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Designing a Token Economy: Incentives, Governance and Tokenomics

Thesis · June 2023

DOI: 10.13140/RG.2.2.13326.13124

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 TALLINN UNIVERSITY OF TECHNOLOGY
School of Information Technologies

Samela Kivilo 204162IABM

Designing a Token Economy: Incentives,

Governance and Tokenomics

Master's thesis

Supervisor: Dr. Alexander Norta

Tallinn 2023
 TALLINNA TEHNIKAÜLIKOOL
Infotehnoloogia teaduskond

Samela Kivilo 201462IABM

Tokenimajanduse disain: stiimulid,

valitsemissüsteemid ja tokenoomika

Magistritöö

Juhendaja: Dr. Alexander Norta

Tallinn 2023
 Author’s declaration of originality

I hereby certify that I am the sole author of this thesis. All the used materials, references
to the literature and the work of others have been referred to. This thesis has not been
presented for examination anywhere else.

Author: Samela Kivilo

08.05.2023

3
 Abstract

In recent years, tokenomic systems have evolved that allow for more complex incentive
structures, which have greatly increased the applicability of blockchain systems further
than mere transactional use cases. Nevertheless, little has been documented about the
design of sustainable token economies, resulting in the collapses of several
cryptoeconomic ecosystems, e.g., the collapse of Luna and TerraUSD in early 2022. The
majority of the state-of-the-art literature focuses on either 1) niche use cases such as
industrials or gaming, some applying Design Science Research (DSR) methodology, 2)
theoretical frameworks for token classification, 3) the aspects of token economy in
isolation: governance, token incentive design, and tokenomics. No scientific literature
exists, however, that proposes a holistic step-by-step token economy design framework
which considers these three facets. This thesis aims to provide such a practical design
framework, which is fundamentally different from abstract theoretical frameworks. By
following a DSR methodology, overlapping ideas in the literature are analysed, and a
step-by-step token economy guidebook is synthesised. The artefact is then evaluated
using 1) the case study method based on Currynomics – an ecosystem that maintains the
Redcurry stablecoin with real estate as the token’s underlying asset, and 2) additional
expert interviews. Thematic analysis is applied to the semi-structured interviews held
both in the case study and expert interviews.

This thesis is written in English and is 103 pages long, including 7 chapters, 8 figures and
9 tables.

4
 Annotatsioon
Tokenimajanduse disain: stiimulid, valitsemissüsteemid ja tokenoomika

Viimastel aastatel on oluliselt arenenud plokiahela virtuaalvääringutel ehk tokenitel

põhinevad tokenimajandused ehk tokeniökosüsteemid, mis võimaldavad
organisatsioonide sidusrühmade vahel luua keerukaid stiimulstruktuure. Tänu sellistele
tokenimajandustele on plokiahela rakendatavus arenenud kaugemale kui pelgalt
plokiahela kaudu teostatavad (makse)tehingud. Siiski esineb hetkel vähe teaduskirjandust
jätkusuutliku tokenimajanduse disaini kohta, mis on kaasa toonud mitmete
tokenimajanduslike ökosüsteemide ebaõnnestumise, nagu näiteks Luna ja TerraUSD
kokkuvarisemine 2022. aasta alguses. Valdav osa uuemast kirjandusest
tokenimajanduslike süsteemide disainimisel keskendub kas 1) nišikasutusjuhtudele
näiteks tööstusvaldkondades või mängudes, 2) teoreetilistele raamistikele tokenite
kategoriseerimiseks või 3) eraldiseisvatele tokenimajanduse disainiaspektidele: stiimulite
disain, valitsemissüsteemid ja tokenoomika ehk tokenite rahapoliitika kujundamine.
Puudub teaduskirjandus, mis käsitleks terviklikku samm-sammult järgitavat
tokenimajanduse disainijuhendit, mis arvestaks nimetatud kolme aspektiga. Käesoleva
töö eesmärgiks on koostada praktiline disainijuhend, mis erineb oma olemuselt
teoreetilistest raamistikest, mis kalduvad olema liiga abstraktsed. Järgides Design Science
Research (DSR) metoodikat, analüüsib autor kirjanduses leiduvaid tokenimajanduse
loomise nõuandeid ja parimaid praktikaid ning sünteesib juhendi ehk artefakti, mis
võimaldab lugejal samm-sammult tokenimajanduse disainiga alustada. Artefakti
valideerimine toimub esmalt läbi juhtumiuuringu, mille aluseks on Currynomics-
nimeline tokeniökosüsteem, mille eesmärk on luua virtuaalvääring, mille väärtus on
tagatud alusvaraks oleva kinnisvaraportfelliga. Teise valideerimismeetodina kasutatakse
täiendavaid intervjuusid kolme valdkonna eksperdiga. Mõlemas valideerimisetapis
viiakse läbi poolstruktureeritud intervjuud, millele rakendatakse temaatilist analüüsi.

Lõputöö on kirjutatud inglise keeles ning sisaldab teksti 103 leheküljel, 7 peatükki, 8
joonist, 9 tabelit.

5
 List of abbreviations and terms

CRE Commercial Real Estate

DAO Decentralised Autonomous Organisation
DEX Decentralised Exchange
DSR Design Science Research
ICO Initial Coin Offering
IEO Initial Exchange Offering
IS Information Systems
NAV Net Asset Value
PoP Proof of personhood
PoaP Proof of attendance
STO Security Token Offering
1t1v 1-token-1-vote

6
 Table of contents

1 Introduction ................................................................................................................. 12
1.1 Aim of the Thesis ................................................................................................. 13
1.2 State of the Art ...................................................................................................... 14
1.2.1 Special Purpose Token Economy Design ...................................................... 14
1.2.2 Theoretical Frameworks of Token Economies .............................................. 15
1.2.3 Token Economy Design Aspects ................................................................... 16
1.2.4 Summary of the State of the Art .................................................................... 18
1.3 Research Questions............................................................................................... 18
1.4 Research Methodology ......................................................................................... 20
1.4.1 Design Science Research ............................................................................... 20
1.4.2 Research Guidelines ...................................................................................... 21
2 Research Background .................................................................................................. 24
2.1 Building Blocks of Token Economies .................................................................. 24
2.1.1 Token Definition............................................................................................ 24
2.1.2 Token Types .................................................................................................. 25
2.1.3 Token Economy Definition ........................................................................... 27
2.2 Use-Case Problem ................................................................................................ 28
2.2.1 The Currynomics Ecosystem ......................................................................... 28
2.2.2 Premises for Currynomics Token Economy Design ..................................... 30
3 Incentives ..................................................................................................................... 31
3.1 Introduction .......................................................................................................... 31
3.2 Token Economy Value Proposition ...................................................................... 32
3.2.1 Token Economy Functions ............................................................................ 32
3.2.2 Functions of the Currynomics Token Economy ............................................ 33
3.2.3 Stakeholder Mapping ..................................................................................... 33
3.2.4 Stakeholders in Currynomics......................................................................... 34
3.3 Defining Desirable Behaviours ............................................................................ 35
3.3.1 Desirable Behaviours in Currynomics ........................................................... 36
3.4 Selection of Incentive Mechanisms ...................................................................... 37

7
 3.4.1 Monetary and Non-monetary Incentive Mechanisms ................................... 37
3.4.2 Types of Monetary Incentive Mechanisms ................................................... 39
3.4.3 Types of Non-monetary Reward Mechanisms .............................................. 40
3.4.4 Incentive Mechanisms in Currynomics ......................................................... 41
3.5 Conclusion ............................................................................................................ 43
4 Governance .................................................................................................................. 45
4.1 Introduction .......................................................................................................... 45
4.2 Governance Decentralisation ................................................................................ 47
4.2.1 Governance Areas.......................................................................................... 47
4.2.2 Governance Areas in Currynomics................................................................ 47
4.2.3 Governance Decentralisation ......................................................................... 48
4.2.4 Decentralisation in Currynomics ................................................................... 50
4.3 On-chain and Off-chain Governance .................................................................... 51
4.3.1 On-chain and Off-chain Governance Mechanisms ....................................... 51
4.3.2 On-chain and Off-chain Governance in Currynomics ................................... 52
4.4 Voting Mechanisms .............................................................................................. 53
4.4.1 Desired Voting Mechanism Properties .......................................................... 53
4.4.2 Core Voting Mechanisms .............................................................................. 54
4.4.3 Support Mechanisms for Voting.................................................................... 57
4.4.4 Voting in Currynomics .................................................................................. 58
4.5 Conclusion ............................................................................................................ 61
5 Tokenomics ................................................................................................................. 63
5.1 Introduction .......................................................................................................... 63
5.2 Token Issuance ..................................................................................................... 64
5.2.1 Amount .......................................................................................................... 64
5.2.2 Timing ........................................................................................................... 65
5.2.3 Token Release Schedule in Currynomics ...................................................... 66
5.3 Token Distribution ................................................................................................ 67
5.3.1 Private and public token distribution ............................................................. 67
5.3.2 Token Distribution in Currynomics ............................................................... 68
5.4 Token Price Sustainability .................................................................................... 69
5.4.1 Token Underlying Value ............................................................................... 69
5.4.2 Price Management Mechanisms .................................................................... 70
5.4.3 Token Price Sustainability in Currynomics ................................................... 71

8
 5.5 Conclusion ............................................................................................................ 74
6 Evaluation .................................................................................................................... 76
6.1 Methodology ......................................................................................................... 76
6.1.1 Case Study ..................................................................................................... 76
6.1.2 Expert Interviews ........................................................................................... 77
6.2 Results .................................................................................................................. 79
6.3 Discussion............................................................................................................. 82
6.3.1 Case Study ..................................................................................................... 82
6.3.2 To-Be State of the Use-Case ......................................................................... 85
6.3.3 Expert Interviews ........................................................................................... 86
7 Conclusion ................................................................................................................... 91
7.1 Conclusion ............................................................................................................ 92
7.2 Research Questions............................................................................................... 92
7.2.1 RQ1: How to Design Token Economy Incentive Mechanisms? ................... 92
7.2.2 RQ2: How to Design Token Economy Governance? .................................... 93
7.2.3 RQ3: How to Design Token Economy Tokenomics? ................................... 93
7.3 Limitations ............................................................................................................ 93
7.4 Future Work .......................................................................................................... 94
References ...................................................................................................................... 95
Appendix 1 – Non-exclusive licence for reproduction and publication of a graduation
thesis ............................................................................................................................. 102
Appendix 2 – Interviewee List ..................................................................................... 103

9
 List of figures

Figure 1. The House Framework by Barrera & Hurder (2020) ...................................... 16

Figure 2. IS Research Framework. Hevner et al. (2004) ................................................ 21
Figure 3. Redcurry portfolio generation and cash movement cycle ............................... 30
Figure 4. Stakeholder map of the Currynomics ecosystem ............................................ 30
Figure 5. Goal model for designing token economy incentive structures ...................... 42
Figure 6. Goal model for designing token economy governance ................................... 60
Figure 7. Goal model for designing token economy tokenomics ................................... 73
Figure 8. Summary of the code labels in thematic analysis ........................................... 81

10
 List of tables

Table 1. Required token characteristics by Tapscott (2020) .......................................... 25

Table 2. Currynomics ecosystem stakeholders............................................................... 35
Table 3. Currynomics ecosystem token holders and their desirable behaviours ............ 37
Table 4. Selection guide for monetary or non-monetary incentive mechanisms ........... 39
Table 5. Legend for the goal model ................................................................................ 42
Table 6. Use case comparison for centralisation and decentralisation ........................... 50
Table 7. Centralised and decentralised governance areas in Currynomics .................... 51
Table 8. Summary of voting mechanisms and their properties ...................................... 57
Table 9. Summary of interview comments on model evaluation metrics ...................... 80

11
1 Introduction

Blockchain technology has become increasingly popular in recent years due to its ability
to provide decentralisation, security, and transparency. However, even with significant
advancements in blockchain technology over time, the true potential of it has not yet been
fully realised. While simple cryptocurrency transfers are straightforward to execute and
comprehend, it remains challenging to link such transactions to real-world objects or
activities. The latter makes it difficult to extend the range of beneficial blockchain use
cases [1]. As a solution, cryptographic tokens have emerged that can be used to represent
various assets or utilities within a network [2].

