Why Tokenomics is the New Game Design Document

Traditional models force a choice: high staking yields for security (e.g., PoS L1s) or pure utility for users. This creates misaligned incentives and fragile systems.

• Solution: Design tokens where security and utility are co-dependent. EigenLayer restaking and Celestia modular data availability turn security into a composable resource.
• Result: $15B+ in restaked ETH secures new networks, creating a flywheel where utility demand directly funds protocol security.

Most token supplies are held by passive speculators, creating sell pressure that dwarfs protocol revenue. This kills sustainable growth.

• Solution: Engineer sinks and flows that lock value into the product. Uniswap's fee switch debate and Frax Finance's algorithmic backing are battles over this pillar.
• Result: Protocols like MakerDAO with $8B+ in RWA collateral convert speculative MKR into productive yield, aligning token value with ecosystem GDP.

Pre-set, time-based emissions (see early DeFi 1.0) are blind to market conditions, leading to hyperinflation and eventual collapse.

• Solution: Implement state-contingent issuance. Axie Infinity's failed SLP model versus Ethena's USDE yield backed by stETH and futures funding.
• Result: Protocols can dynamically adjust rewards based on TVL growth, fee revenue, or network usage, creating a self-regulating economic engine that avoids death spirals.

The Problem: New Actively Validated Services (AVSs) face a cold-start bootstrap problem for security and trust. The Solution: Allow Ethereum stakers to re-stake their ETH to secure other networks, creating a flywheel of shared security.

• Capital Efficiency: Unlocks ~$50B+ of staked ETH for pooled security.
• Trust Minimization: AVSs inherit Ethereum's validator set, avoiding fragmented, weaker security models.

The Problem: Stablecoins face the impossible trinity: decentralization, scalability, and stability. The Solution: A multi-layered algorithmic monetary policy with Frax (stable), FPI (inflation-pegged), and sFRAX (yield-bearing).

• Protocol-Controlled Value: $3B+ in treasury assets (like CRV, CVX) used to defend the peg and generate yield.
• Multi-Chain Native: Deployed on Ethereum, Arbitrum, Avalanche with native bridges for seamless liquidity.

The Problem: Perp DEXs suffer from liquidity fragmentation and LP impermanent loss from volatile assets. The Solution: Isolate risk into single-asset Liquidity Vaults and use a multi-tiered keeper/keeper network for execution.

• Capital Efficiency: LPs provide only one asset (e.g., USDC), used as collateral for all perp markets.
• Real Yield Sourcing: Fees are distributed to GMX stakers and liquidity providers, creating a sustainable flywheel.

The Problem: Illiquid staking locks up capital, killing composability and DeFi utility for stakers. The Solution: Issue a liquid staking token (stETH) that accrues yield and is usable across Aave, Maker, Curve.

• Composability as a Feature: stETH becomes a core DeFi collateral asset with $10B+ in integrations.
• Validator Decentralization: Distributed operator set mitigates the systemic risk of a single staking entity.

The Problem: Protocol treasury is passive and unproductive, and governance is plagued by low voter participation. The Solution: Activate protocol fee switch to fund the treasury, and implement delegated staking to incentivize active governance.

• Value Capture: Redirects 0.05%-0.25% of swap fees to UNI stakers and delegates, creating a direct revenue claim.
• Governance Alignment: Delegates earn fees, creating a professional class of incentivized protocol stewards.

The Problem: Protocol-native stablecoins fail due to poor peg stability mechanisms and limited utility. The Solution: Mint GHO against collateral on Aave, with customizable Facilitators (e.g., FlashMint) controlling minting rights.

• Collateral Diversity: Backed by a basket of blue-chip assets already deposited in Aave (ETH, wBTC, etc.).
• Modular Expansion: New facilitators (like RWA vaults) can be permissionlessly added, scaling minting capacity.

Token-GDDs often model a single, unsustainable growth curve. When the incentive flywheel stalls, the only lever is to print more tokens, leading to death spirals seen in many DeFi 2.0 protocols.

• Key Flaw: Linear emission schedules with no real yield sink.
• Result: >90% of governance tokens trade below their initial distribution price.
• Antidote: Design for multiple equilibrium states, not just hyper-growth.

Distributing governance tokens does not create governance. Low participation (<5% voter turnout is common) cedes control to whales and delegates, creating centralization and apathy feedback loops.

• Key Flaw: Misalignment between token holding and protocol expertise.
• Result: Proposals are passed by <1% of token holders, creating regulatory risk.
• Antidote: Differentiated voting rights (e.g., Uniswap's fee switch debate) or futarchy mechanisms.

