Interview with 1kx Researcher: The Right Way to Design Web3 Tokens

2024.07.21

Interview with 1kx Researcher: The Right Way to Design Web3 Tokens

"The true economic design lies in the coordinated dynamics of products." — Robert Koschig

2024.07.21 - 04:02:43

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Navigating Web3 tides with focused insights

"The true economic design lies in the coordinated dynamics of products." — Robert Koschig

Author: Sunny, TechFlow

Guest: Robert Koschig, Researcher at 1kx

Robert Koschig is a token economics researcher at the crypto venture firm 1k(x). At this year’s Dapp Summit in Berlin hosted by Gnosis, Koschig summarized his thoughts on token design for decentralized hardware networks. For instance, he believes Filecoin's KPI-based token issuance plan is more scientifically sound than time-based emission schedules. Koschig also pointed out that token rewards in DePIN networks currently lack predictability, challenging the Bitcoin model’s hallmark of predictability and stability.

Beyond decentralized hardware networks, what does token design mean overall? As the industry evolves from the wild "Wild West" era to today’s imminent Ethereum ETF approvals, rational and scientific token design has become an essential component for most decentralized protocols. Or put differently, today’s token designers are the product managers of the next-generation internet.

Are there established frameworks for token design? Is there a universal token design model projects can emulate? Koschig identifies several key dimensions: supply-side token issuance, governance, demand-side incentives, and investment. The discussion also compares two classic token models—Bitcoin and Ethereum—from perspectives of constancy and change, exploring how projects can adapt elements from each to suit their needs.

Key Takeaways:

Token design should focus on continuous improvement rather than being confined to the concept of “Tokenomics,” which carries baggage from past practices.
Protocols don’t necessarily need tokens, but when used effectively, they are powerful tools.
Unlike traditional coupons or rewards, tokens are permanently yours once received.
Common goals in token design include coordination, value capture, and value transfer.
Centralized payment channels contradict the purpose of decentralized infrastructure.
Having your own token brings additional benefits, such as control over issuance—how much you mint and who receives it.
If broader community participation is desired, governance tokens enable that transition.
In governance, tokens determine proposal eligibility and voting power, but separate entities handle execution of decisions. This separation aids more effective management of economies, staking mechanisms, and governance processes.
Tokenomics hasn't changed much: projects design it, launch it, and run with a fixed inflation rate indefinitely.
When observing Ethereum’s approach, you see a case where they can think through code, adjust parameters, and unlock infinite economic possibilities.

Tokenomic Design Is New Product Design in Web3

TechFlow: Can you share why you chose to focus on token economics research?

Robert:

Tokenomics is still in its research phase. Typically, developers are highly skilled technically, but when it comes to economic design, there’s tremendous opportunity in this space.

This field aligns well with my background. You need knowledge of mathematics, game theory, and economics, combined with data science skills like simulation and data analysis. Combining these areas creates a promising emerging field, perfectly matching my strengths.

TechFlow: Can you explain what Tokenomics is?

Robert:

Certainly. If someone asked me, “What is Tokenomics?”

I would describe it as an initial attempt to explain how a protocol functions within its designed economic framework.

You always encounter technical questions first—like, “What is this product?”

But once people grasp the technology, they begin to appreciate the power of these economic coordination mechanisms. Their attention shifts toward studying the potential of tokens and what they can unlock—for example, when sudden airdrops occur.

We’ve seen what happens when projects initially don’t issue tokens and then introduce them later. “Tokenomics” was among the first terms used to describe this process.

However, the term “Tokenomics” often carries the burden of pie charts and vesting schedules.

True economic design is about the coordination dynamics of your product. It’s not just what you do before launching a token or include in your whitepaper; it’s an ongoing effort, just like technical development. You start with a minimum viable product, iteratively build and improve the technology—testing on testnets and mainnets. Economic design should follow the same iterative process.

Token design should emphasize continuous improvement rather than being limited by the concept of “Tokenomics,” which carries historical baggage.

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 so. If you don’t need to rely on incentives, that’s ideal!

Even so, experimenting might still benefit projects that don’t depend on incentives. Traditional economics uses methods like cashback or Starbucks coupons, but tokens offer new possibilities due to their immutability. For example, if I give you my token because you completed a specific task, I cannot take it back. Unlike traditional coupons or rewards, tokens, once owned, belong to you permanently.

This permanence makes tokens powerful tools within protocols. They can provide strong incentives without risk of revocation, unlike mileage points or conditional coupons.

