Author: Sunny, TechFlow
Guest: Robert Koschig, 1kx Researcher
Robert Koschig is a token economics researcher at crypto venture capital 1k(x). At the Decentralized Application Summit held by Gnosis in Berlin this year, Koschig summarized his token design for decentralized hardware networks. For example, he believes that Filecoin's token issuance plan based on KPI index is more scientific than the time-based token issuance plan. At the same time, Koschig also pointed out that the current unpredictability of token rewards in the Depin network challenges the predictability and stability of the Bitcoin model.
What does token design mean in general, outside of decentralized hardware networks? As the industry gradually moves from the wild "Wild West" to today's Ethereum ETF, reasonable and scientific token design has become an indispensable part of most decentralized protocol products. In other words, the current token designers will be the product managers of the next generation of the Internet.
So is there a routine for token design? Is there a set of constant token design models in the industry that projects can follow? Koschig pointed out the main thinking directions of supply-side token issuance (supply), governance (governance), demand-side subsidies (incentives), and venture capital (investment). The conversation also compared two classic token models in the industry: Bitcoin and Ethereum, from the perspective of immutability and ever-changing, and how projects can extract appropriate design models from them according to local conditions.
Selected highlights:
Token design should focus on continuous improvement rather than being limited to the concept of “Tokenomics” which carries the baggage of past practices.
A protocol doesn’t necessarily need to have a token, but it is a very powerful tool if used effectively.
Unlike traditional coupons or rewards, tokens are yours forever.
The common points of token design are coordination, value capture and value transfer.
Centralized payment channels contradict the purpose of decentralized infrastructure.
Owning your own tokens comes with additional benefits, such as controlling issuance — how many you mint and to whom you distribute them.
If you want broader community participation, governance tokens allow for that transition.
In terms of governance, tokens decide on proposals and votes, but different entities are responsible for executing decisions. This separation helps manage the economy, staking mechanisms, and governance more efficiently.
Tokenomics hasn’t changed much: projects design it, launch it, and it continues to run at a fixed inflation rate.
When you look at Ethereum’s approach, there’s a case to be made that they can think through code, tweak it, and introduce endless possibilities in terms of the economy.
Tokenomic Design is a new product design in Web3
TechFlow: Can you share why you chose to focus on research in token economics?
Robert：
Tokenomics is still in the research phase. Typically, developers have expertise in the technical aspects, but when it comes to economic design, this area is full of opportunities.
This field fits my background very well. You need to have a good grasp of mathematics, game theory, and economics, while also understanding data science, such as simulation and data analysis. Combining these two parts forms an emerging field with great potential, which fits my main strengths.
TechFlow: Can you explain what Tokenomics is?
Robert：
Of course, if someone asks me, “What is Tokenomics?”
I would describe it as a preliminary attempt to explain how the protocol works in terms of the economic aspects of its design.
You will always get technical questions like, “What is this product?”
But once people understand the technical side, they will realize how powerful these economic coordination mechanisms are. They will focus on the powerful potential of tokens and what they can unlock, such as when you suddenly do an airdrop.
We have seen what happens when projects do not issue tokens initially and then introduce them later. Tokenomics was the term first used to describe this process.
However, the term “Tokenomics” often comes with the burden of pie charts and vesting schedules.
True economic design is about the coordination dynamics of your product. It’s not just something you do before your token launch or include in your whitepaper; it’s an ongoing effort, just like technical development. You start with a minimum viable product and gradually build and improve the technology — developers testing it on testnets and mainnet. The same iterative process should apply to economic design.
Token design should focus on continuous improvement rather than being limited to the concept of “Tokenomics” which carries the baggage of past practices.
We should think more about economic design and how it evolves over time.
Does every Web3 project need its own Tokenomics?
TechFlow: Does every Web3 project need its own Tokenomics?
Robert: I don’t think it’s necessary. If you don’t need to rely on incentives, that’s the best!
Even so, for projects that don’t rely on incentives, there may still be benefits to trying some experiments. Traditional economic methods are cashback or Starbucks coupons, but tokens offer some new possibilities because they are immutable. For example, if I give you my tokens for completing a specific task, I can’t take them back. Unlike traditional coupons or rewards, tokens are yours once you have them.
This immutability makes tokens a powerful tool in protocols. They can provide important incentives without the risk of withdrawal, unlike miles or coupons that may come with strings attached.
A protocol doesn’t have to have a token, but it is a very powerful tool if used properly.
TechFlow: Why do some protocols require token design while others do not?
Robert: It all depends on what you want to achieve as a protocol.
Are you a consumer-facing application or a DeFi application?
