Purpose-Driven Tokens

This is a chapter from the book Token Economy (Third Edition) by Shermin Voshmgir. Paper & audio formats are available on Amazon and other bookstores. Find copyright information at the end of the page.

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The governance of DAOs is closely tied to the design and distribution rules of their network-native and purpose-driven tokens that steer the actions of stakeholders with automated incentives and disincentives. This chapter will define the term “purpose-driven token” and outline the knowledge domains relevant when conceptualizing a new token system.

Bitcoin’s groundbreaking consensus mechanism launched a new era of socioeconomic coordination over the Internet. Proof-of-Work demonstrated how anonymous network participants could contribute to a collectively maintained public payment infrastructure without central coordinators. Aligning incentives among a community of anonymous Internet actors in a collusion- and attack-resistant manner sparked a new field of research and development around economic coordination games using cryptographic tools. It showed how a reward mechanism tied to a network-native token can steer the actions of anonymous Internet users to collectively pursue a common purpose—which is why I refer to these tokens as “purpose-driven.”

Many developers expanded on Bitcoin’s foundational ideas, tweaking its technical, social, political, and economic design to issue new tokens with varying degrees of success and sustainability. The Ethereum network, along with similar blockchain networks that emerged later, paved the way for the easy technical issuance of tokens—from simple asset tokens that represent private goods to purpose-driven tokens that incentivize the co-creation of public goods. Numerous Web3 protocols have emerged ever since, each steered by purpose-driven tokens designed to incentivize contributions toward a collective purpose. By “purpose,” I refer to a greater goal beyond maximizing personal profit. This might be a P2P payment network (Bitcoin), a P2P social network (Steemit), a P2P stable token (DAI), a P2P telecommunication network (Helium), or a P2P data market (Ocean Protocol). The collective goal could also be the reduction of negative externalities on a public or common good—such as the reduction of CO2 emissions via CO2 tokens or biodiversity tokens (Rebalance Earth).

Unlike conventional economic systems, which focus on individual value creation for private goods, these purpose-driven tokens incentivize collective action toward shared goals by rewarding individual contributions with a network token. They transcend traditional political and economic philosophies such as “capitalism” versus “communism”—philosophies that stem from a pre-Internet era. These tokens are issued according to rules encoded in the protocol, often fulfilling the role of an internal currency. New disciplines have emerged around this idea—such as “Cryptoeconomics,” “Cryptogovernance,” “Token Economics,” and “Tokenomics”—which are all part of a more broadly defined field of “Token Engineering.”

Token Engineering, Token Economics, Cryptoeconomics & Cryptogovernance

The design of token systems in Web3 has given rise to various overlapping terms, such as "cryptoeconomics," "cryptogovernance," "token economics," and "token engineering." Each term reflects a different perspective and historical context, contributing to the broader discourse on how to create sustainable, purpose-driven token ecosystems.

Cryptoeconomics is a term that emerged within the Ethereum developer community and is often attributed to Vitalik Buterin and Vlad Zamfir. They defined it as the study of economic interactions in untrusted environments, where every actor could potentially be corrupt—combining cryptography, game theory, and computer science. Since the emergence of Bitcoin’s Proof-of-Work, many variations and alternative cryptoeconomic mechanisms, such as Proof-of-Stake, have been developed with the aim of providing a security equilibrium for blockchain networks. Security, however, is not only a technical question but also depends on the resilience of the assumptions made about how network actors will react to economic incentives. It is also subject to the fields of sociology, political science, and behavioral economics—fields that are often overlooked in the Web3 developer community.
Token economics, or tokenomics, is less rigidly defined than cryptoeconomics, as it does not necessarily imply collusion-resistant mechanisms in a peer-to-peer network of untrusted actors. It emerged from colloquial usage on social media, mostly by people trying to build tokenized applications. It is often employed to describe the economic design patterns of different types of application tokens—from simple asset tokens to more complex tokens that steer any form of decentralized organization. While the term captures the economic aspects of token design, it often neglects non-economic incentives, such as reputation or governance rights. This reductionist focus risks oversimplifying the complexities of token systems, which require an interdisciplinary approach to balance economic, social, and political factors, especially in the case of protocol tokens that steer the actions of large online communities.
Cryptogovernance is a term that has been used to address the governance layer of Web3 networks, focusing on how decisions over protocol upgrades are made and how voting rights should be distributed. The question of political participation is either completely segregated from the question of economic incentives or blended with the design of economic incentives—often tying voting rights to the amount of network tokens owned. Both approaches have been unsatisfying. In theory, governance is a political science term that describes the general politics of a community of people—including their economic interactions—and not only their political voting rights. Economic design is always a result of a political worldview. What economic system one wants to create is a political decision. After all, Web3 protocols operate like planned economies on steroids, steered by very rigid market rules determining who is allowed to transact under which conditions and how many tokenized rewards they can earn for specific actions. These rules are hard-coded into the protocol. While the term governance should include the questions of market design as well as voting rights, legislative rights, information rights, and executive rights, the interpretation of what constitutes governance varies widely in the crypto community.
Token engineering offers a more comprehensive and ethically grounded approach. It was notably popularized by Trent McConaghy, who compared token engineering to disciplines like aerospace or civil engineering, stressing the importance of safety and accountability in designing public infrastructure. Just as physical systems like bridges or railroads must be robust and reliable to prevent collapse, Web3 systems must be built to withstand economic and social collapse. Token engineering advocates for a more holistic perspective, recognizing that technology is ultimately created to serve individual human needs and social goals. McConaghy drew similarities between creating token mechanisms and other disciplines that share a heavy dependence on the mathematics of optimization and decision-making. He listed a range of scientific fields relevant to designing these systems, such as electrical engineering, swarm robotics, operations research, software engineering, civil engineering, aerospace engineering, complex systems design, public policy design, economics, robotics, machine learning, and artificial intelligence.

Regardless of the terminology used, the design of purpose-driven tokens demands a balanced approach that integrates technical rigor, political inclusivity, economic sustainability, and legal compliance. By adopting this holistic mindset, one can build token ecosystems that are not only functional but also capable of maintaining sustainable economies over time. To simplify the range of relevant disciplines, I suggest grouping them into four categories: “technical engineering,” “political engineering,” “economic engineering,” and “legal engineering.”

“Token Engineering” from Token Economy (Third Edition) 2025, Shermin Voshmgir

“Token Engineering Aspects” from Token Economy (Third Edition) 2025, Shermin Voshmgir

Political & Ethical Engineering

While Web3 provides a technological governance layer for the Internet, its design is fundamentally a political question of what type of system we want to create. Before addressing technological solutions, one must define the political and ethical principles guiding the creation of protocols and their tokens. Think of Web3 networks as the digital railroads of the Internet. Deciding where the rails go and which cities they connect is a political choice, not a technical one. Engineers ensure the infrastructure is safe, cost-effective, and durable, but the purpose and direction are determined by political decisions. The same applies to Web3 networks.

Political, moral, and ethical considerations inevitably arise for any Internet-based network and cannot be ignored indefinitely. The history of Web2 demonstrates that when these questions are addressed only after a system has been deployed, systemic biases become difficult to reverse due to inertia and the entrenched interests of all stakeholders involved. In Web3, this inertia seems to be even greater due to the decentralized nature of its governance structures. Failing to embed political and ethical considerations during the design phase risks creating unintended biases that become hardwired into the protocol and difficult to reverse.