Yield farming incentives attract TVL tourists, not sticky users. When emissions drop, liquidity evaporates, causing impermanent loss death spirals and rendering the protocol's core DEX or lending market unusable.

• Key Flaw: Incentives target capital, not usage or loyalty.
• Result: >70% TVL drop post-emissions is standard, crippling protocol utility.
• Antidote: Vesting based on continuous action (e.g., Curve's ve-model) or proof-of-usage.

Forced utility features (e.g., staking for discounts) are a weak defense against the Howey Test. Regulators like the SEC see through artificial constructs, targeting tokens where profit expectation is primary.

• Key Flaw: 'Utility' is a bolt-on, not core to the token's value accrual.
• Result: Legal overhang suppresses institutional adoption and on-chain innovation.
• Antidote: Protocol-native essential functions (e.g., ETH for gas, Maker's DAI stability fees).

Tokens used as collateral become attack vectors. If the token's price is manipulable (low liquidity, centralized oracles), attackers can mint unlimited synthetic assets, as seen in the Mango Markets and BonqDAO exploits.

• Key Flaw: Native token as primary collateral creates reflexive risk.
• Result: Single exploits can drain >$100M in minutes from otherwise sound protocols.
• Antidote: Over-collateralization with exogenous assets or time-weighted oracles like Chainlink's LOW.

Governance tokens used to pay for protocol services (e.g., security, data) create a circular economy where the treasury pays itself, diluting all holders. This is the Web3 equivalent of printing money to cover deficits.

• Key Flaw: Token is both the asset and the cost unit for core operations.
• Result: Real yield per token trends to zero despite protocol revenue growth.
• Antidote: Dual-token models (governance vs. utility) or fee conversion/burn mechanisms like Ethereum's EIP-1559.

Treating airdrop farmers as noise is a critical mistake. They are your most aggressive, incentive-aligned stress testers. Their behavior reveals the exact exploit vectors and economic loopholes in your system before real users arrive.

• Key Benefit 1: Identifies sycophant attack and wash trading vulnerabilities pre-launch.
• Key Benefit 2: Provides a $100M+ live dataset on how to game your protocol, allowing for pre-emptive fixes.

Generic staking for yield and security is a dead end (see dYdX v3 to v4). The new model ties staked assets directly to protocol utility, creating a virtuous cycle of usage and value capture.

• Key Benefit 1: Staked ETH in EigenLayer secures AVSs; staked SOL provides compute for Firedancer; staked JTO governs Jito's MEV infra.
• Key Benefit 2: Transforms passive capital into active protocol infrastructure, justifying higher fee capture and valuation multiples.

Unchecked emissions to liquidity providers and stakers dilute long-term holders and create perpetual sell pressure. This turns your token into a farm-and-dump instrument, killing any chance of becoming a store of value or governance asset.

• Key Benefit 1: Recognizing this flaw forced a shift to real yield models (GMX, SNX) and fee-buyback-and-burn mechanisms.
• Key Benefit 2: Drives design towards sustainable equilibrium where token demand is linked to protocol usage, not mercenary capital.

Every token emission (faucet) must have a pre-defined, compelling use case (sink). Start with the sink: protocol fees, governance power, exclusive access, or collateral utility. Then, and only then, design a faucet to feed it.

• Key Benefit 1: Prevents the circular economy fallacy where tokens are only used to earn more tokens.
• Key Benefit 2: Creates a clear value accrual pathway, making the tokenomics model legible and investable from day one.

If your primary token utility is "governance," you've built a security with extra steps. Passive holders don't vote, leading to low participation, whale dominance, and protocol stagnation. This was the fatal flaw of many DeFi 1.0 models.

• Key Benefit 1: Forces a hard look at delegated governance (Compound, Uniswap) and futarchy models to mitigate apathy.
• Key Benefit 2: Highlights the need for non-governance utility pillars to sustain token demand between votes.

EigenLayer isn't just a protocol; it's a masterclass in multi-faceted tokenomics design. It creates a new asset class (restaked ETH) that serves as collateral, security, and yield-bearing capital simultaneously, bootstrapping an entire ecosystem of Actively Validated Services (AVSs).

• Key Benefit 1: Solves the bootstrapping problem for new protocols by leveraging Ethereum's established trust.
• Key Benefit 2: Demonstrates how a meta-protocol can capture value from an entire vertical (modular security), not just a single application.