Typically, common use cases for tokens involve coordination, value capture, and value transfer. In these areas, tokens can be very effective tools. But the key is always tokenomics and token design - how you implement it is up to you.
You may have a goal to launch a specific token through your protocol. However, if it is not done correctly, the results may be completely different from the intended results. This decision should be made firmly to ensure that the inclusion of a token in your protocol can truly enhance your product. Once this decision is made, it needs to be given enough attention because while tokens can bring benefits through economics and dynamics, they can also cause harm if not handled correctly.
TechFlow: Can you elaborate on the advantages and rationale for using digital tokens in decentralized infrastructure compared to traditional fiat currencies?
Robert：
Of course. There are many reasons for wanting digital tokens, even to experiment with different hardware. The typical argument for tokens is to incentivize the supply chain.
Someone needs to buy these tokens and provide storage services. Technically, you can allow users to pay with USDC or other fiat currencies and operate outside the crypto world, even if you run on decentralized crypto infrastructure, you can use centralized payment methods.
However, this is often illogical, as centralized payment methods go against the purpose of decentralized infrastructure.
That’s why it’s best to stick with decentralized payment methods, such as using stablecoins. This doesn’t necessarily mean you have to use your own token; there are other excellent payment tokens on the market. However, having your own token can bring additional benefits, such as controlling issuance — how many tokens you mint and to whom you distribute them.
The beauty of token design is that it provides a lot of freedom. You can make any decision you want and even change those decisions over time. This is a powerful tool to grow your community and engagement. A simple mechanism is a governance token. Initially, it may be the team driving things, but as you grow, you’ll want the wider community to get involved. Governance tokens allow for that transition. Of course, you can also build more advanced features on top of this.
Modular Tokenomics Design
TechFlow: Can projects take a modular approach when designing their Tokenomics?
Robert：
Yes, ideally, you could have modularity. That's the ideal goal. You could say, "Okay, the supply-side incentives are one module, the governance is one module, the demand-side incentives are one module, the investment speculation part is one module."
Ultimately, you only have one token, and then you need to figure out how all of this relates to each other. That's why governance becomes very interesting in DeFi. For example, in the early stages, governance decisions may be needed to cover real costs. Investors want to know that if they invest in your protocol, from a rational perspective, they will get a better return.
This means you need to allocate them a significant share of your network. However, when this is combined with governance, rewards become dependent. For example, if you allocate a certain amount to the supply side, and leave the rest to be determined by governance, operators who do not sell their tokens will accumulate more voting power over time. This can lead to internal problems, as they may decide their own rewards, and game theory predicts that this can lead to power struggles.
You also need to consider the governance aspect, as managing different interest groups is crucial. Relying solely on token-based governance may not be enough. This is why many well-known protocols like MakerDAO have set up independent governance committees. Tokens are used to determine proposals and votes, but different entities are responsible for executing decisions. This separation helps manage the economy, staking mechanisms, and governance more efficiently.
Comparing Bitcoin and Ethereum’s Tokenomics: What Changes and What Doesn’t
TechFlow: Have you observed the evolution of Tokenomics? How have different projects adapted their Tokenomics models and what changes have been made?
Robert：
Token rewards always make sense, right?
Early projects like Bitcoin demonstrated their power as a network effect and economic incentive. Bitcoin's fixed issuance schedule inspired many platforms to adopt similar strategies. They often emphasize the importance of fixed issuance schedules.
However, some realized that this approach might be too restrictive. So they added a second layer of logic that is more dynamic, albeit still fixed. From this perspective, Tokenomics hasn’t changed much: the project designed it, launched it, and it continues to run at a fixed inflation rate.
But there have been adjustments. For example, The Graph has improved its design over time. Initially, it had a curation function for data indexing via a bonding curve. Over time, they found inefficiencies and adjusted the model.
This suggests that while the initial design may be fixed, learning and adjustment are necessary. Complex token economies like DeFi require iterative learning and modification.
It is important to allow for experimentation and learning rather than rigidly adhering to an initial design. While this approach may seem more flexible than the traditional crypto narrative, it avoids being stuck in an inefficient model. This industry is evolving rapidly and new technologies are constantly emerging. Leveraging simulations, data science, and continuous tweaking can help design tokens correctly.
TechFlow: What fundamental components of Tokenomics design remain constant over time?
Robert：
What I think has not changed is that the underlying economic principles have been consistent since the development of the field of economics. Your tokens and their issuance incentivize contributions, similar to how early Bitcoin incentivized miners. This is more efficient than starting from scratch yourself. The early issuance of Bitcoin was much higher than it is now.
The basic concept remains that if you have a well-functioning supply system, your protocol works as expected and provides a good user experience, revenue will come naturally. And then this revenue can support the system. This principle is foundational and always relevant.