Before blockchain technology, tokens were commonly associated with vouchers

indicating tangible values such as casino chips or beverages at festivals [3]. In the
blockchain context, tokens act as a claim on both physical and immaterial assets - e.g.,
gold ingots, real estate, and the accompanying rental contracts. Establishing a connection
between real-life and blockchain technology paves the way for the development of
advanced and inventive applications. Thus, tokens play an important role in offering
competition to the hyper scaler web2 platforms that have reached a near monopoly status
during the last decade [4]. These dominant platforms – e.g., Facebook, Instagram, Airbnb,
and Google – own users’ data in a centralised manner, allowing the former to use it for
the sake of increasing proprietary profits [5]. Such centralisation endangers user data
privacy, as well as increases the ecosystem's general vulnerability against hackers [6].
Tokens, however, enable translating various functionalities of such platforms – from
social media to search engines and file storage – into a decentralised form, where the user
data cannot be maliciously converted into profits for the intermediary platforms.

There is a further range of benefits tokens provide for blockchain startups: they are an
innovative channel for financing and can function as an “internal currency” of the
ecosystems [7]. Also, due to their decentralised nature, tokens enabled the creation of a
novel organisational form - decentralised autonomous organisations (DAOs), which are
entities that are led almost entirely by self-executive predefined rules or algorithms that

12
are called smart contracts [8]. Tokens provide the foundation for the governance
mechanisms of DAOs by enabling token-based voting when changes need to be made to
these smart contracts. Most importantly, tokens can align the interest of various
stakeholder groups in a blockchain ecosystem, as the value of the token is tied to the
inherent value-add of the ecosystem itself [6].

The wide range of token functionalities, however, brings about the need for careful
tokenomic design - a claim supported by a range of academic literature. Developers often
do not fully comprehend the incentive structures they are setting up for the users of
blockchain systems, as well as how the incentivisation may backfire in the emergence of
unexpected market events [9]. For example, an ill-reasoned use of combined token
functionalities - asset and payment tokens - can hinder the growth of token ecosystems
[10]. Also, excessive token liquidity decreases a token economy’s market capitalisation
in relation to future profits, setting a limit on financing [11]. Sockin & Xiong [12] warn
against a token price collapse - a situation where there is no such equilibrium price that
would match the token supply with the demand, commonly caused by speculation.

One of the largest empirical examples of poor tokenomic design is the collapse of Luna
and TerraUSD tokens in 2022, causing thousands of stakeholders to lose their investments
[13]. Many more blockchain collapses during the year were caused by the excessive
accumulation of risk within the cryptocurrency ecosystem [9]. That is, inadequate risk
management frequently coincided with poor product design, whereby tokens were created
in a manner that left them vulnerable to significant losses when unexpected events
occurred. In 2022, a lot of digital asset initiatives and token releases continued to cause
damage to individuals who used them and those who bought the tokens [14]. Often, these
individuals ended up with worthless tokens after an initial period of success.

1.1 Aim of the Thesis

Considering the challenges and importance of designing a token economy, the objective
of this thesis is to propose a design artefact that offers a step-by-step guide for
practitioners in establishing the fundamentals of a sustainable token economy. To this
end, existing literature is examined to identify overlapping methodologies and theories
regarding token economy design and is iterated towards an effective design artefact. The
use-case to aid the search process for effective design principles is Currynomics – a token

13
ecosystem that is developing a stablecoin (the Redcurry token) pegged to the Net Asset
Value (NAV) of an underlying commercial real estate (CRE) portfolio. The business
environment describing the goals of the Currynomics ecosystem can be accessed via its
publicly available documentation [15]. Finally, the artefact is evaluated via 1) a case study
by assessing the real-life practicality of the proposed design guidelines when employed
by the Currynomics ecosystem, and 2) additional expert interviews. Thematic analysis is
applied to the semi-structured interviews held both in the case study and expert
interviews.

1.2 State of the Art

This chapter introduces the state-of-the-art literature regarding token economy design,
which can be categorised into three: 1) the incentive design of various token economy
stakeholders (described in Chapter 1.2.1), token economy governance (Chapter 1.2.2),
and tokenomics (Chapter 1.2.3). Lastly, Chapter 1.2.4 summarises the existing body of
knowledge.

1.2.1 Special Purpose Token Economy Design

A large part of the existing token design research is focused on special-purpose token
design cases: for example, [16] [17] in the industrial and [18] [19] [20] in the automotive
industry. Furthermore, Direr et al. [21] create an economic design for a Web3 game; Hou
et al. [22] establish a mechanism for a public voluntary carbon market while utilising a
dual token economic model; and Kim et al. [23] propose a model for token economics
that can be implemented within the Insolar business network. The closest study to propose
a step-by-step guidebook for token economy design is by Kim & Chung [24], who analyse
a tokenised social network Steemit and suggest an 8-step design flow for ensuring a
successful initial coin offering (ICO). The latter studies are, however, based on specific
use cases and are likely not helpful for building token economies in other fields.

Some of the special purpose design frameworks follow a DSR methodology: Ballandies
et al. [25] suggest a new methodology which combines DSR and value-sensitive design
to address cryptoeconomic design principles in light of the commons dilemma when an
ecosystem is designed with environmental sustainability as one of the underlying values.
The proposed methodology and resulting design framework are nevertheless mainly
derived from only technical details regarding distributed ledger and consensus

14
mechanisms. Aistov et al. [5] take the narrow definition of a token economy as a financing
method for decentralised platforms that include the use of bonding curves. They propose
the following design aspects to specify in a token economy: 1) token function, 2)
consensus mechanism, 3) the number of token types, 4) use of primary or secondary
marketplaces, and 5) the type of the bonding curve. However, the research leaves aside
scenarios where the adoption of a bonding curve mechanism is not necessary.

An earlier paper addressing token economy design using a DSR approach is by

Hülsemann & Tumasjan [26], who develop an agent-based model for determining and
testing the effect of different token types on user incentives to join prediction markets.
Their key research questions, however, revolve around selecting an optimal token type
for fostering user adoption and retention and are thus not linked to other aspects of token
economy design such as governance and tokenomics. Moreover, the proposed artefact is
a model which practitioners can use to test the effect of token design on user behaviour
pre-launch but does not provide guidelines for the design process itself.

1.2.2 Theoretical Frameworks of Token Economies

Another larger block of existing literature features theoretical frameworks regarding

token economy design. Benedetti et al. [27] examine typical tokenomic designs, explore
various regulatory approaches, and showcase current applications of utility tokens in
decentralised platforms such as decentralised finance and virtual reality platforms. Lage
et al. [28] provide a comprehensive analysis of the fundamental characteristics of
decentralised platform models based on blockchain technology. Khamisa [6] suggests a
theoretical structure for token economy design, which includes defining economic goals,
token design, and establishing appropriate governance mechanisms.

A more extensive theoretical concept for designing a token economy is suggested by

Barrera & Hurder [29], who borrow most of the insights from economic theory. They
introduce the House Framework (see Figure 1), which is a framework aimed at blockchain
economic design. It consists of five layers, where each one is foundational to the one
above it: 1) value proposition, 2) financing, 3) incentives, 4) token design, and 5)
governance. The incentive and token layers are highlighted and considered the key
components. Nevertheless, Barrera & Hurder bring out only a few design choices
regarding each layer and sublayer, leaving a gap in the literature for a more thorough
explanation of how to navigate among the numerous design choices.

15
 Figure 1. The House Framework by Barrera & Hurder (2020)

Within the theoretical framework domain, several papers address token classification and
taxonomy. Freni et al. [30] map three broad channels through which tokens can add value
- technology, behaviour, and coordination. They also suggest three core aspects that need
to be assessed in designing a token economy - token characteristics, monetary policy, and
incentive mechanisms. Oliviera et al. [2] attempt to compile a universal guidebook on
token design based on a thorough literature review and 16 expert interviews. Tapscott
[31] defines and describes tokens as digital assets, the token taxonomy framework, as
well as benefits of shared token standards.

1.2.3 Token Economy Design Aspects

There exists literature that covers various aspects of token economy governance. Fritsch
et al. [32] undertake an empirical study of three significant DAO governance systems -
Compound, Uniswap, and ENS - and investigate the distribution of voting power within
these systems. Bena & Zhang [33] explore the decentralised governance of a token
economy, wherein users contribute to the ecosystem’s output and face varying costs that
are contingent on the type of technology utilized by the platform. Kiayas & Lazos [34]
provide a basis for evaluating governance procedures in blockchain systems. Similarly,
Liu et al. [35] propose a blockchain governance framework that provides a comprehensive
perspective on factors such as the degree of decentralisation, decision-making authority,
incentives, accountability, ecosystem, and legal and ethical obligations. Fernandez et al.
[36] employ an agent-based model to simulate and examine the concentration of voting

16
rights tokens following a fair token launch. Gazi & Sadhev [37] present a value-based
blockchain governance model and analysis that considers blockchain protocols as digital
commons, rather than public infrastructure, and Bersani [38] examines the distinctions
between governance tokens and securities from the perspective of investment contracts.
Mohan et al. [39] delve deeper into the challenges of Sybil attacks, plutocracy and
enabling the expression of preference intensity.

Another standalone topic that emerges from the literature is designing the incentive
system behind the tokens. Jürjens et al. [40] examine the impact of token design on
incentivisation within ecosystems that rely on decentralised ledger technology. They
present two use cases - supply chain management and personal data market. Guo et al.
[41] suggest a "dual incentive value-based" model that enhances the profitability of a
token economy in the business market. Liu et al. [42] investigate the effects of token
incentives on the competition between two decentralised exchange platforms – Sushiswap
and Uniswap. Liu et al. [4] examine Steemit's incentive mechanism and evaluate the effect
of the dual roles of social capital theory and psychological ownership theory on user
participation behaviour.

The third prominent category under token economy design revolves around tokenomics,
also referred to as token supply strategies or token monetary policy. Lommers et al. [43]
examine previous instances of airdrops and deliberate on the strategies for creating
effective airdrops. Similarly, Liu & Zhu [44] model the behaviour of greedy hackers
(Sybils) in token airdrops. Carvalho [45] compares the effects of tokenomics to the
foundational concepts in finance (shares, profits, dividends), and Lommers et al. [46]
elaborate on a valuation framework for DAOs. Gan et al. [47] examine the design process
for a successful ICO, specifically in the context of post-ICO income and limits on token
issuance caps. Kaal [14] examines the commonalities of projects that use “fair token
launches”, whereas Kaal et al. [48] evaluate existing asset valuation methods and their
limited application to digital assets. Kusmierz & Overko [49] analyse the wealth
distribution of the richest addresses in various cryptocurrencies. Allen et al. [50] apply
corporate finance theory to the practice of token burn and buyback mechanisms.

The most similar study to the thesis at hand is by Schubert et al. [3], who follow a DSR
methodology to develop a modular framework that guides the design of token use cases.
The framework consists of 1) environment modules, 2) token types and 3) a system

17
configurator. However, it only minimally handles the topic of designing token economy
tokenomics. In the system configurator, the authors bring out that a token supply can be
fixed/unlimited, burnable/non-burnable, have an expiry date/not, and list five options for
token distribution. The reader has no guidelines on how to decide between the options.
Token distribution, for example, is closely linked to governance if the tokens also have
voting power. As to governance, they list that decisions can be made on-chain / off-chain
and can be central / community-based. No steps are offered for the reader to determine
what is the best option for the ecosystem.

1.2.4 Summary of the State of the Art

The existing state of the art in token design can at large be categorised into three: 1)
studies specialising on niche use cases (e.g., industrials, gaming, carbon credits, and
social media) - some of them applying DSR methodology, 2) ones proposing theoretical
frameworks for token design and classification but no step-by-step guidelines 3) papers
discussing the important aspects of token economy in isolation: governance, token
incentive design, and tokenomics. As is also confirmed by Schubert et al. [3], there is a
lack of structured and holistic frameworks for developing token economies. Therefore, to
the best of the author’s knowledge, no scientific literature exists that proposes a step-by-
step wholesome token economy design framework which considers the aspects of
incentive design, governance and tokenomics.

1.3 Research Questions

Considering the research gap outlined above, the core research question this thesis aims
to answer is as follows:

RQ: How to design a sustainable token economy?

After analysing the state-of-the-art literature on the topic of token economy design, three
core domains stand out that make up a token economy: the incentive design of various
token economy stakeholders, token economy governance, and tokenomics. This is
supported by Khamisa [6], who states that designing a token economy needs a
“multidisciplinary” framework, where the core components are “stakeholder mapping”,
“governance mechanisms”, and “economic objectives”. Thus, the suggested token
economy design process in this thesis entails three components that form the three sub-

18
questions explained below. Since establishing clear incentive structures for the token
economy participants is a key step in the design of blockchain ecosystems, the first sub-
question is:

RQ1: How to design token economy incentive mechanisms?

