Beyond Token Economics: How to Understand the Three Main Driving Forces of Cryptocurrency Projects

Tokenomics was once a hot topic in the crypto market, with countless projects attempting to drive growth through intricate incentive mechanisms. However, a perspective shared by Ethereum founder Vitalik in July 2022 sparked deep reflection: “The first law of tokenomics is: do not take advice on tokenomics from someone who uses the term ‘tokenomics’.”

This statement may seem paradoxical, but it actually reveals a core issue—those overly obsessed with tokenomics often fail to grasp the bigger picture and struggle to ensure balanced development of protocols. In past market cycles, we witnessed the collapses of projects like Fcoin, Luna, and FTX. What do they have in common? They all overly focused on token incentive mechanisms while neglecting the importance of business logic and governance frameworks.

In contrast, projects like Compound and Uniswap, which carefully build their business layers and refine governance systems, have survived to this day even without aggressive token leverage. The hidden truth behind this phenomenon is: The value growth of crypto projects is not determined solely by tokenomics but is driven by the combined forces of business, incentives, and governance.

Why Tokenomics Is No Longer Sufficient

Theoretical Limitations

Traditional tokenomics research tends to be one-dimensional, mainly focusing on supply-demand mechanisms, incentive design, and consensus achievement. However, the economic-financial systems based on tokens are inherently complex, exhibiting chaos and non-linearity. The emergent behaviors of such systems far exceed what a single discipline of economics can explain. Like the three-body problem in physics, when multiple entities influence and interfere with each other, the system’s non-linearity and dynamics make precise predictions difficult.

From an economic perspective, tokenomics struggles to explain the complex outcomes that emerge from such systems. It’s akin to using economics to explain physical phenomena—inevitably leading to blind spots.

Immaturity in Practice

The early crypto market exuberance taught us harsh lessons. During times of immature regulation and aggressive capital expansion, everyone fixated on supply-demand and incentive mechanisms. Why? Because studying tokenomics seemed easier for creating bubbles, becoming a popular “shortcut to wealth.”

The results are clear: many projects that gained temporary popularity focused solely on token design and failed to survive even a full market cycle. This is not coincidence but systemic failure—when business logic is unclear and governance frameworks are incomplete, any incentive mechanism is just adding bricks to an empty castle.

Lack of Tools

This is the most overlooked aspect. Traditional finance uses mathematical models and computer simulations to assess risks, but evaluation of crypto projects still relies heavily on spreadsheets and experience-based judgment. Ironically, token projects are more complex and chaotic than traditional financial systems, evolving at a much faster pace. Yet, the industry still relies on primitive decision-making methods—this is a significant obstacle to development.

Moreover, although code is open source on GitHub, few outside professional developers can fully understand the actual operational logic of a project from the code. This creates a huge “information asymmetry,” which is a primary reason investors and users are hesitant to trust blindly.

Business, Incentives, Governance: The Three Pillars Supporting Project Value

Since tokenomics alone cannot explain the entire system, what constitutes a complete framework?

Imagine you are the founder of a stablecoin project, facing four key decisions on day one:

First is business layer design. You need to ask yourself: what does the market truly lack? With many similar stablecoin projects, only those solving real pain points can generate positive externalities. This involves choices around fiat collateral, crypto collateral, or algorithmic mechanisms, as well as complex parameters like staking ratios, liquidation mechanisms, and liquidation parameters.

Take MakerDAO as an example. It faces choices between English auctions (ascending price auctions) and Dutch auctions (descending price auctions). The rules of English auctions are simple but may lead to extremely high bids; Dutch auctions allow immediate trading but involve different risk parameters. These seemingly technical choices actually determine the project’s risk configuration and value realization path. A well-planned business strategy can prevent the project from becoming an “empty shell” and ensure it truly takes root and grows within the crypto ecosystem.

Next is incentive layer design. You need to decide whether to issue project tokens, how to design economic mechanisms, whether to reward holders or stakers, and what parameter ranges to set. Properly designed incentive mechanisms can provide stable supply-demand dynamics for tokens, helping the project maximize consensus and influence.

