The emergence of blockchain technology has given rise to a new economic paradigm—one centered around tokens. While the concept of issuing tokens is relatively well understood, the journey from a token launch to a self-sustaining token-based economy is far more complex than it is often made to seem. A major issue in this space is the misinterpretation and misuse of the term Tokenomics, leading to short-term hype cycles that often overshadow the foundational economic principles necessary for long-term sustainability.
There is an important distinction between Tokenomics, Token Financial Engineering, and Token Economies.
Tokenomics, the term I first coined in my July 2017 blog post, Tokenomics: A Business Guide to Token Usage, Utility and Value originally referred to the study of token-based business models and the creation of sustainable economies around them. The core focus was on how tokens function within a system—how they are earned, spent, circulated, and how they are a key enabler to a new valuable business model within a given ecosystem. However, over time, the term has been diluted and misappropriated to mean something entirely different.
What we see today is a prioritization on Token Financial Engineering—a practice that focuses on crafting complex launch mechanisms, gamified incentive structures, and supply manipulations designed to maximize short-term gains for token issuers rather than ensuring long-term viability for the ecosystem. Many projects are launched based on financial tricks such as Dutch auctions, “fair launches”, airdrops, lock drops, or bonding curve pricing to create the illusion of early success and mask the reality of hard-to-earn business viability. Then comes a variety of float-related limits that choke the supply of tokens in the market while squeezing demand to artificially increase prices. In reality, all these mechanisms often serve to drive speculative activity with less focus on required iterations toward the business model in order to prove real utility and a sustainable economic activity around the token.
The Shift from Utility to Speculation
The proliferation of these speculative token launches has led to an erosion of credibility within the blockchain space. Many consultancy firms that claim expertise in Tokenomics are, in reality, focusing on optimizing token distribution in ways that inflate market capitalization rather than ensure a functional economic model. They talk to their clients about modelling and simulation techniques as if they were panaceas to success. These firms often neglect fundamental aspects of business viability, such as product-market fit, user adoption, and organic demand creation. The result is a wave of projects that experience an initial surge in value but ultimately struggle to sustain long-term demand, leading to price crashes and loss of market confidence.
This deviation from fundamental economic principles is stark when we compare recent token launches to those of Bitcoin and Ethereum, the two largest cryptocurrencies to date. Bitcoin’s token emissions are transparent and follow a predictable, programmatic mining schedule, ensuring a well-structured supply mechanism. Ethereum’s initial token distribution was also straightforward, with a fixed price public sale that allowed broad participation. Neither Bitcoin or Ethereum relied on gimmicky financial engineering techniques to generate early traction. Instead, their successes stemmed from their inherent utility, native network effects, and a believable vision.
In contrast, many modern token projects rely on overcomplicated economic mechanisms designed to benefit early adopters and insiders rather than fostering sustainable functionality. Governance tokens, for instance, have been widely used as a justification for issuing new tokens, yet they often fail to create meaningful engagement or utility because their role is primarily passive. While governance can be a valuable feature in decentralized networks, merely issuing a token with governance rights does not automatically translate into a functionally engaged ecosystem.
The Path to Sustainable Token Economies
For tokenized ecosystems to thrive in the long run, they must evolve from mere tokenomics—as it is commonly understood today—to token economies. A well-functioning token economy should mirror real-world economic systems, where the balance of supply and demand is driven by actual usage rather than speculative trading. This means that tokens should be primarily and genuinely earned and spent within the system, rather than being treated as mere assets for price speculation.
A successful token economy should be built upon the following core principles:
1. Utility-Driven Demand – The token must serve a genuine purpose within its ecosystem, whether as a medium of exchange, a unit of account, or a means to access services. Demand should emerge naturally from users (or services) who need the token to engage with the network to procure other services (or products), rather than from speculative investors hoping for price appreciation. If the token is trading, its market cap should have a logical direct relationship to inherent success metrics.
2. Sustainable Supply Dynamics – Token issuance should be structured in a way that aligns with the long-term growth of the ecosystem. Inflationary or deflationary mechanisms should be carefully designed to ensure a balance between incentivizing participation while preventing over-dilution.
3. Market-Driven Equilibrium – Just like traditional economies rely on the balance between buyers and sellers, token economies must ensure a dynamic equilibrium between token holders and token users. Artificial scarcity or excessive incentives can create short-term booms, but without real economic activity, these systems will eventually collapse.