For the token economy to adapt to the changes in the environment and its users’
preferences, changes must likely be made to the underlying protocol. A key aspect in
designing a token economy is thus to understand who, when and how can decide on
suggesting and implementing the changes to be made to the ecosystem. Governance is
heavily linked to the ecosystem’s incentive mechanisms (RQ1), in that the ability to
participate in the governance acts as an incentive mechanism in itself. Also, to coordinate
the participants to take part in token economy governance, it is necessary to establish
incentive mechanisms specific to governance. Thus, the second sub-question is:

RQ2: How to design token economy governance?

The last core component in designing a token economy is about understanding how and
when are the tokens issued. Tokenomics, the economics of the tokens in circulation, is
closely linked to incentive structures, as it directly influences all monetary incentive
rewards the ecosystem issues. Also, poor design of token distribution promotes harmful
speculative behaviour among individuals who want to benefit from token price
movement. Similarly, poor allocation of tokens that have voting rights can work against
the objectives set in the governance design. The third sub-question is therefore:

RQ3: How to design token economy tokenomics?

The remaining thesis is structured as follows: Chapter 2 introduces the necessary

definitions regarding the token economy as well as the thesis’ use case – the Currynomics
ecosystem. Chapter 3 elaborates on the steps to consider in laying a foundation for token
economy incentive structures. Chapter 4 goes into the details of how to design governance
mechanisms for the token economy. Chapter 5 provides guidelines on how to distribute
the tokens and manage the supply to guarantee token price long-term sustainability.
Chapter 6 evaluates the artefact by 1) applying a case study on the Currynomics
ecosystem and 2) conducting additional expert interviews. Lastly, Chapter 7 features the
conclusions of the study.

19
1.4 Research Methodology

This chapter elaborates on the methodology applied in this thesis. Chapter 1.4.1 defines
Design Science Research (DSR), and Chapter 1.4.2 explains the core guidelines when
applying DSR.

1.4.1 Design Science Research

The chosen methodology for this thesis is DSR, as the latter is well suited for socio-
technical systems such as a token economy [51]. DSR is described as an iterative search
process, where the aim is to create an artefact or design theory which would enable an
organisation to move from an actual to a desired state of operations. DSR aims to
contribute to the existing knowledge base by building and evaluating either an artefact or
a design theory that solves a real issue in the business environment.

The goal of the current thesis is to build and evaluate a novel artefact - a design process
for establishing the fundamentals of a token economy. The core structure of the artefact
is inspired by the House Framework [29] - a framework for blockchain economic design
introduced in Chapter 1.2.2. Similar to Khamisa [6], it distinguishes token incentives and
governance as separate crucial design domains. Freni et al. [30] also bring out that next
to token characteristics and incentive mechanisms, setting up token monetary policy is
another standalone design category. By synthesising these studies together with the rest
of the state-of-the-art literature, three key pillars for the current DSR artefact were
formed: incentive structures, governance, and tokenomics.

One of the key inputs for the DSR framework (see Figure 2) is the environmental
component that determines the key needs, shortcomings, and objectives of the
organisation under analysis. Identifying the organisational goals and resource constraints
helps to assure that the research outline has sufficient relevance in real life. For the
Currynomics ecosystem, the environment entails 1) the people (mainly the Users,
Investors and Community members), 2) the organisations (Partners, Currynomics Labs
OÜ, and Currynomics DAO), and 3) the technology - application protocols to
accommodate the Redcurry token and the DAO token. All three are introduced in detail
in Chapter 2.2.1 and Chapter 3.2.4. Combined, these three pillars of the environment
component determine the underlying business needs, which are then conveyed as one of
the key inputs for Information Systems (IS) research.

20
 Figure 2. IS Research Framework. Hevner et al. (2004)

The second key input of IS research is the applicable knowledge that can either take the
form of foundations or research methodologies. The former can be in the form of theories
or frameworks, while the latter represents key methodologies used for similar business
problems in the existing literature. Most of the existing theories and frameworks used in
this thesis were introduced in the state-of-the-art section (see Chapter 1.2). The
methodologies’ component includes the selection of relevant evaluation criteria for the
artefact, as well as semi-structured interviews together with thematic analysis that is
applied to the interview transcripts. To achieve rigour, it is the responsibility of the
researcher to study and apply the knowledge base diligently before applying it to the
business needs discovered in the environmental component.

1.4.2 Research Guidelines

Hevner et al. [51] propose seven DSR guidelines to instruct the researcher, whereas their
underlying standpoint is that the comprehension and knowledge of the problem at hand
are obtained during the creation and application of the artefact. In other words, DSR is
intrinsically a process of problem-solving. The seven guidelines are as follows:

1) Design as an Artefact. The outcome of a DSR study is an IT artefact which serves

as a practical solution for organisational problems. Thus, the artefact must be

21
 explicitly defined for it to be easily implemented in the respective business area.
Peffers et al. [52] distinguish between six types of artefacts that can be developed
via DSR:

• Construct - a concept or idea based on other concepts or arguments;

• Model - a simpler representation of real life using “a formal notation or

language”;

• Framework - a conceptual “meta-model”;

• Method - conceptual non-algorithmic guidelines that can be acted upon;

• Algorithm - guidelines that are specified using “formal logical instructions”;

• Instantiation - real-life hardware or software operational applications.

As the aim of this thesis is to create a step-by-step guidebook for practitioners, the
most applicable artefact type is in this case method, because the guidelines are
non-algorithmic and conceptual rather than representing ready-to-implement
software or algorithms.

2) Problem Relevance. It is important that the search process for designing the
artefact or design theory is to solve a relevant and unsolved business problem [51].
That said, the outcome of DSR needs to serve as a practical guideline to change
how an organisation operates. The underlying business problem is elaborated on
both in the Introduction (the importance of a comprehensive token economy
design) and in Chapter 2.2.2 (the premises for designing a token economy for the
Currynomics ecosystem).

3) Design Evaluation. As important as the development of theories and artefacts is

the evaluation of the latter [51]. The evaluation step in IS research stands in
rigorously highlighting the utility, quality and efficacy of a proposed artefact or
theory. A key input for applying the chosen evaluation methods is the information
about the business environment’s requirements and limitations. Secondly, the
evaluation process requires determining relevant metrics and reference data [51].
The IT artefact can then be evaluated regarding attributes such as functionality,

22
 soundness, efficiency, and suitability for the organisation. The description of the
chosen evaluation method and evaluation criteria for this thesis is elaborated in
Chapter 6.1.

4) Research Contributions. For a DSR to be successful, the researcher must clearly

outline how the developed artefact or design theory contributes to the existing
knowledge base regarding the existing state-of-the-art design artefacts,
foundations and/or methodologies [51]. At least one of the latter three must be
presented in the research. This thesis aims to contribute to the scientific literature
by being a first attempt at using DSR to develop step-by-step guidelines for token
economy design that simultaneously consider the aspects of token incentive
design, token economy governance and tokenomics.

5) Research Rigour. When applying the methodologies or foundations in the

existing knowledge base to the business needs of the chosen area, the process must
follow rigour [51]. That is, the details of the applicable knowledge must be studied
and understood properly before being included in the design of a theory or
artefact.

6) Design as a Search Process. DSR is in essence iterative, meaning that the exact
search process is often hard to govern fully [51]. The search process is here
initiated by carefully studying the documentation of the Currynomics ecosystem.
Then, relevant literature is assessed, and further information is inquired from
representatives of Currynomics for specifications if necessary.

7) Communication of Research. DSR must be introduced to audiences of both

managerial and technological backgrounds [51]. The latter requires enough level
of detail in the description of the artefact to apply it in the context of their
organisation. This way, the scientific contributions of the novel artefact can be
justified in real-life settings, and benefit organisations in the chosen space. More
than understanding the artefact itself, the audience must also comprehend the
evaluation process of the research - this ensures that the research is repeatable and
thus suitable as a building block for future research in IS.

23
2 Research Background

This chapter details the underlying assumptions that are necessary for comprehending the
rest of the thesis. Chapter 2.1 explains the building blocks of token economies, whereas
Chapter 2.2 describes the use-case of this thesis – the Currynomics ecosystem.

2.1 Building Blocks of Token Economies

This chapter introduces the presuppositions required for understanding Chapters 3-5: the
definition of a token (Chapter 2.1.1), existing token types (Chapter 2.1.2), and the
definition of a token economy (Chapter 2.1.3).

2.1.1 Token Definition

Santos et al. [1] define tokens as unchangeable digital records or representations of

contracts, which are redeemable either via traditional or cryptographic currencies.
Similarly, tokenisation can be defined as the “encapsulation” of value in units that can be
easily traded [30]. These units are also used to govern the system’s business model, as
well as to coordinate their holders’ actions and rewards associated with these actions.
Thus, the authors note that tokens can be defined along two dimensions: based on the
value the tokens represent, as well as token functionality. Tapscott [31] highlights the key
requirements a token must have (see Table 1) – a token must be representative, digital,
discrete, and authentic.

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 Table 1. Required token characteristics by Tapscott (2020)

Feature Description

Representative Token represents its holder’s right to an underlying asset or right.

Digital Token is issued on a blockchain and can be held in a cryptographic

wallet.

Discrete Tokens are countable and distinguishable among each other.

Authentic The originality of the token can be controlled via the blockchain.

2.1.2 Token Types

From a board perspective, there exist “protocol” and “application” tokens [53], or
synonymously, “native” and “on-chain” tokens [10]. Native tokens symbolise the core
value of a protocol - mainly transaction validation (e.g., Bitcoin and Ether). Application
or on-chain tokens, however, establish a new code layer of smart contracts on top of
protocol tokens for more specific functions such as facilitating ecosystem services and
products. Jürjens et al. [40] and Tapscott [31] refer to the native and on-chain tokens as
currencies and tokens, respectively. This thesis will adopt the simplified definition of
naming them both as tokens, albeit having different functionalities that are explained
below. Khamisa [6] sees tokens as intermediates between the “market layer” (where users
exchange tokens against the value created in or by the system) and the “ledger layer”,
where transaction settlement takes place. Following a socio-technological perspective,
the framework proposed in this study mainly considers guidelines regarding the design
of application tokens and leaves the purely technical aspects of protocol tokens (such as
transaction speed, token standards and custody options) for other lines of study in the
field.

ICO guidelines published by the Swiss Financial Market Supervisory Authority assign
different regulatory requirements for three different token categories [54]. Combining
these with the token classification in other studies [2] [6], three token categories and their
subcategories can be outlined:

25
1) Store of value tokens. Khamisa [6] suggests a broad category consisting of both
“medium of exchange” and “store of value tokens”, which can be further
categorized into three subgroups:

a. Cryptocurrencies. According to FINMA [54], cryptocurrencies serve the

simplest function of either value transfer or facilitating payments for the
acquisition of goods or services. Thus, they also fall under the regulation
of the Anti-Money Laundering Act. Drasch et al. [10] specify that such
payments are often made across different platforms rather than within one
token economy (as opposed to payment tokens described later).

b. Stablecoins. Stablecoins’ main function is to facilitate payments but with

an important property of reducing token price volatility [55]. By binding
its price to chosen underlying assets, typically fiat currencies, stablecoins
maintain a stable value about the latter [6]. For example, a single USD
Coin can be purchased at a price equal to the underlying asset, one US
dollar.

c. Crypto collectables. Due to their unique nature, crypto collectables suit

well for application in blockchain-based art and games and can be viewed
as both mediums of exchange as well as a store of value type of tokens [6].

2) Utility tokens. Utility tokens are commonly established for token economies built
based on an existing, native blockchain ecosystem [6]. With their original purpose
of upholding a community, utility tokens enable the holder to use the services or
products offered by the system [54] [56]. Utility tokens are the most innovative
type due to their multiple functions ranging from financial to governance aspects
[7]. For example, they can perform both as a means of payment [10] and as an
incentive reward for the holder’s work of verifying transactions. There are four
main classes of utility tokens:

a. Payment tokens. Payment tokens function as a blockchain ecosystem’s

internal payment mechanism [2]. Some token economies such as Ada,
Filecoin and Ethereum have chosen payment tokens as the only type of
tokens in the ecosystem with the purpose of establishing transactions
among users [57].

26
 b. Governance tokens. Governance tokens are for decentralising the
governance mechanism of a token economy, and therefore including the
user community in the development process of the ecosystem. In this
manner, companies can raise financing, while sustaining their autonomy
[1].

c. Discount tokens. These tokens are meant for granting their holder a
discount on the ecosystem’s services or products [6]. The discount serves
the role of allocating platform revenues to users, but it only activates if the
token holder uses the platform’s services. Discount tokens can both remain
valid or be invalidated (destroyed) after their usage. In the former case, the
applicable discount might even increase concerning the overall usage
growth of the ecosystem [58].

d. Work tokens. Work tokens enable the allocation of rights as to who is

eligible to perform work on the platform [6]. For example, in the Augur
prediction platform, staking a work token enables the users to contribute a
prediction. Oliviera et al. [2] see it differently and add that work tokens
are meant for rewarding users upon the completion of desirable behaviours
or actions.

