Dual-Token Model

This token is used to pay for transaction fees (gas), access network services, or participate in staking for network security. It is designed to have a stable or predictable value to facilitate everyday use.

• Examples: Ethereum's ETH (pre-EIP-1559 as pure utility), Binance Chain's BNB for fees.
• Purpose: Provides the fundamental "fuel" for the blockchain's operation, decoupling volatile speculation from core utility.

A separate token, often with a stable or burn mechanism, designed to capture the protocol's revenue or fees. This creates a direct link between network usage and token value, separate from governance.

• Mechanisms: Fee burning (reducing supply) or redistribution to stakers.
• Example: Ethereum's ETH post-EIP-1559, where base fees are burned, accruing value to holders.

In some models, a stable-value token is used exclusively for gas and transactions to ensure predictable costs. The governance token remains separate for speculation and voting.

• Rationale: Protects users from volatile gas prices during network congestion.
• Historical Example: VeChain's VTHO (gas) vs. VET (governance).

The core advantage is separating high-volatility speculative assets from operational necessities. This protects the network's basic functions from market swings and allows each token to be optimized for a specific economic purpose.

• Security: A stable gas token prevents fee spirals from harming usability.
• Incentives: Governance tokens can appreciate based on protocol success without affecting transaction costs.

While powerful, dual-token models add complexity. Key considerations include:

• Liquidity Fragmentation: Dividing value between two assets.
• User Friction: Requiring users to hold and manage multiple tokens.
• Model Viability: The utility token must have sufficient, consistent demand to sustain its value proposition.

These models share core design goals:

• Stability vs. Speculation: Separate volatile governance/value accrual from inflationary utility.
• Sovereign Monetary Policy: Adjust utility token issuance without harming governance token holders.
• Clear Value Flows: Utility tokens circulate in-game; governance tokens capture ecosystem value.
• Sink Mechanisms: Utility tokens are burned or locked via gameplay actions to control inflation.

This model decouples distinct economic functions to prevent conflicts. A utility token is used for network operations (e.g., paying transaction fees, accessing services), while a governance token is used for voting on protocol upgrades and treasury management. This separation allows each token to be optimized for its specific purpose without compromising the other.

By isolating the medium-of-exchange function into a utility token, projects can design a governance or security token with clearer compliance pathways. This can help mitigate the risk of the entire token system being classified as a security, as the utility token's primary use case is consumptive, not investment-driven.

Separating governance rights from day-to-day transaction fees insulates the decision-making process from speculative volatility. Holders of the governance token can vote on long-term protocol direction without their voting power being directly tied to frequent, high-volume microtransactions on the network.

Protocols can implement independent monetary policies for each token. For example, the utility token's supply can be inflationary to ensure low, stable fees, while the governance token's supply can be deflationary or capped to drive value accrual for long-term stakeholders, similar to a store of value.

Several major protocols successfully employ this architecture:

• MakerDAO (MKR/DAI): MKR for governance and system solvency, DAI as the stable utility token.
• VeChain (VET/VTHO): VET for governance and value, VTHO as "gas" for transactions.
• BNB Chain (BNB): While a single token, its dual-function design (governance + gas fee payment) illustrates the conceptual split, with a burn mechanism linking the two.

The model creates a clear pathway for the governance token to capture value from network usage. Revenue generated from utility token fees (e.g., through burning, staking rewards, or treasury allocation) can be directed to governance token holders, aligning incentives between users and long-term stakeholders.

Separating utility and governance rights into distinct tokens can create regulatory ambiguity. Authorities like the SEC may scrutinize the governance token as a potential security if its value is perceived as deriving from the efforts of others. This creates legal risk and can limit exchange listings and institutional adoption.

Requiring users to hold and manage two separate tokens increases friction. New users must understand the distinct purposes of each token, manage two balances, and potentially execute multiple transactions. This complexity can be a significant barrier to mainstream adoption compared to single-token systems.

Capital and trading volume are split between two separate markets (e.g., ETH/TOKEN_A and ETH/TOKEN_B pools). This can lead to:

• Thinner order books and higher slippage for both assets.
• Increased vulnerability to market manipulation.
• Higher costs for market makers and liquidity providers to support both assets effectively.

Managing the supply, inflation, and burn mechanics for two interdependent tokens is a significant challenge. The project must balance incentives between token holders without creating perverse economic loops. Poorly calibrated emissions for a utility token can devalue the governance token, and vice versa.

If the utility token holds most of the economic value, governance token holders may lack sufficient skin in the game, leading to low voter turnout (voter apathy). Conversely, if governance power is highly valuable, it risks being concentrated by whales, leading to governance capture where decisions benefit a small group.

Protocols like Curve (CRV/veCRV) illustrate specific trade-offs. The vote-escrow model locks tokens for power, which:

• Creates deep, long-term alignment (protocol-owned liquidity).
• But also leads to illiquid governance power and can cement the dominance of early large holders, creating a potentially rigid power structure.

A token designed to provide access to a specific service or function within a protocol. In a dual-token model, it is the primary medium of exchange for using the network. Common use cases are:

• Paying for transaction fees or gas.
• Staking to secure the network or provide services.
• Acting as an in-ecosystem currency for payments.

Examples: Ethereum's ETH (for gas), Filecoin's FIL (for storage), and The Graph's GRT (for query fees).

A mechanism where a protocol redirects a portion of the fees generated by its utility token to benefit its governance token holders. This is a core method for creating sustainable value accrual in a dual-token system. Mechanisms include:

• Direct fee distribution (buybacks, burns, or dividends).
• Treasury revenue sharing.
• Staking rewards funded by protocol revenue.

The comprehensive economic design of a cryptocurrency, encompassing its supply, distribution, utility, and incentives. Analyzing a dual-token model requires deep tokenomic scrutiny of:

• The emission schedule and inflation of each token.
• The symbiotic relationship and flow of value between the two tokens.
• Incentive alignment for users, stakers, and governance participants.

An alternative architecture where a single token combines utility, governance, and value accrual functions. This contrasts with the separation of concerns in a dual-token system. Characteristics include:

• Simplified user experience and token dynamics.
• Potential for clearer value accrual to a single asset.
• Examples: Bitcoin (BTC), Solana (SOL), and many early DeFi protocols like Compound (COMP).