The Power of Tokenomics in Creating Decentralized Infrastructures

It was discussed how tokenomics can significantly incentivize the creation of decentralized infrastructures. An example cited was the ambitious aim of establishing millions of hotspots globally, a task deemed almost impossible without the application of incentives. These incentives can kickstart a decentralized infrastructure and resolve a coordination problem. Gutsche highlighted seven key dimensions to successful tokenomics, with the first being the resolution of a coordination problem. However, a cautionary note was struck regarding the creation of tokens, with the assertion that not all projects require a token and some may create tokens simply as a fundraising mechanism. The success of Bitcoin was pointed to as an illustrative example of effective tokenomics.

Common Pitfalls in Tokenomics Design for Early-Stage Projects

The discussion moved on to the common pitfalls early-stage projects often encounter when designing tokenomics for their tokens. Among these, unsustainable reward structures, a lack of value accrual, an absence of demand drivers, and the misconception of governance as a demand driver were highlighted. An emphasis was placed on the risks of relying solely on token utility as a demand driver for smaller projects. This approach was said to potentially add friction and might fail to generate sufficient demand for the token. Governance was dissected, with the clarification that it is a liability, not an asset. It was also noted that creating a token that can be redeemed at any time for a stable price essentially creates a stable coin, a product that already saturates the market.

Sustainable Tokenomics and the Challenges of Changing Course Post-Launch

The importance of designing sustainable tokenomics for a project was emphasized, as well as the inherent challenges in modifying the tokenomics once the token has launched. The discussion warned against adding unnecessary friction to the ecosystem or crafting tokenomics for mere marketing purposes. If a project realizes that their tokenomics is unsustainable, changing course can prove challenging, especially if control over the token distribution has been lost. The necessity of conducting simulations and analyzing key metrics defining the network’s value before launch was underscored. Tools such as Monte Carlo’s emulation and Machinations were cited as invaluable resources to predict user behavior and assess the sustainability of the token ecosystem.

The Role of Simulation in Testing Token Ecosystem Scenarios

The conversation then steered towards the importance of simulation in testing different scenarios for token ecosystems. The utility of tools like Machinations for simulating scenarios across a variety of ecosystems, such as PlayTurn games and DeFi projects, was pointed out. The complexities of determining whether a token is necessary for a particular project and how to define token requirements were discussed. The conversation emphasized the need to scrutinize the demand for token utility, particularly for governance-only tokens.

Prioritizing Demand Drivers and Supply Stability in Token Ecosystem Design

In the concluding segment of the podcast, attention was focused on the crucial role of demand drivers in designing a sustainable token ecosystem. It was suggested that creating an artificial demand for a token by mandating its use on a platform is not a sustainable strategy if no real benefits are derived from it. It was emphasized that demand should be constant and that incentives and demand drivers should take center stage when designing the token ecosystem. The conversation also underscored the importance of supply stability, the need to sidestep dubious allocation tactics, and the significance of well-planned vesting schedules in the engineering of the supply side of the ecosystem.

You can watch the full podcast here:


No Investment Advice: The information provided in this article does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the website’s content as such. Block Consult GmbH does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions. For more details visit our Legal Notice here.


Subscribe To Our Newsletter

Receive our free NFT use case report & valuable insights into the Web3 ecosystem.

You are successfully Subscribed! Oops! Something went wrong, please try again.