3) Asset tokens. Asset tokens (also called security or investment tokens) represent
the holder's rights to dividends from the token economy’s future earnings and cash
flows. Asset tokens may also confer voting rights [56]. Therefore, asset tokens are
the most like traditional equity stakes or securities in general. For a token to
classify as an asset token, it must pass the Howey test, in which the presence of
key characteristics of securities is tested. Khamisa [6] further differentiates
between three types of asset tokens: tokenized physical assets, tokenized debt, and
tokenized equity, but the detailed consideration of these goes outside the scope of
this thesis.

2.1.3 Token Economy Definition

Freni et al. [30] propose an interesting parallel between economics and tokenomics,
according to which the former drives innovation by passively observing changes made to
the rules of an ecosystem. Tokenomics, however, follows an “active design” approach,

27
meaning that the behaviour of the agents is from the very start aligned and guided towards
a common goal. It follows naturally that the following definitions of the token economy
include incentive mechanism design as the core component.

Guo et al. [41] define the token economy as a “complex system of reinforcement”, which
provides a means of exchange for the system’s users for redeeming different products and
services. For Khamisa [6], a decentralised token economy resembles a complicated token
system in which the behaviour (e.g., transactions) of individual actors is incentivised with
tokens to strive towards a common goal. Kim & Chung [24] add that the token economy
represents a “management system” which directs the participants to apply a desirable
behaviour via the use of tokens that are exchangeable for goods provided by the system.
Similarly, Kim et al. [23] describe token economics as a study of establishing incentive
and governance mechanisms for cryptocurrencies. Kang and Park [59] see a token
economy as a fundamental aspect of a blockchain-based project that encompasses a range
of factors, including monetary policies, service models, and interactions between agents.

2.2 Use-Case Problem

This chapter explains the use-case that is the subject of the case study applied in this
thesis. Chapter 2.2.1 describes the overall functioning of the Currynomics ecosystem, and
Chapter 2.2.2 elaborates on the more exact premises that are crucial when designing a
token economy for the Currynomics ecosystem.

2.2.1 The Currynomics Ecosystem

In this thesis, the design artefact is evaluated using the Currynomics ecosystem as a
practical example. Currynomics is a decentralised blockchain ecosystem that links the
value of its stablecoin (the Redcurry token) to the Net Asset Value (NAV) of a
commercial real estate portfolio (CRE) [15]. The creation of the Redcurry token is
inspired by the common problem among stablecoins that the token holders can never truly
trust the validity of a token’s underlying assets. That is, the shortfall risk is largely tied to
the capability of the ecosystem to maintain the currency peg. Redcurry token, however,
represents the value of the CRE portfolio and self-sustainably maintains the peg.

By representing a means of payment and store of value, Redcurry resembles other

stablecoins such as USDT but with the difference that the supply of Redcurry is not fixed

28
[15]. Moreover, the currency is special in the sense that it is not a mere asset token - the
holders of Redcurry tokens have no rights to the underlying property. Instead, the system
“truly commodities” real estate: the financial gains from the assets owned by the
ecosystem are reinvested back into the system. This way, Redcurry acts as a bridge
through which money moves from the traditional economy into the crypto economy.

The Currynomics ecosystem consists of various entities. Redcurry tokens are issued by
Redcurry Holding, a legal body that is in turn owned by the Currinomics Foundation [15].
The former then uses the funds from token purchases to buy real estate by establishing
subsidiaries for each real estate object separately (see Figure 3), where the solid line
arrows refer to the cash movement direction). The real estate portfolio will then generate
recurring revenue through rent payments and real estate sales. These proceeds will be
redirected into purchasing further real estate objects, ensuring that the portfolio will
continuously increase in value. To ensure that the portfolio value will be solely used to
back the Redcurry token, no money must exit the holding (e.g., via dividends). Should
the real estate portfolio be sold, the sales proceeds are equal to the capital used to buy
back all Redcurry tokens. From a legal perspective, this is largely guaranteed by having
the Currinomics Foundation registered as a non-profit foundation and the sole owner of
Redcurry Holding.

The Currynomics ecosystem is summarised in Figure 4. Marked in red are the core bodies
of the ecosystem – Redcurry Holding mints the Redcurry tokens, purchases real estate
into the CRE portfolio, and distributes the tokens to partners. Marked in orange are the
developers and maintainers of the ecosystem: Currynomics Labs OÜ provides
development, marketing, and management services, whereas Currynomics DAO is the
governing body of the token economy, which uses DAO tokens in its decision-making
operations. It needs to be noted that Currynomics DAO operates independently as a
decentralised organisation that is distinct from other mentioned legal entities.

29
 Figure 3. Redcurry portfolio generation and cash movement cycle

Figure 4. Stakeholder map of the Currynomics ecosystem

2.2.2 Premises for Currynomics Token Economy Design

The token economy that supports the functioning of the Redcurry token faces multiple
challenges stemming from the surrounding business environment. One of the most crucial
aspects is to understand the levers that build trust for the Users (Redcurry token holders)
to purchase the token and retain it in the long term, given that there are plenty of
investment alternatives outside the crypto economy that offer a similar value proposition
(e.g., real estate funds that follow a low-risk investing approach). The trust of the Users
is largely tied to the governing body that oversees the ecosystem. It poses a question of

30
whether (and how) it is sustainable to involve community members in the decision-
making process, as opposed to leaving governance only to the power of the project team.
Lastly, the creation of a governance token (the DAO token) requires careful consideration
of tokenomics: when, how and how many DAO tokens will be allocated.

3 Incentives

Chapter 3 gives insights into how a token economy designer should think of the
fundamentals in establishing token economy incentive mechanisms. After developing the
research questions in Chapter 3.1, Chapter 3.2 elaborates on determining a token
economy’s value proposition. Chapter 3.3 introduces the concept of defining desirable
behaviours among the ecosystem stakeholders, whereas Chapter 3.4 goes into the details
of selecting the exact incentive mechanisms. Chapter 3.5 concludes the core findings of
Chapter 3, together with its limitations and insights regarding future work.

3.1 Introduction

The importance of establishing clear incentive structures in a decentralised blockchain

ecosystem is highlighted by many [4] [6] [10] [40] [41] [60]. The most important
principles in incentive creation are to promote behaviours which satisfy the needs of the
maximum number of stakeholders, promote the token economy’s main goals, and
discourage “destructive” actions [6]. Guo et al. [41] add that incentive mechanisms ought
to motivate new users to join the ecosystem. Also, incentives encourage truthful
behaviour among participants in a competitive setting [40]. Thus, desirable token
incentive structures are ones that: 1) contribute to the fulfilment of token economy goals,
2) motivate users to act in the interest of the ecosystem, and 3) attract new users to join
the token economy. Chapter 3 aims to answer the following research question:

RQ1: How to design token economy incentive mechanisms?

31
Yoo [60] claims that it is crucial to define user groups who will benefit from the
ecosystem, including determining their participation rates and necessary reward
mechanisms. Therefore, the focus of this chapter is to guide the reader through three key
blocks that are necessary for designing token economy incentive structures: 1)
understanding the objectives of a token economy and its stakeholders, 2) identifying
which behaviours help to fulfil these objectives, and 3) which incentive mechanisms exist
to promote these desirable behaviours. Respectively, the sub-questions to be answered in
Chapter 3 are as follows:

RQ1.1 What determines a token economy’s value proposition?

RQ1.2 What are the desired behaviours in a token economy?

RQ1.3 What are the incentive mechanisms to apply in a token economy?

3.2 Token Economy Value Proposition

The first step in designing a token economy is to distinguish its goals, i.e., the problems
that the system is meant to solve [60]. Determining the value proposition of a token
system is an essential activity after validating the need for blockchain technology in the
first place [3]. Similarly, token economy design is about determining where tokens are to
be used, as well as how many use cases a token might have [7]. Barrera & Hurder [29]
emphasise that before other aspects of token economy design, one must establish the
system’s value proposition which consists mainly of 1) the ecosystem use cases, 2) its
key users, and 3) its strategy. They also warn that the goals must be consistent and in case
conflicts between the fulfilment of strategies occur, superiority among the goals must be
planned for in advance. Establishing a token economy value proposition can then be
broken down into understanding 1) token economy functions (Chapter 3.2.1) and 2) its
stakeholders (Chapter 3.2.3). Respectively, Chapters 3.2.2 and 3.2.4 apply these findings
on the Currynomics ecosystem.

3.2.1 Token Economy Functions

Blockchain ecosystems are meant to connect different stakeholders to create value based
on a shared set of resources [29]. Value creation can be in the form of the transfer of
goods, means of payment, asset status monitoring, enabling access to a specific

32
service/product, or voting [3]. Sockin & Xiong [12] add that the system value comes from
either 1) fulfilling transactions among a large set of users or 2) providing an investment
vehicle for both investors and users who do not demand such transactional functions.
From a financial perspective, a system’s value can stand in maintaining price stability (as
is common with stablecoins) or ensuring wealth protection against inflation [61]. Some
empirical examples include Bitcoin, whose core function is to create a decentralised
digital currency that can be used as a medium of exchange for goods and services without
relying on traditional financial institutions [62]. Also, Filecoin’s function is to provide a
decentralised file storage network to create a secure and cost-effective way to store and
retrieve data via a peer-to-peer network of nodes [63].

3.2.2 Functions of the Currynomics Token Economy

The core objectives of the Currynomics ecosystem are of financial type. The Redcurry
token, which is minted against the acquisition of real estate, serves the following financial
functions:

• a wealth protection/liquidity parking vehicle for savings;

• an investment vehicle, since the value of the Redcurry token grows hand in hand
with the appreciation of the real estate portfolio;

• a means of payment;

• loan collateral due to its price stability.

3.2.3 Stakeholder Mapping

Understanding users’ incentives to participate in the ecosystem is another crucial

component besides determining the goal of a token economy [6]. For this, the term
“stakeholder mapping” will be adopted in this study. Similarly, Ballandies et al. [25] state
that the main “design principles'' for a cryptoeconomic system are derived from studying
stakeholder values. Only then it is possible to establish incentive structures that induce
desirable stakeholder behaviour. For that matter, Kim et al. [23] introduce a useful
framework for mapping stakeholders with functions each stakeholder group awaits from
the token economy. It is important to note that stakeholder roles common to traditional
economics may overlap or be joined in the context of blockchain systems - e.g., a single

33
stakeholder might simultaneously hold the roles of an investor, user, and miner [7]. In the
case of many stakeholders, a recommendation is to divide them into clusters based on the
strength of their interests in the ecosystem to succeed or their capabilities of impacting
that success [25].

Davidson [64] distinguishes between three general stakeholder groups in a token

economy: maintainers, contributors, and users. Whereas maintainers have responsibility
for protocol creation and maintenance, contributors may do so voluntarily. Allen & Berg
[65] are more specific and bring out token holders, developers, founding team of the token
economy, miners or validators, and even indirect stakeholders such as the government,
venture capitalist investors and environmentalists (the latter might be concerned with the
environmental footprint of the blockchain). Token holders can also be distinguished based
on incentives into ones who hold the token for transactional purposes and others who are
expecting financial gains. For Voshmigr [66], the main stakeholder groups in distributed
ledger ecosystems are miners, developers, nodes, and the business environment (e.g.,
market makers). Liu et al. [35] differentiate between the project team, node operators,
users, application providers, and regulators.

3.2.4 Stakeholders in Currynomics

The stakeholders in the Currynomics ecosystem include Users, Partners, Developers,

Community, and Investors. Users are regular Redcurry token holders, who have
purchased the token for personal financial purposes. Partners represent licensed financial
institutions that purchase the token from Redcurry Holding and further distribute these to
the users for a transaction fee. The Developers are represented by Currynomics Labs OÜ
and provide development, marketing, and management services for the ecosystem.
Community refers to individuals (a likely subgroup of Users), who own Currynomics’
governance token (the DAO token). They contribute to the ecosystem development via
governance processes, in hope that the DAO token will appreciate in the future. The token
economy also has stakeholders who maintain the role of Investors. Partly, this role is
undertaken by Users, who purchase the Redcurry token to get exposure to the CRE
portfolio value appreciation. Another way to define investors are the individuals or
institutions who invest in Currynomics Labs OÜ to foster the development of the
ecosystem. The expected return on investment will result from the DAO token
appreciation. Lastly, it has to be noted that a single individual can simultaneously belong

34
to multiple stakeholder groups - e.g., one can purchase both the Redcurry token and the
DAO token, thus acting as a User, Community member and Investor.