Finally is governance layer design. You need to consider whether to establish a DAO, define community permissions, whether governance tokens are necessary, how to set proposal processes, and how to prevent malicious attacks like sybil attacks. Carefully crafted governance can enable the project to evolve autonomously over time, with continuously optimized business and incentive layers, giving the project greater “resilience” to adapt to unpredictable market environments.

Positive Externalities: The Overlooked Core Driver

Among the three key elements, the most critical yet easiest to overlook is positive externalities—the real value the project provides to external systems, solving actual market pain points.

Many project teams enter the crypto space with good intentions but fail to seriously assess where real market needs lie. They mistakenly believe they possess “positive externalities” and thus heavily focus on incentives. The result? The “amplification effect” of token economics often worsens the situation—false value promises are ultimately exposed by the market.

Exploring positive externalities is the most worthwhile reflection for current token project startups. Projects without positive externalities are just “hollow shells” that can collapse at any moment. This requires teams to sharpen their eyes, carefully explore the value points of their business, consider whether the market truly needs it, whether current technology matches, whether the timing is right, and even plan the ideal implementation path in advance.

How Multidisciplinary Integration Can Break the Deadlock

The first upgrade of tokenomics is to recognize that it requires support from multiple disciplines. Based on different aspects, we need to introduce methodologies from various fields:

Business layer needs optimization and control theory guidance

Control theory is an interdisciplinary field focused on system iteration and optimization. For complex projects like MakerDAO, which face decisions on liquidation mechanisms and parameters (step, cut, buf, cusp, tail, etc.), using control theory to guide iteration results in lower risk, more logical robustness, and easier community acceptance compared to “armchair” decision-making.

Incentive layer needs game theory guidance

The core of token incentives is to find the optimal incentive balance. Different users have different goals and expectations; the same parameters can produce vastly different results across groups. It’s similar to how central banks implement monetary policy to regulate macroeconomics.

Olympus DAO (OHM) exemplifies the power of game theory. It introduces (3, 3) game strategies, viewing pure staking as the most beneficial choice for the project. The result? Currently, 91.5% of OHM supply is staked—possibly one of the highest staking rates in crypto. Game theory provides a scientific methodology for designing incentive mechanisms, aligning system goals with Nash equilibrium.

Governance layer needs institutional economics guidance

Institutional economics studies how formal or informal institutions guide social and economic interactions. For example, 1HiveDAO uses conviction voting to decide on proposals, where voters stake tokens to express preferences, and over time collective belief accumulates until a threshold is reached. This innovative decision-making process embodies principles of institutional economics.

In complex social networks, institutional economics can help projects design more scientific decision frameworks, integrating individual decisions into organizational choices, and steering the system toward common goals.

From Code is Law to Model is Law

In practice, two major challenges hinder the healthy development of token projects:

Information Asymmetry Dilemma

“Code is law” is a fundamental principle in crypto, but the logic in open-source code is often only understandable by hackers and professional developers, creating a huge “information asymmetry.” If we can leverage tools to convert code logic into visual models and display operational data via charts, transforming “Code is law” into “Model is law,” then all projects can become accessible, understandable, and verifiable models for the public—this is the true meaning of an “open-source world.”

Gap Between Expectations and Reality

Market evidence shows that actual user behavior often diverges significantly from project expectations. On one hand, there is a lack of universal frameworks to evaluate token system design; on the other, human participation introduces high uncertainty. While these uncertainties cannot be entirely eliminated, they can be gradually reduced through continuous tool-assisted optimization and iteration, narrowing the gap between expected and real behaviors.

Conclusion

Tokenomics once fueled ICO booms, DeFi Summer, and the “X2Earn” frenzy, making undeniable contributions to the industry’s history. But as the industry advances, theories must evolve accordingly.

Contemporary projects operate under the protection of business, incentives, and governance pillars, driven by positive externalities, enabling rapid “snowball” growth. These three elements are indispensable and constitute the necessary and sufficient conditions for the project’s value to grow steadily.

To truly realize the technological and economic goals of crypto projects, we need to introduce more reliable practical methods and tools during conception, design, development, and deployment stages. Only when the public’s understanding improves can practical steps be more solid, paving the way for a healthier, freer, and more vibrant crypto future.