4. Incentives Aligned with Users, Not Just Issuers – Many current token models disproportionately benefit early investors and project teams at the expense of later participants. A sustainable token economy should prioritize value creation for users rather than focusing solely on financial returns for issuers. The issuers should benefit only and only if the model is successful for users.
The Future Is About Token-Based Economies
Tokens were initially envisioned as a mechanism for decentralizing economies, empowering users, and creating new models of ownership and participation. However, the trend toward excessive financial engineering has undermined these original goals, turning many token projects into speculative bubbles with little real-world utility. To build robust, lasting token economies, we must return to first principles—focusing on economic fundamentals rather than short-term financial engineering.
Blockchain technology offers a powerful foundation for new economic models, but its success depends on how we design and implement token-based systems. The shift from speculative Tokenomics to real Token Economies is not just a theoretical exercise—it is an essential step toward building trust, sustainability, and long-term value in the blockchain ecosystem at the application level.
Funny, I had forgotten that you had coined the term Tokenomics. Back in the days leading to the use of that term, what were then ICO issuers, were at least trying to make a case for a sustainable token economy. Of course, most failed in doing this, but not before being able to convert their magic tokens for btc or eth (aka. the hard currency of those times ;). The grift was on, even if unintentional, since the fact was that everyone believed the new token would become the next bitcoin. Ethereum was also its own grift given its pre-mine, but I'm fine with people retelling history to make it seem like that was a good thing ;) It's most popular use case quickly became the creation of new magic tokens, so I'm not sure how well that's worked out for us. The magic token phenomena was always rooted in the fact that the target audience for ICOs were speculators since the "system" needed to get completed as funds needed to be raised to pay those working on the "project". Users weren't there yet since the projects were never done before the ICO, or at least not done in a way that users could start actually using the system in an economic way. Angel and VC money wasn't forthcoming until some of the early ICOs showed that there was enough enthusiasm from some market segments willing to part with their money. In some cases it came from those who were early to Bitcoin and Ethereum and wanted to spend their new found wealth in tax protected ways, in some cases it was n00bs just feeling that they were no longer shackled from the "accredited investor" restrictions and could "invest" at will to watch it moon. The irony of some wanting their money back after taking life altering losses was always somewhat humorous since that was the entire point of the accredited investor high bar, to prevent the fleecing they got. Young VCs quickly figured out how to monetize and exit their early tokens, project success or failure be damned ;) There's also always been the rub around the concept you describe above as "Market-Driven Equilibrium", other than perhaps Filecoin (and I'm not even sure about that one), no project ever succeeded in finding any such equilibrium. Arguably, it doesn't exist. What we see today are tokens divorced of utility (or divorced from their utility) being bet upon based on momentum and other nonsensical metrics. Take Ripple, it's a great business concept and I love the notion that they're attacking SWIFT with a very disruptive model, but the way XRP is used, it's value is completely divorced from its utility. In other words, XRP could be worth $10K or $1 and the Ripple system doesn't care and the users on that system also wont care because they are not exposed to the cost of the token to use the system. Speculators buying XRP on the basis of its value to banks, simply don't understand how it all works (in other words 99.99% of those speculating on the token ;). Today, I find a sort of purity in memecoins, where the grift is fully reminiscent of the ICO madness but with more honesty since no one is trying to pretend that these tokens are anything other than some vanity tokens. No one is talking utility or any of that. It's like the token version of musical chairs. Everyone watches the new token, starts to buy in, then more and faster, then someone pulls out and the house of cards comes tumbling down as fast as it was raised :). In the DeFi world, there's a lot of that too but for super smart math geeks :) It's the fun and maybe make some money along the way that they all seem to be into, not overly blowhard perspective that this is all somehow the dawning of a new age of finance. All this to say that I'm skeptical the four core principles you listed can come together in one system. Frequently flier miles and general loyalty points work pretty well as a business incentive without the need for their value to fluctuate unpredictably and maybe that's as it should be.
Direwolff, You’re right. “ What we see today are tokens divorced of utility (or divorced from their utility) being bet upon based on momentum and other nonsensical metrics.” Blackbird is trying something progressively inching toward that goal. I’m still hopeful that we’ll see successful token-based models at the app level where the token is necessary for buying a given service that you couldn’t otherwise with another currency.