Using the stakeholder mapping layout proposed by Kim et al. [23], the stakeholders of
the Currynomics ecosystem, together with their expectations from the token economy,
are summarised in Table 2. Since the focus of this chapter is on designing token incentive
structures, Table 2 also features a column to mark if a stakeholder group can be
incentivised via tokens, i.e., whether the entity is meant to be a token holder. For such
stakeholders, the design process continues in Chapter 3.3.

Table 2. Currynomics ecosystem stakeholders

Stakeholder Expectations from the token economy Can their behaviour be

motivated via tokens?
Users To use the product - a stable and secure
cryptocurrency that protects their Yes
investment against inflation
Developers
Receive fees for development,
(Currynomics No
marketing, and management activities
Labs OÜ)
Community A sustainably growing ecosystem Yes
Partners Receive transaction fees No
Investors Redcurry token / DAO token price
Yes
appreciation

3.3 Defining Desirable Behaviours

In an effective token economy, users act not only in the interest of themselves but think
about increasing the ecosystem quality as a whole [6] [67]. Khamisa [6] names this
phenomenon the “token-network fit”, which means that the stakeholders’ incentives are
aligned to act in the best interest of the system. This is supported by Yoo [60] who
explains that a desirable behaviour stimulated by the token does not stem from ethical
principles but is solely determined by whether an action in the long term adds economic
value to the platform. Yoo [60] and Kang & Park [59] claim that the most desirable
behaviour is for the users to be part of the ecosystem over a long-term period. Kim &

35
Chung [24] explain that in the case of long-term token retention, token supply will
gradually decrease, leading to a token price increase. They add that long-term token
retention will also decrease undesired token price velocity, and price stability will in turn
make holding the token for longer periods more attractive. Nevertheless, holding a token
for too long might affect its transactional volume [24].

On a broad scale, a token holder can take three main actions: 1) holding the token, 2)
selling the token, and 3) spending the token in exchange for the token economy’s services
or products [30] [60]. If the token economy goal is to maintain a cryptocurrency, the most
desirable action is for the users to hold the token, proving that the users have trust in the
ecosystem [60]. Selling a token, however, signal low trust and long-term demand for the
token. Following the approach by Yoo [60], it is good to understand if the desirability of
these actions can change at the time of token launch and post-launch, or in other words,
in the short-term and long-term perspective. The desirable behaviours of the stakeholders
in the Currynomics ecosystem are identified in Chapter 3.3.1.

3.3.1 Desirable Behaviours in Currynomics

Table 3 summarises the desirable behaviours of each stakeholder group in the

Currynomics ecosystem whose behaviour can be influenced via tokens. Since the
Redcurry token does not have any other purpose than being a store of value, the most
desirable behaviour for its holders, Users, is to hold the token as long as possible. Another
option for the user is to trade the token – an undesirable action in the starting phase, where
token liquidity is low and the CRE portfolio is relatively small. However, in the later
phases, trading the Redcurry token is more of a neutral activity, as long as the trading
does not take place below the market price, which is an undesirable behaviour. As to the
Community stakeholder group, it is best if the individuals are active participants in
community discussions, and do not become passive DAO token holders. Investors are
expected to provide liquidity for the development activities via purchasing and holding
the DAO token.

36
 Table 3. Currynomics ecosystem token holders and their desirable behaviours

Stakeholder Desirable behaviour

Users Purchase Redcurry token and hold it long-term. Trade the token
once ecosystem has reached sufficient liquidity. Do not trade
the token below fair market price.
Community Participate in community discussions, take part in the decision-
making process via the use of the DAO token.
Investors Provide liquidity for ecosystem development via purchasing
both the Redcurry and DAO tokens.

3.4 Selection of Incentive Mechanisms

Once stakeholders and their desirable behaviours have been mapped, it is possible to
establish incentive mechanisms for promoting the selected behaviours. The need for well-
planned incentive mechanisms is confirmed by many [4] [6] [10] [23] [42] [44] [68] [69].
According to [70], introducing a compensation system for platform users is one of the
most crucial features for a blockchain-based business model to excel. Without such
rewarding mechanisms, the platform’s token economy would become unsustainable -
after distributing the tokens only via token sales to investors, the only driver for the token
value growth would be inflation [60]. The most important principles in incentive creation
are to promote behaviours which satisfy the needs of the maximum number of
stakeholders, promote the token economy’s main goals, and discourage “destructive”
actions [6]. Kampakis [69] observes that most tokenomics practitioners are focused on
establishing incentive rewards for promoting desirable behaviour rather than penalties for
inhibiting undesirable behaviour.

Existing literature distinguishes two main types of incentives: monetary and non-
monetary [68], which are compared on a broader scale in Chapter 3.4.1. Respectively,
Chapters 3.4.2 and 3.4.3 look into the examples of both of them in more detail. Chapter
3.4.4 describes the incentive mechanisms in the Currynomics ecosystem.

3.4.1 Monetary and Non-monetary Incentive Mechanisms

Monetary incentives refer to mechanisms where individuals are rewarded for their actions
with tokens that can be redeemed for monetary value [30]. Kaal [71] adds that introducing

37
“commercial benefits” stimulates the usage of different services linked to the token, and
in turn the demand for the token. Also, the use of such benefits reduces the need for
implementing more stricter monetary policy measures such as “emergency” sales,
establishing token reserves, or adjusting the token’s total supply amount. Yoo [60],
however, challenges the concept of monetary rewards by claiming that the digital
economy operates fundamentally differently from traditional economies. In a traditional
economy, financial incentives typically foster better behaviour, but this might not be the
case in digital economies, where implementing only financial incentive mechanisms can
lead to an ecosystem failure. Liu et al. [42] add that monetary incentives may be effective
but also impose a greater cost for the ecosystem.

Hülsemann & Tumasjan [26] study the effect of token types on incentives in blockchain-
based prediction markets and find that utility tokens provide the biggest trigger for people
to become long-term users of the system. For asset tokens, the opposite is true: holding a
token for the sake of future earnings potential is a weaker incentive compared to non-
monetary incentives provided by utility tokens. Similarly, Liu et al. [4] warn that in
community activities, economic incentives tend to promote user contribution quantity
rather than quality. Kaal [14] adds that incentive mechanisms should not only favour
short-term speculative users but also users with more long-term intentions, who are
participating in community discussions and voting procedures. Table 4 summarises these
observations by suggesting three main categories under which monetary and non-
monetary reward mechanisms can be compared: 1) type of behaviour, 2) timeframe of the
reward effects, and 3) budget requirements.

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 Table 4. Selection guide for monetary or non-monetary incentive mechanisms

Monetary incentives Non-monetary incentives

Type of Incentivise behaviours that are tied Effective for behaviours that are
behaviour to monetary outcomes; when the more social or community-oriented,
value created is easier to measure. such as participating in forums.

Timeframe More immediately tangible and More effective in motivating long-

hence more effective in motivating term participation in the ecosystem.
short-term behaviour.

Budget Can be costly, as they require the Can be less expensive to distribute.
and distribution of actual tokens or
resources other monetary rewards.

3.4.2 Types of Monetary Incentive Mechanisms

There is an increasing amount of literature focusing on monetary incentive mechanisms

in token economies [4] [21] [30] [42]. One example of such a mechanism is to offer token
rewards for actions such as contributing content or completing specific tasks. For
example, in Steemit - a blockchain-based social media platform - users are rewarded with
cryptocurrency for creating and curating content [24]. Another monetary incentive
mechanism is called staking, which is about users locking up their tokens to contribute
to the ecosystem’s operations, e.g., via performing specific tasks of work [30] [46].
Staking entails that the contributors have “skin in the game”, which makes them act more
in the interest of the token economy rather than themselves. Staking helps to secure the
token supply by reducing the likelihood of malicious actors attempting to compromise
the ecosystem. For example, Tezos – a decentralised blockchain platform – uses token
staking to secure the network and validate transactions [72]. Token holders can participate
in the consensus process by staking their tokens and earning rewards for their
contributions, incentivising long-term commitment to the Tezos ecosystem.

Liu et al. [42] introduce the mechanism of liquidity mining, a process where users can
earn tokens by providing liquidity to decentralised exchanges (DEXs) or other
decentralised finance (DeFi) protocols. Users can earn a portion of the transaction fees

39
generated on the platform in addition to the tokens they receive for providing liquidity.
Examples of token economies that offer liquidity mining include Uniswap and
Sushiswap. Fan et al. [73] specify that Sushiswap liquidity mining issues governance
tokens as the token reward. Direr et al. [21] criticise liquidity mining by warning against
a situation where the majority of liquidity miners may have no significant economic
interest in the platform and thus do not actively participate in the governance. They bring
an example of the Compound platform, where only 19% of the users retained above 1%
of the reward tokens received, selling the rest to the market. A possible mechanism to
reduce the short-term sell pressure would be to employ a ve-token model, which is
explained in Chapter 4.4.2.

Freni et al. [30] elaborate on monetary incentive mechanisms that are not tied to receiving
additional tokens – token holders can also be motivated by getting a share of the
ecosystem’s revenues and dividends, or simply by the appreciation potential of the
token price. If the token holder believes in the token economy growth, the potential gain
from token price appreciation might eventually exceed the utility of actually using the
ecosystem’s products or services [10].

3.4.3 Types of Non-monetary Reward Mechanisms

Freni et al. [30] list three types of non-monetary incentives for the token economy users
to engage with the ecosystem. A straightforward example that attracts users to the token
economy is to get access to the products or services. Secondly, Freni et al. [30] mention
reputational gains. Reputation is a non-monetary incentive mechanism that can be used
in blockchain-based token economies to incentivise positive behaviour and discourage
negative behaviour. By assigning reputation scores to users based on their contributions
to the network, individuals are incentivised to maintain a positive reputation and engage
in behaviours that benefit the network. Thirdly, users can be incentivised via being able
to participate in the governance of the token economy [61] – they can have a say in the
direction and development of the network. Such governance rights incentivise users to
hold the tokens as opposed to selling the latter on exchanges.

Network effects can also be considered as an incentive to participate in the token

economy [24]. The value of a network often increases as more users participate, which
can incentivise new users to join and contribute to the network. Ballandies [74] suggests
gamification as another non-monetary incentive mechanism. As an example, Steemit’s

40
users can earn token rewards for creating and curating high-quality content on the social
media platform [24]. The rewards are distributed based on the popularity and engagement
of the content, which encourages users to create and share content that is valuable and
engaging. The competitive element makes it a non-monetary incentive besides merely
receiving tokens as a reward.

3.4.4 Incentive Mechanisms in Currynomics

As the Redcurry token follows solely financial objectives, it is reasonable that Redcurry
token holders (Users) are motivated by monetary incentive mechanisms, more
specifically, gains from potential Redcurry token price increases. The DAO token,
however, serves the core purpose of incentivising community members to take part in
governance. As it has a community-engagement component, participation in governance
should be incentivised by non-monetary mechanisms, such as reputational gains. This is
especially relevant for the Currynomics ecosystem, as a high degree of trust and
collaboration is required among participants. Of course, participation in governance itself
serves as a (non-monetary) incentive mechanism to engage in community discussions.
Lastly, the fact that DAO tokens can also appreciate in value serves as a monetary
incentive mechanism for Investors.

The summarising goal model for designing token economy incentive mechanisms is
pictured in Figure 5, whereas the legend for understanding the goal models in this thesis
is presented in Table 5. The token economy designer should first identify the stakeholders
and functions of the token economy (Steps 1 and 2). Provided that token economy
functions are matched with stakeholder expectations, these two components define token
economy utility. The latter is in turn needed to determine desirable behaviours (Step 3).
Only then it is possible to understand whether these behaviours are likely to be promoted
via monetary or non-monetary incentive mechanisms (Step 4). Lastly, specific incentive
mechanisms can be established (Step 5), whereas desirable mechanisms are ones that 1)
contribute to the fulfilment of token economy goals, 2) motivate users to act in the interest
of the ecosystem as a whole, and 3) attract new users to join the economy. The latter three
are defined as quality goals illustrated with a cloud shape – i.e., a set of criteria that must
be met when establishing incentive mechanisms.

41
 Figure 5. Goal model for designing token economy incentive structures

Table 5. Legend for the goal model

Element Description Notation

Goal A particular situation or state of things
in the world that the stakeholders
desire to attain.
Quality goal A set of precise standards or criteria
that must be met in order to achieve a
broader goal.
Decomposition Relationship to illustrate the
connection between two distinct
goals, namely a higher-level or parent
goal and a lower-level or sub-goal.
Association Relationship used to connect a goal
with other related elements that aid in
defining or describing the goal.
Example A set of things that serve as an
example of goal outcome.