A protocol doesn’t have to have a token, but if used properly, it’s indeed a very powerful tool.

TechFlow: Why do some protocols require token design while others don’t?

Robert:

It entirely depends on what you aim to achieve as a protocol.

Are you a consumer-facing app or a DeFi application?

Typically, common use cases for tokens involve coordination, value capture, and value transfer. In these areas, tokens can be highly effective. But ultimately, it’s up to you how you implement Tokenomics and token design.

You may have goals around launching a specific token via your protocol. But if done poorly, results could deviate significantly from expectations. This decision must be solid—ensuring adding a token genuinely enhances your product. Once made, it requires sufficient attention, as tokens can bring benefits through economics and incentives, but mismanagement can also cause harm.

TechFlow: Could you elaborate on the advantages and rationale for using digital tokens instead of traditional fiat currency in decentralized infrastructure?

Robert:

Of course. There are multiple layers to why digital tokens are needed—even different hardware experiments. A typical argument for tokens is incentivizing the supply chain.

Someone needs to buy these tokens and provide storage services. Technically, you could let users pay in USDC or other fiat-backed currencies and operate outside the crypto world—even if running atop decentralized cryptographic infrastructure, you could adopt centralized payment methods.

However, this usually doesn’t make sense, because centralized payments contradict the original intent of decentralized infrastructure.

That’s why it’s better to stick with decentralized payment methods, such as stablecoins. This doesn’t necessarily mean you must use your own token—there are other excellent payment tokens available. Yet, having your own token offers additional benefits, such as control over issuance—how many tokens you mint and who gets them.

The beauty of token design lies in its flexibility. You can make any decision and even modify them over time. It’s a powerful tool for growing your community and engagement. A simple mechanism is a governance token. Initially, the team may drive operations, but as it grows, you’ll want broader community involvement. Governance tokens enable this transition. Of course, you can build more advanced features on top of that.

Modular Tokenomics Design

TechFlow: Can projects adopt a modular approach when designing their Tokenomics?

Robert:

Yes, ideally you can achieve modularity. That’s the ideal goal. You can define modules such as “supply-side incentives,” “governance,” “demand-side incentives,” and “investment/speculation.”

Ultimately, you only have one token, so you need to figure out how all these components interconnect. This is why governance in DeFi becomes particularly interesting. In early stages, governance decisions may need to cover actual costs. Investors want to know, rationally speaking, that investing in your protocol will yield better returns.

This means you need to allocate a significant share of your network to them. However, when combined with governance, rewards create dependencies. For example, if you allocate a certain amount to suppliers and leave the rest to governance decisions, operators who don’t sell their tokens accumulate greater voting power over time. This could lead to internal issues, as they might set their own rewards—game theory suggests this could result in power struggles.

You also need to consider governance aspects, since managing diverse stakeholder groups is crucial. Relying solely on token-based governance may not suffice. That’s why many prominent protocols like MakerDAO establish independent governance councils. Tokens determine proposal eligibility and voting rights, but different entities handle decision execution. This separation helps manage economies, staking mechanisms, and governance more effectively.

Comparing Bitcoin and Ethereum’s Tokenomics: Change vs. Constancy

TechFlow: Have you observed evolution in Tokenomics? How have different projects adjusted their Tokenomics models, and what changes have been made?

Robert:

Token rewards always make sense, right?

Early projects like Bitcoin demonstrated their strength as drivers of network effects and economic incentives. Bitcoin’s fixed issuance schedule inspired many platforms to adopt similar strategies. They frequently emphasize the importance of fixed issuance schedules.

Yet, some realized this approach might be too restrictive. So they added a second layer with more dynamic logic—though still largely fixed. From this perspective, Tokenomics hasn’t changed much: projects design it, launch it, and keep running with a fixed inflation rate.

But adjustments have occurred. For example, The Graph improved its design over time. Initially, it used bonding curves for curation of data indexing. Over time, inefficiencies were identified and the model adjusted.

This shows that while initial designs may be fixed, learning and adaptation are necessary. Complex token economies like DeFi require iterative learning and modification.

It’s important to allow experimentation and learning instead of rigidly sticking to initial designs. While this approach appears more flexible than traditional crypto narratives, it avoids getting trapped in inefficient models. The industry moves fast, with new technologies constantly emerging. Using simulations, data science, and continuous adjustments helps properly design tokens.

TechFlow: Which fundamental components of Tokenomics design remain unchanged over time?