You can cover some of the reward amounts by issuing additional incentives or adjusting revenue streams to ensure that the overall rewards are sustainable even if the rewards are not reduced.
TechFlow: Cryptocurrencies other than Bitcoin seem more complex in some ways. Do you think Tokenomics or Web3 protocols will become as composable as smart contracts, given the complexity involved? Is there a way to simplify these theories?
Robert：
It's true, it's difficult, but that's the beauty of Bitcoin. It takes a simple mechanism. On the other hand, when you look at Ethereum's approach, there's a case where they can think through the code, tweak it, and introduce endless possibilities in terms of the economy.
If mistakes are made, then offline discussions come into play. People understand the new dynamics, different committees emerge, leading to proposals to separate or collaborate. It’s a challenging process, but it allows for adaptation and optimization.
Complexity is a huge challenge and even the brightest minds in the industry are working around them without seeing every dynamic. Predicting behavior is extremely difficult.
Long story short, yes, it is complex and will probably never get simpler. The simplest and most efficient models already exist and can be replicated. New projects these days tend to be more complex and adjustable rather than static and rigid. This is generally the way technology evolves.
Think about bicycles: they have been around for a long time and were once the fastest means of transportation. The basic concept remains the same, but they are no longer the best choice for all modern needs. People keep adding new features, creating new problems and solving them. This evolution makes Tokenomics more complex but also more reliable.
The goal is to reach a stage where people can understand what is happening. If understanding is lost, trust is also lost. Balancing the need for immutability with adaptability is key, ensuring that a majority of owners can vote to make necessary changes while maintaining stability.
Common pitfalls to watch out for in tokenomics design
TechFlow: What common pitfalls in tokenomics design have you observed that can hurt a project? Does tokenomics design help or hinder a project’s growth?
Robert：
It's easy to fall into the trap of treating tokens like candy. When you dip into a pool of tokens, it's like you're getting a reward. People get addicted to it, not realizing that the more they do it, the more the project becomes focused on just the token. That's why we now have issues like misleading metrics, high total value locked (TVL), and low market cap.
We lose sight of the fundamental purpose of tokens. Tokens are more than rewards; they are powerful tools for alignment, growth, and acceleration of your project. However, tokens should not overshadow the core product. At the end of the day, you still need to build a solid product. The token will eventually become part of your product, but it should not be the sole focus.
At first, you may feel like you have a certain budget and criteria, but eventually you realize that you have spent all your incentives on short-term appeal and hype without real revenue, usage, or commercialization. This often leads to a rapid collapse when market conditions change.
That’s why I spend a lot of time running simple simulations analyzing the basic mechanics of supply and selling pressure, ignoring any narrative content. I ask questions like, “Do you think these participants will hold or sell the tokens?” How will this affect the market when the tokens unlock? Understanding these dynamics is critical to avoiding the pitfalls of short-term incentives and building a sustainable project.
Case Study: Tokenomics Design at Safe
TechFlow: I want to talk about Safe’s Tokenomics design. Do you have any insights into the design and evolution of Safe? (Note: Safe is a company invested by 1KX)
Robert：
Safe launched their token two years ago, initially as a pure governance token, non-transferable. I really appreciated its community nature. At the time, I hadn't joined 1KX yet, so I didn't pay close attention. Since governance was running smoothly, I didn't have much to do.
They had a good governance structure in place, and another team member helped with that. They had a clear communication plan that detailed the steps needed to make the token transferable. One of the key steps involved the utility of the token, and they got government approval. Now, the token is tradable.
This shows a good governance token design. Initially, it was non-transferable and served its purpose well. They distributed the tokens to the right people and kept it that way. However, the community eventually decided to make it transferable.
It will be interesting to see how this unfolds. Safe is very driven and has a clear vision for value capture and potential collaborations. They recently talked about plans to monetize their success and build an economic model around this. Safe is an excellent product and we invested in it for a reason.
They also have a points program now, and I think this is a trend that will see more similar programs appear in the future. For example, I have heard of similar initiatives in the DeFi space. These programs are moving away from pure mining activities and focusing more on real product participation. Users provide feedback because they truly like the product, not just to earn rewards.
Recommended reading on Tokenomics:
https://www.youtube.com/@EconomicsDesign
https://dl.ebooksworld.ir/motoman/Mastering_Ethereum_Andreas.M.Antonopoulos.www.EBooksWorld.ir.pdf
https://unglueit-files.s3.amazonaws.com/ebf/05db7df4f31840f0a873d6ea14dcc28d.pdf
https://x.com/tokengineering
https://www.youtube.com/watch?v=hKI56jbpVws