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3.5 Conclusion

The goal of Chapter 3 was to guide the reader in establishing incentive structures for a
token economy by answering the research question:

RQ1: How to design token economy incentive structures?

Literature suggests that laying a foundation for setting up incentive structures needs a
good understanding of the token economy’s value proposition – its stakeholders and the
core functions that the token economy is expected to perform. It is then possible to
understand the behaviours that are expected from the ecosystem stakeholders, and lastly,
the specific incentive mechanisms to induce such behaviours. The limitation of Chapter
3 is that it does not provide a technical guide on how one should build a token model to
support the incentives, e.g., the selection of token standards. Nor does it provide advice
from the legal perspective on which types of token properties to choose from so that no
unexpected tax or compliance liabilities would arise. Combining the design flow with
actionable steps in these two fields would be subject to future work. The answers to
RQ1.1, RQ1.2 and RQ1.3 are as follows:

RQ1.1 What is the value proposition of a token economy?

Understanding a token economy’s value proposition can be broken down into two aspects.
First, one must define the core functions of the token economy. For example, the
ecosystem can support the functioning of a digital currency, act as a social network or an
investment platform. The next step is to determine the ecosystem stakeholders together
with their roles and expectations in the token economy. For example, regular users are
most interested in using the core functions of the token economy, investors are looking
for financial gains, and community members want to feel good about contributing to the
development of something novel and beneficial for society. Only after understanding a
token economy’s core functions and stakeholders, it is possible to define which kind of
behaviours should be promoted among the stakeholders. It is important to note, however,
that the next step can only be applied to stakeholders whose behaviour can be influenced

43
via tokens (this would most likely exclude stakeholders such as regulators and the
development teams with no token allocation).

RQ1.2 What are the desired behaviours in a token economy?

On a broad scale, the token economy participants can involve in three types of actions: 1)
holding the token, 2) spending the token against the ecosystem’s products and services,
and 3) selling the token. In most token economies, holding the token or redeeming it
against the ecosystem’s services is the most popular choice. More specifically, desirable
behaviours can also include contributing to the development of the token economy,
participating in governance, and providing liquidity for the token economy’s treasury. As
described previously, each desirable behaviour is linked with one or more stakeholder
groups.

RQ1.3 What are the incentive mechanisms to apply in a token economy?

A token economy can employ monetary or non-monetary incentive mechanisms.

Whereas monetary incentive mechanisms are fit for behaviours linked to direct monetary
outcomes, non-monetary mechanisms are best for community-oriented projects.
Monetary incentive mechanisms (such as token-based rewards, liquidity mining, staking,
revenue sharing, dividend potential and token price appreciation) tend to be more costly
for the token economy to distribute. In comparison, non-monetary mechanisms (such as
getting access to the ecosystem’s product, participation in governance, reputation gain,
network effects and gamification) require less of the token economy’s monetary resources
to be employed. Monetary mechanisms tend to be more tangible and thus of short-term
value and are more efficient in ensuring the ecosystem’s profitability. Non-monetary
incentive mechanisms have a more long-term nature and are suitable for encouraging
community-driven discussions and thus fostering innovative developments within the
token economy. It needs to be noted, however, that a token economy needs not necessarily
use solely monetary or non-monetary mechanisms. Depending on the specific needs of
the ecosystem, a suitable blend of both types of mechanisms can be established.

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4 Governance

Chapter 4 covers the steps in designing token economy governance. After the introductory
Chapter 4.1, Chapter 4.2 discusses determining the optimal level of decentralisation in a
token economy. Chapter 4.3 extends the topic of whether a token economy ought to use
more on-chain or off-chain governance mechanisms. Chapter 4.4 goes into the details of
choosing exact voting mechanisms, and Chapter 4.5 concludes the findings from
academic literature about token economy governance design.

4.1 Introduction

Governance in the blockchain context revolves around mechanisms that allow

decentralised systems to evolve in time [75]. It is about enabling a blockchain system to
progress when exposed to changes in the environment and user preferences [29]. Without
a central decision-making body, as is inherent to decentralised systems, it is especially
critical to have a well-described process regarding governance. Allen & Berg [50] share
a similar viewpoint and see blockchain governance as a method through which
stakeholders can bargain about changes to be made to the system. To clarify, Chapter 4
focuses on token economy governance mechanisms. Consensus mechanisms for
transaction validation (e.g., proof of work and proof of stake concepts) include more
technical protocol-level design parameters that are out of the scope of this thesis.

The importance of governance design within a token economy is confirmed by many [76]
[77] [78]. Several decentralised token economies have substantial treasuries, such as
Uniswap's treasury of $4 billion, making it important to examine their governance
systems and how they come to decisions [32]. Given the unique designs of decentralised
governance systems and the amount of power they wield, it is crucial to determine who
holds the voting power and how are the actors incentivised in the decision-making
process. Voshmgir [66] compares token economies to nation-states and notes that the
latter have had ample time to develop and refine their governance structures over

45
centuries. Blockchain ecosystems, however, have only been in existence for a decade,
and numerous governance issues regarding protocol modifications remain unresolved.
Even though blockchain protocols can effectively replace extensive bureaucracies, they
are not equipped to handle the “unknown unknowns” in multi-party environments.
Similarly, Barrera & Hurder [29] see that governance stands for mechanisms used by the
community to update the system and agree on an operation plan in unexpected
circumstances. The core research question of Chapter 4 is the following:

RQ2: How to design token economy governance?

A large debate in blockchain governance is about whether a token economy can be fully
decentralised in all decision aspects [35], and it is thus one key step to consider when
designing token economy governance [79]. Some argue that there exist critical
governance areas which cannot be trusted in the hands of community decision-making,
as the governance can then come under attack [80]. Hence, the first sub-question is:

RQ2.1 What determines the extent of governance decentralisation?

Another significant discussion similar to the debate about decentralisation is about the
extent of “on-chain” and “off-chain” aspects employed under governance mechanisms
[3] [50] [75]. In other words, should a token economy be fully governed by the “rule of
code” or should more informal channels such as community forums be used in parallel?
The next sub-question is thus:

RQ2.2 What determines the use of on-chain and off-chain governance components?

Lastly, when suitable levels of decentralisation and on/off-chain governance have been
identified, one needs to set in place specific mechanisms as to how are the decisions
finalised. There are already several academic papers analysing the application of various
voting mechanisms. The respective sub-question is thus:

RQ2.3 What are the voting mechanisms for governance proposals?

The three sub-questions are answered in Chapters 4.2-4.4.

46
4.2 Governance Decentralisation

Decentralisation in token economy governance is about determining who has a say in the
governance processes and to what extent can they influence the outcome of the decision-
making in different governance areas [35]. This is supported by Barrera & Hurder [29],
who claim that the first two steps in designing blockchain governance are identifying the
governance areas and stakeholders. Similarly, Fan et al. [75] stress the importance of
determining the areas that the decision-making will cover. Chapter 4.2.1 brings examples
of potential governance areas in a token economy, and Chapter 4.2.2 does the same in the
context of the Currynomics ecosystem. Further, Chapter 4.2.3 elaborates on choosing the
optimal extent of decentralisation of governance, and Chapter 4.2.4 applies this to the
use-case.

4.2.1 Governance Areas

The areas subject to governance can vary based on the underlying design and goal of
blockchain-based systems. Governance decisions can be made regarding general changes
and updates to the protocol, ecosystem’s service or product development plans,
recruitment, management of token treasury, and changes to governance aspects
themselves [6]. Governance could also address aspects such as the activation of
emergency shutdown mode and distributing funds for infrastructure development [38], as
well as adjusting compensation plans [29]. Fritsch et al. [32] bring examples of areas such
as modifications to the protocol or the allocation of a project's treasury funds.

Mosley et al. [81] take a broader view and add that blockchain governance can also deal
with aspects common to traditional enterprises – e.g., questions related to brand,
marketing, and community engagement. They conducted a linear discriminant analysis
on the Dash ecosystem and determined that the most common categories for change
proposals included, for example, marketing, events, protocol development, projects, and
“crypto community outreach”. Rejiers et al. [82] claim that governance can cover areas
related to parties external to the ecosystem – e.g., legislation of the countries,
technological standards, and other binding contracts with chosen third parties.

4.2.2 Governance Areas in Currynomics

The four broad governance areas of the Currynomics ecosystem are as follows:

47
 • Treasury management: Decisions related to the allocation and management of
the DAO's treasury funds.

• Governance and Process: Decisions regarding the DAO's governance

structure, voting processes, community goals, and community sentiment
towards proposals.

• Protocol Upgrades: Decisions regarding the implementation of system

upgrades, adjustments to global and treasury-specific parameters in the protocol,
and replacement of modular smart contracts in the DAO protocol.

• Tokenomics: Decisions related to the design of tokenomics.

4.2.3 Governance Decentralisation

After determining the governance areas, a token economy designer should identify if
some of the areas can be decided upon in a more or less decentralised manner. In a
comprehensive token economy governance design framework, Liu et al. [35] suggest
determining the degree of decentralisation for the governance processes. Based on their
observations, three broad types of token economies can be identified:

• Private and centralised ecosystems such as enterprise blockchain applications

have the least amount of decentralisation when compared to the other two types
[35]. Access to the token economy is limited to specific entities, and there is a
clear hierarchy structure between its stakeholders. In other words, participation
in the token economy or the ability to use the tokens is granted by a trusted entity,
such as a corporation or another governing body, which ensures greater security
and control in the ecosystem. The governance of permissioned private
ecosystems is less demanding than the other types, as decisions are made by the
top entities in the internal hierarchy.

Barrera & Hurder [29] confirm that a centralised board or committee is likely to
be a rather time-efficient governance format. Also, there is a higher probability
that the individuals who decide on the change implementation possess the
necessary expertise for decision-making. Similarly, Davidson [64] notes that in
the earlier phases of a token economy, the main decision-making power is in all
cases likely to be concentrated in the hands of the management, who as a small

48
 group are likely to agree on conclusive outcomes faster when compared to bigger
collectives. A logical downside of this approach, however, is that it does not
consider the opinions of other ecosystem participants. Rejiers et al. [82] warn
against the problem of “personal sovereignty”, which happens when one or a
few prominent individuals in the committee continue to have a disproportionate
influence on the decision-making outcomes. With such excess centralisation, the
majority of the token users are held back from governance, resulting in slower
technological progress and decreased innovation [75]. Biancotti [9] claims that
the concentration of power is one of the core risks of DAOs.

• Public and centralised token economies differ from centralised ecosystems in

that the token economy is accessible to anyone who meets the permission criteria
set by the governing authority. Thus, like in centralised private blockchains,
identity verification is required for participation. Logically, a good example of
public and centralised token economies could be ones that issue government-
backed digital currencies, as the centralised nature enables control of the
ecosystem’s compliance with laws and regulations.

• Public and decentralised ecosystems differ from centralised blockchains in that

there are no pre-set privileged stakeholders and entry to the token economy is
open to all entities [35]. These ecosystems are typically not controlled by a single
entity but rather by a more resilient network of users who collectively manage
the system – also named as DAOs [32]. Such openness and transparency may,
however, result in higher complexity of governance. Barrera & Hurder [29] and
Mosley et al. [81] warn that decentralised governance will not guarantee that all
participants have the respective knowledge for establishing a good judgement.
Also, a potential problem with user-wide voting is that it entails costs related to
information acquisition and blockchain transaction fees. Allen & Berg [50]
caution against allocating decision-power to too many stakeholders, as this
might unduly prioritise the interests of stakeholder groups that have less skin in
the game. Moreover, giving the control rights to the hands of other stakeholders
can help to mask the self-interested actions of the founding team - an idea
borrowed from traditional economic theory [83].

49
Whether a token economy should follow a more centralised structure or a decentralised
one is up to the specific requirements and use cases of the token economies. Table 6
summarises some core arguments on when is best to choose either of them:

Table 6. Use case comparison for centralisation and decentralisation

Centralised token economy Decentralised token economy

When a high level of regulation and When greater transparency is desired.

compliance with laws is desired.

When greater efficiency and speed is When resilience and independency from a
desired for larger volumes of transactions. central entity are desired.

When greater security and control are To foster innovation and invite a larger
critical. pool of contributors.

4.2.4 Decentralisation in Currynomics

There are some specific governance areas that the Currynomics ecosystem cannot trust in
the hands of community members. One example is making treasury decisions on the
Redcurry token, as the token issuance is operated by code and the reserve asset
composition is decided and controlled by a professional investment board. As another
example, the Users cannot directly control the board composition of the Currynomics
Foundation, whose purpose is to monitor the functioning of the whole ecosystem. There
are numerous governance areas, however, where the decision-making is indeed
decentralised and community members can voice their opinions. These are shown in
Table 7.