Robert:

I believe the unchanging part is that core economic principles have remained consistent since the development of economics as a field. Your token and its issuance incentivize contributions, similar to how early Bitcoin incentivized miners. This method is far more efficient than building everything from scratch. Early Bitcoin issuance was much higher than today’s.

The fundamental idea remains: if you have a well-functioning supply system, your protocol works as intended and delivers good user experience, revenue naturally follows. Then, this revenue supports the system. This principle is foundational and always relevant.

You can sustain certain reward levels by issuing additional incentives or adjusting income streams, ensuring overall reward sustainability even if individual rewards don’t decrease.

TechFlow: Other cryptocurrencies beyond Bitcoin seem more complex in some ways. Do you think Tokenomics or Web3 protocols could become composable like smart contracts, given their complexity? Are there ways to simplify these theories?

Robert:

Indeed, it’s difficult, but that’s also Bitcoin’s beauty. It uses a simple mechanism. On the other hand, when you look at Ethereum’s approach, you find a situation where they can reason through code, make adjustments, and introduce infinite economic possibilities.

If mistakes happen, offline discussions come into play. People understand new dynamics, different committees emerge, leading to proposals for separation or collaboration. It’s a challenging process, but it allows adaptation and optimization.

Complexity is a major challenge—even the industry’s brightest minds struggle to fully grasp every dynamic. Predicting behavior is extremely difficult.

In short, yes, it’s complex and likely won’t get simpler. The simplest and most effective models already exist and can be replicated. Today, new projects tend to be more complex and adjustable rather than static and rigid. This is typically how technological evolution unfolds.

Think of bicycles: they’ve existed for a long time and were once the fastest mode of transport. The basic concept remains unchanged, yet they’re no longer optimal for all modern needs. People keep adding new features, creating new problems and solving them. This evolution makes Tokenomics more complex but also more robust.

The goal is reaching a stage where people can understand what’s happening. If understanding is lost, trust will be lost too. Balancing the need for immutability with adaptability is key—ensuring most stakeholders can vote on 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 could harm a project? Does Tokenomics design help or hinder project growth?

Robert:

It’s easy to fall into the trap of treating tokens like candy. When you tap into your token pool, it feels like receiving a reward. People get addicted, unaware that the more they do this, the more the project focuses solely on tokens. This is why we now face issues like misleading metrics, high total value locked (TVL), and low market cap.

We overlook the fundamental purpose of tokens. Tokens aren’t just rewards; they’re powerful tools for coordination, growth, and accelerating your project’s development. However, tokens shouldn’t overshadow the core product. Ultimately, you still need to build a solid product. Tokens eventually become part of your offering, but they shouldn’t be the sole focus.

Initially, you might think you have a budget and standards, but eventually realize that without real revenue, usage, or monetization, you’ve spent all incentives on short-term appeal and hype. This often leads to rapid collapse when market conditions shift.

That’s why I spend a lot of time doing simple simulations, analyzing basic mechanisms of supply and selling pressure, ignoring any narrative. I ask questions like: “Do you think these participants will hold or sell their tokens?” How will market dynamics react when tokens unlock? Understanding these dynamics is crucial to avoiding short-term incentive traps and building a sustainable project.

Case Study: Safe’s Tokenomics Design

TechFlow: I’d like to discuss Safe’s Tokenomics design. What insights do you have regarding Safe’s design and evolution? (Note: Safe is a company invested in by 1KX)

Robert:

Safe launched their token two years ago, initially as a purely non-transferable governance token. I really appreciated its community-oriented nature. At the time, I hadn’t joined 1KX yet, so I wasn’t closely involved. Since governance worked smoothly, there wasn’t much for me to do.

They built solid governance structures, with another team member supporting this effort. They created a clear communication roadmap outlining steps required to make the token transferable. One key step involved establishing utility for the token, gaining regulatory approval. Now, the token is tradable.

This demonstrates a well-executed governance token design. Initially non-transferable, it served its purpose well. They distributed tokens to target participants and maintained that state. Eventually, the community decided to make it transferable.

It will be interesting to see how this unfolds. Safe is highly driven, with a clear vision for value capture and potential partnerships. Recently, they discussed plans to monetize success and build an economic model around it. Safe is an excellent product—that’s why we invested.

They now also have a points program, which I believe is a trend—we’ll see more of these going forward. For example, I’ve heard of similar initiatives in DeFi. These programs are shifting away from pure mining activities, focusing more on genuine product engagement. Users provide feedback because they genuinely like the product, not just to earn rewards.