50
 Table 7. Centralised and decentralised governance areas in Currynomics

Centralised governance areas Decentralised governance areas

Decisions regarding Redcurry token DAO treasury decisions, including treasury-

reserve asset treasury specific parameters in the DAO protocol

Composition of the board of Global system parameters in the DAO

Currynomics Foundation, Redcurry protocol (transaction fees, pool sizes and
Holding, and other organisations in the pool distributions)
ecosystem
Community goals and targets; extent of on-
chain reporting

4.3 On-chain and Off-chain Governance

A major debate in blockchain governance design is about whether decision-making

should take place “on-chain” or “off-chain” [3] [50] [75], which is the subject of Chapter
4.3.1. Chapter 4.3.2 takes a look at the respective mechanisms in the Currynomics
ecosystem.

4.3.1 On-chain and Off-chain Governance Mechanisms

Rejiers et al. [82] explain that in on-chain governance, developers can suggest new blocks
of protocol code, which are then put up for a decentralised collective vote among selected
stakeholders. If agreed upon, the changes to the protocol are automatically executed via
smart contracts [82]. Thus, on-chain governance functions via the use of smart contracts
- fragments of code that are self-executive once pre-set rules or conditions are met [7]. In
other words, the decision-making is based on the “rule of code”. On-chain governance is
beneficial for its transparency, accountability, and inclusivity as the encoded consensus
mechanisms make it difficult to manipulate the votes, and all votes are recorded
immutably on the blockchain [34] [81]. The decentralisation characteristic, however,
makes on-chain governance subject to security risks such as 51% attacks, where a single
entity gains control of the majority of the network's decision-making power and can
manipulate the decision-making outcome for its own benefit [82]. It needs to be noted
that the latter is not specific to application level tokens but applies to protocol level tokens

51
as well. Lastly, on-chain governance also entails a lot of complexity in token economies
with sophisticated economic objectives and many different stakeholders [82], which
requires costly computational resources to execute the voting process [64].

Governance is considered “off-chain” when the decision-making takes place outside of

the protocol. In other words, more “informal” communication channels are used such as
social media or community forums [50]. Fritsch et al. [32] describe that in Uniswap's
governance process, an off-chain temperature check and a consensus check are
conducted, where a particular number of yes-votes is required for the proposal to move
into the next step – voting. Off-chain governance can be more cost-effective compared to
on-chain mechanisms since it does not require as many computational resources [64].
Buterin [80] adds that off-chain governance is better suited for native protocols such as
Ethereum, as it comes with greater security required for governance areas related to
transaction validation. That is, off-chain governance is less subject to hacker attacks as
described before in the case of on-chain governance. However, off-chain is the most
centralised form of governance as the majority of the decisions are made by a small group
of trusted contributors or core developers, which can be seen as one of the main
disadvantages of this approach [34].

At least in the near future, even the most decentralised blockchain ecosystems will need
to involve some off-chain components in their governance, as in many instances the
questions subject to governance are hard to foresee and thus fully integrate into the
protocol [29]. On-chain governance - such as other consensus-based mechanisms - may
fall victim to malicious actions [81]. If an envisaged “crisis governance” requires a
majority approval similar to the regular governance procedures, an attacker can in essence
hit two birds with one stone - hijacking the main governance while being able to refute
the defence mechanisms. Fan et al. [75] specify that this threat is amplified for token
systems with small initial market capitalisation and token supply circulation. It is
therefore suggested to implement a crisis governance mechanism off-chain.

4.3.2 On-chain and Off-chain Governance in Currynomics

The Currynomics ecosystem aims to have its governance processes as decentralised and
community-wide as possible. Hence, most of the governance areas described in Chapter
4.2.4 should be decided via using on-chain governance mechanisms so that the decision-

52
making is transparent and inclusive. The means of mitigating on-chain governance
security risks are analysed in more detail in Chapter 4.4.

Some off-chain governance areas such as identifying the most relevant proposals that
should be set up for a community-wide vote will, however, be decided off-chain. This
process is named as a “temperature check”, and it is held in the community forum. In the
event that the proposal successfully passes the temperature check, a key member will then
upload the proposal for a DAO vote on Snapshot. Having the temperature check off-chain
is reasonable, as the community members are able to express their views in more detailed
and complex ways that would be hard to accommodate on-chain.

4.4 Voting Mechanisms

The aim of this chapter is to guide the reader in understanding the desired properties of
voting mechanisms in a token economy (see Chapter 4.4.1) as well as the core types of
mechanisms employed by existing token economies (Chapter 4.4.2). It is then followed
by a discussion on additional support mechanisms that tackle the potential issues left
uncovered by the core voting mechanisms (Chapter 4.4.3). Chapter 4.4.4 explains the
selection of respective mechanisms in the Currynomics ecosystem.

4.4.1 Desired Voting Mechanism Properties

It has to be noted that no voting mechanism has so far demonstrated complete

effectiveness [34]. The voting mechanisms described in Chapter 4.4.2 are analysed based
on the following desired properties, which were developed by combining the overlapping
ideas in the literature:

1) Simplicity. The artefact developed in this thesis aims to follow the first principles
mindset by keeping the suggested mechanisms as simple as possible. In the
context of governance, this would mean creating decision-making procedures that
are not overly complicated and are thus easier to understand and implement.

2) Accountability. Governance participants need to have 'skin in the game' in order

to be accountable for their decisions [34]. This can come in the form of different
resources, such as committed tokens, time, or reputation, as explained later.

53
 3) Inclusivity. A good voting mechanism prevents the emergence of plutocracy,
where wealthier individuals have excessive influence on the decision-making
[39]. Inclusion refers to a mechanism where small stakeholders have equal
standing in terms of voting power regardless of their financial means.

4) Time efficiency. A voting mechanism should enable urgent reactions to decide

on time-sensitive governance areas [34].

5) Intensity of preferences. A good voting mechanism enables the expression of

strong preferences of the ecosystem participants [39]. Voters can have a larger
influence over decisions they are particularly interested in.

6) Security. A good voting mechanism prevents voter fraud through Sybil attacks,
where voters create several different identities to evade the voting procedure [39].

4.4.2 Core Voting Mechanisms

Literature suggests the following four core types of existing voting mechanisms:

• 1-token-1-vote (1t1v) is the simplest type of voting mechanism used in

blockchain governance that gives equal voting power to each token held by a
participant [39]. In this mechanism, the weight of a vote is directly proportional
to the number of tokens held by the voter - the more tokens a participant holds,
the more influence they have in the decision-making process. However, Buterin
[80] warns that the 1t1v model allows an individual to engage in vote
purchasing, which gives rise to plutocracy and thus low accountability. To
alleviate this, governance mechanisms can be used that do not rely on token
voting or where a single token grants the holder less than one unit of the voting
power. Similarly, Mohan et al. [39] note that achieving both Sybil resistance and
plutocracy resistance at the same time is a challenge when the voting system is
dependent on a single factor such as the number of tokens staked for voting. It
must be noted in advance, however, that including other factors such as time and
reputation does not rule out the possibility of Sybil attacks and plutocracy
entirely, which is why none of the voting mechanisms gets a full score in the
security dimension. Some of the most prominent alternatives to the 1t1v model
are outlined below.

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• Time-weighted voting. These mechanisms all share the characteristic that they
require a “time commitment” from the voters in order to keep them accountable
for their decision-making and alleviate the risk of plutocracy and Sybil attacks
[39]. Thus, such mechanisms are typically more complex than a simple 1t1v
model. Literature covers at least 3 types of time-weighted voting mechanisms:

a. Conviction voting is a mechanism where individuals convey their

preferences (votes) for specific proposals, and as they maintain their
preference for a proposal over time, their "conviction" in that proposal
increases [84]. In other words, as the duration of an individual’s token
stake on a particular proposal grows longer, the weight of their vote will
also increase. Individuals can change their preferences at any moment.
One can argue, however, that determining the most precise conviction of
the community requires a certain time period, which makes conviction
voting non-optimal for time-sensitive decisions.

b. Ve-token model or vote-escrow model is a voting procedure where users

can stake their regular ecosystem tokens for a specified period of time, and
in return, receive greater voting power in the form of ve-tokens [39]. The
ve-tokens received have a time-based "weight" that determines how much
voting power they give to the holder. The longer the ve-tokens are held,
the more weight they have, and the more governance power they will give
when voting on proposals [21]. Thus, the ve-token model incentivises
token holders to make thoughtful and informed decisions, as they are
required to make a long-term commitment to their vote. On the flip side,
the ve-token model might hinder efficient short-term decision-making for
matters that require a fast reaction. Compared to conviction voting, it is
also a more complex mechanism to set up and explain to the community.

c. Bond voting is a type of voting system where the voters can show the
strength of their preferences and increase their voting power by staking
(i.e., locking) their tokens in exchange for bonds [39]. In order to purchase
one vote, an individual must purchase a bond by staking a certain number
of tokens P for a certain length of time. The tokens are locked until the
bond expires, i.e., when the individual receives a refund of P tokens at the

55
 bond’s maturity date. Thus, bond voting is a “static” and irreversible
mechanism that requires voters to commit to a specific period of time at a
particular moment, and this commitment cannot be changed later on. This
mechanism may be less flexible than other voting mechanisms, as voters
are committed to their stake for a specific period of time.

• Reputation-weighted voting. Another rather complex alternative to 1t1v

mechanisms is to give the participants voting weight based on their reputation
[85]. This approach is used by Colony – a platform that enables the creation and
launch of DAOs [86]. In Colony, voting power is determined by members’
reputation - a numerical value associated with the members, reflecting their
contributions to the DAO and their expertise in specific domains. This value is
used to weigh members' votes on proposals related to their area of expertise.
Reputation is granted through peer evaluations of a member’s actions, ensuring
that individuals with proven expertise have greater voting power on relevant.
Reputation may be diminished due to lack of engagement, misconduct, or
generally negative actions. Thus, a likely disadvantage of reputation-weighted
voting is that it requires the setup of additional mechanisms for quantifying and
standardising user-generated value and expertise.

• Quadratic Voting is a mechanism that assigns a higher weight to the votes of

individuals who are particularly passionate about a particular issue [87]. Each
individual is given a certain number of voice credits, which they can use to vote
on different proposals [77]. However, the cost of each additional vote increases
quadratically, meaning that individuals who are particularly passionate about a
particular issue can allocate more of their credits to that issue. For example, with
a given budget of 10 votes, a user can cast 1 vote for one proposal and 3 votes
for another proposal. In total, this would cost the voter 12 + 32 = 10 credits. The
core benefit of quadratic voting is that it takes into account the strong preferences
of minority voters. Wright [87] adds that quadratic voting can even out the “weak
preferences” of a larger group of users with the strong inclinations of a smaller
group. Since the cost of votes increases quadratically, users are held accountable
by having to give away a large number of tokens for influencing the outcome of
the voting result.

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The summary of the four types of voting mechanisms and their relation to the desired
properties outlined in Chapter 4.4.1 are provided in Table 8, where: a full node indicates
that a voting mechanism fulfils the desired property, a half-filled node represents partial
fulfilment, and an empty node refers to weak fulfilment of the respective voting
mechanism property.

Table 8. Summary of voting mechanisms and their properties

Voting Simplicity Accountability Inclusivity Time Intensity of Security

mechanism efficiency preferences

1t1v

Time-
weighted

Reputation-
weighted

Quadratic
voting

Legend: - strong fulfilment - rather strong fulfilment - weak fulfilment

4.4.3 Support Mechanisms for Voting

There are several issues that the abovementioned voting mechanisms do not directly
tackle as the token economy matures. Thus, the artefact also equips the token economy
designer with additional modules that can be integrated into governance in later phases
when a need occurs. The issues and respective support mechanisms are described below:

• Inaction from decision fatigue occurs when there are too many proposals for
the participants to analyse. A way to alleviate this is to employ prediction
markets - a mechanism where individuals can buy and sell prediction shares
based on their belief about the likely outcome of a particular decision [8]. The
collective prediction outcome then helps to filter out proposals that are most
relevant. Another way is to use algorithmic pre-screening for the proposals [29].

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 • Inaction from rational ignorance can occur when decision-makers choose not
to gather the necessary information to make informed decisions [34]. This is
because the cost of acquiring the information outweighs the potential benefits.
A potential solution is to either provide a more efficient means of educating the
decision-makers [29] or to enable delegated voting. Delegate voting allows
token holders to delegate their voting power to trusted individuals or
organizations [32] [75] [88]. This can help to ensure that decisions are made by
knowledgeable individuals who have the best interests of the token economy in
mind. According to [75], vote delegation is beneficial as it maintains the
decentralisation of governance while turning the voting procedure more flexible.

• Sybil attacks can take place regardless of requiring the voters to contribute their
tokens, time, and reputation. To prevent Sybil attacks, a trusted identity
management system such as Proof of Personhood (PoP) can be employed [39].
These systems aim to verify the human behind an account by creating a unique
and singular identity system.

4.4.4 Voting in Currynomics

Out of the five core types of voting mechanisms, the time-weighted voting will be
employed in Currynomics DAO. The selection process first eliminated 1t1v as the least
innovative and useful voting mechanism. Reputation-weighted voting, however, comes
with too much complexity in setting up separate reputation evaluation mechanisms.
Quadratic voting has not yet been proven to give an advantage to the smaller stakeholders
in the ecosystem [77], so it needs to be better researched if the utility of this mechanism
is worth the complexity that comes with integrating and explaining the quadratic voting
mechanism to the community. Within the category of time-weighted voting, Currynomics
DAO will employ conviction voting as the simplest form, since simplicity is an important
characteristic for the ecosystem. As mentioned before, bond voting is a rather inflexible
mechanism, whereas ve-token model would require the setup of special-purpose ve-
tokens, which again would add unnecessary complexity to the governance processes.

The summary of the design steps created in Chapter 4 is presented in Figure 6. To

understand the optimal level of decentralisation in a token economy, one must first map
the areas that the governance has to deal with (Step 1), as well as the respective

58
stakeholders who can have a say with respect to each of the areas (Step 2). Once
decentralisation has been thought through (Step 3), it is possible to move closer to
identifying the specific mechanisms for governance procedures. This would start by first
analysing if the token economy should be more inclined towards on-chain or off-chain
mechanisms (Step 4). Before moving to the next step – the selection of exact voting
mechanisms, it is also necessary to determine what are the desired properties that a voting
mechanism should have (Step 5). After the selection of a suitable voting mechanism type,
a token economy might also need to establish additional support mechanisms to tackle
issues that might arise as the ecosystem matures (Step 7).

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Figure 6. Goal model for designing token economy governance

60
4.5 Conclusion

The goal of this chapter was to guide the reader through the steps one has to take in
establishing a governance structure for a token economy and answer the second core
research question:

RQ2: How to design token economy governance?

Similar to Chapter 3, the suggested governance design steps in this chapter are not linked
with technical specifications about best code-writing practices. Also, it is necessary to
analyse quantitative parameters for the voting mechanisms mentioned - for example, the
optimal duration and number of tokens to be locked in the ve-token model, and the
effectiveness of conviction voting in time-sensitive issues. The latter can be a subject for
future research. The answers to RQ2.1, RQ2.2 and RQ2.3 are as follows:

RQ2.1 What determines the extent of governance decentralisation?

Setting up a governance structure for a token economy starts by first determining the
stakeholders and their roles in the governance. This analysis is in turn divided into two
parts: identifying the areas subject to governance in the first place (e.g., decisions related
to general updates to the protocol, distribution of token economy treasury funds,
community, and marketing matters), and 2) deciding the level of decentralisation for each
governance area. As a final step, the stakeholder groups can be mapped with governance
areas where they can have a say.

RQ2.2 What determines the use of on-chain and off-chain governance

components?

It is very likely that a token economy will employ both on-chain and off-chain types of
governance mechanisms. There is an increasing amount of literature on on-chain
governance, the latter enabling greater transparency, accountability, and inclusivity since
every community member can audit the decision-making process. However, a fully on-
chain token economy governance is not viable, as there remain security risks (such as
exposure to 51% attacks) that no mechanism has yet managed to mitigate entirely. For
that matter, some suggest establishing “crisis mechanisms” that should stay off-chain,
away from manipulators who aim to hijack the governance via purchasing the majority

61
of the tokens or voting rights. Off-chain mechanisms also come with greater flexibility,
as the community members can express their thoughts in a free form either via real-life
or forum discussions. The resulting decisions might be too complex to be encoded into
the governance protocol. However, these benefits of off-chain governance mechanisms
come with the risk of excess centralisation, which is the opposite direction of the desired
innovation in decentralised blockchain projects.

RQ2.3 What are the voting mechanisms for governance proposals?

Selecting the most suitable voting mechanism starts with identifying what are the most
desired properties this voting mechanism should have. For instance, token economies that
are just about to launch may value the simplicity of the governance procedures. Similarly,
many communities might appreciate it if the decision-making takes place in a time-
efficient manner. Other properties include accountability, inclusivity of smaller
stakeholders, intensity of preferences, and security. Four main types of voting
mechanisms to choose from are 1t1v systems, time- or reputation-weighted voting, and
quadratic voting (or in other words, many-token-1-vote systems). As the literature
advances, it is likely that there are not many token economies that will employ the
simplest form of 1t1v voting mechanism due to its shortcomings in security, inclusivity,
and accountability. Lastly, there might occur a need for adding support methods for the
selected voting mechanism as the ecosystem matures. These methods are intended to
tackle issues such as community inaction (either due to decision fatigue or rational
ignorance), or Sybil attacks.

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5 Tokenomics

This chapter gives an overview of how a token economy designer ought to think of the
fundamentals of designing a token economy’s tokenomics. Firstly, Chapter 5.1 introduces
the development of the research questions. Chapter 5.2 answers the first sub-question
related to token issuance amount and timing; Chapter 5.3 answers the second sub-question
on token distribution mechanisms, and Chapter 5.4 focuses on the third sub-question
about ensuring token price sustainability. Lastly, Chapter 5.5 concludes the findings.

5.1 Introduction

Blockchain technologies have received the most attention for their technological issues
like consensus mechanisms. However, questions about cryptocurrency distribution and
tokenomics have been mostly neglected in academic research on cryptocurrencies [49].
The long-term viability of a blockchain ecosystem is greatly influenced by its tokenomics
– mechanisms which determine token supply and distribution, the incentives offered by
the token, and its utility [44]. Alternatively, tokenomics revolves around the “economy”
that is based on the ecosystem’s tokens [28]. Freni et al. [30] suggest that the token supply
structure - how and when are the tokens issued into circulation - acts as a summary of a
token economy’s monetary policy. Conley [89] brings out that next to game theory and
financial economics, applying monetary theory is a crucial aspect in the design of a token
economy. Poor tokenomics design is often the reason behind the failure of some of the
biggest ecosystem projects, e.g., the collapse of Luna and TerraUSD in early 2022. For
this reason, the aim of this chapter is to guide the token economy designer through the
steps and decisions that need to be made in designing tokenomics.

Good tokenomics is characterised as: 1) stable, for maintaining token price stability and
preventing excessive volatility [45]; 2) incentivising by providing motivation for users to
hold and use the token [61]; 3) sustainable by ensuring that the token price does not rely

63
solely on inflation [50]; and 4) adaptive to the business environment and user demand.
Given these qualities, the chapter aims to answer the following research questions:

RQ3: How to design token economy tokenomics?

According to the definition proposed by Kaal [71], monetary policies in blockchain

ecosystems stand for the relationships between token supply, token release and the
maximum number of tokens issued. Thus, the first two research questions are:

RQ3.1: What are the aspects of designing a token release schedule?

RQ3.2: What are the mechanisms for token distribution?

As tokens frequently experience significant fluctuations in price [48], it is necessary to

maintain token price sustainability post-launch. The research question is thus:

RQ3.3: What are the mechanisms for ensuring token price sustainability?

5.2 Token Issuance

An overlapping theme in the existing literature is that a token release schedule consists
of the number of tokens issued (see Chapter 5.2.1), and the timing of token issuance
(Chapter 5.2.2). Chapter 5.2.3 reflects on the token issuance amount and timing in the
Currynomics ecosystem.

5.2.1 Amount

Token issuance can follow either an inflationary or deflationary “valuation trajectory”

[48]. In the last years, there has been a rapid growth of inflationary token models - token
economies in which tokens will be gradually minted over time and no cap is implied on
the total token supply. The authors explain that an inflationary design permits the use of
mechanisms that provide stability by preventing undesirable token price volatility, which
is further elaborated in Chapter 5.4.2. As the value of tokens decreases over time, it is
likely that inflationary token issuance encourages spending in the token economy.

Kaal [71] adds that a gradual token issuance is similar to operating a fiat currency, which
brings about more flexibility in adjusting to the current market conditions. This is
supported by Conley [89], who claims that an effective token issuance design that

64
prevents “pump and dump” schemes must take into account the premise that the supply
of money has to grow hand in hand with the extent of economic activity - a feature of an
inflationary token economy. Also, Gan et al. [90] prove that this approach enables raising
more financing and gives the platform a better standing compared to having a capped
ICO. In the case of a capped ICO, a relatively larger part of future profits is likely to go
into the hands of speculators. According to [90], uncapped token issuance can dilute both
the investors' and founders’ token ownership, making the latter less incentivised to
develop the ecosystem.

In a deflationary model, the number of tokens to be ever issued is limited [90]. In an

analysis of 100 token economies, Kaal [71] finds that 72 of them have chosen to set a cap
on the total number of issued tokens. He suggests that such an issuance cap can induce
scarcity and have a positive effect on the token price. A deflationary token economy is
thus best suited for long-term store of value purposes - the limited supply can make the
token more attractive to investors who are looking for a hedge against inflation or a long-
term investment opportunity. As argued later in Chapter 5.4, however, scarcity does not
necessarily add to the underlying value of a token. Another aspect to consider is that once
the token supply is limited, token holders might start to “hoard” the tokens and decrease
the accessibility of tokens from other stakeholders who would gain value from the tokens
[48].

5.2.2 Timing

Based on [32], there are two main token release timing strategies for a token economy:

• Pre-launch token issuance involves distributing tokens before the project or

product is launched. Kaal [71] suggests a mechanism of establishing escrow
accounts, according to which tokens are stored on specific accounts before being
released for financing further project development. Importantly, it must be
ensured that the tokens held in escrow accounts will not be released at a
discounted price, in order to avoid a token price crash. According to [91], pre-
sales can be seen as a means to address the coordination failure that can arise in
an ICO due to what they refer to as a "same-side network effect." This refers to
a traditional network effect in which the value of using the token economy is
dependent on the presence of a sufficient number of other users. By preselling
tokens at a discounted rate, issuers can increase the chances of reaching the

65
 necessary level of participation, or critical mass, required to create value for all
users. However, as described in Chapter 5.4, token price is a function of token
demand. In the pre-launch period, the true token demand is unknown, and it
might be thus more challenging to determine the initial fair price of the token.

• Post-launch. Post-launch token issuance involves distributing tokens after the

project or product is launched. This entails either following a schedule-based
issuance or to mint tokens in accordance with the demand for the token.
Demand-driven issuance can help to ensure that token supply meets token
demand, which can support price stability and reduce volatility [71]. Thus, the
post-launch issuance approach can provide more flexibility and control over
token issuance, as the project team can adjust the token supply based on user
demand and market conditions. Post-launch token issuance can thus also help to
avoid over-supplying tokens, which can lead to price volatility and reduced user
adoption. However, if it is easy to generate initial user interest in pre-launch
token distribution, the opposite might be true for a post-launch scenario.

Kaal [14] also brings attention to a new promising type of token launch
mechanism - a “fair launch”, which is about launching a new token with no pre-
mine or pre-sale, ensuring that all tokens are distributed in a fair and
decentralised manner [14]. Thus, fair launches are good for establishing a truly
decentralised and community-driven token economy with high transparency.

5.2.3 Token Release Schedule in Currynomics

As the Redcurry token is printed in accordance with the real estate portfolio size, it does
not follow a strictly inflationary or deflationary valuation trajectory. However, the fact
that tokens are printed on demand refers to inflationary characteristics, which are good
for adjusting to the market conditions (e.g., the users can attempt to time the market after
assessing the attractiveness of investing in the real estate sector). Redcurry tokens cannot
be purchased pre-launch of the ecosystem, as the tokens require the acquisition of the real
estate portfolio, which can take place once the token economy is live and operating.

The DAO tokens, however, can be purchased before the launch of the ecosystem, which
will help to secure a critical mass of early interested users. The team does not see a
problem in the threat of over-supplying the DAO tokens, since the effective token supply

66
can later be adjusted with various mechanisms such as increasing the price for
participating in governance. The founding team of Currynomics has chosen that the DAO
token follows a deflationary valuation trajectory with a fixed cap for the token supply.
However, a deflationary token tends to induce scarcity and act as a long-term store of
value. Thus, it might decrease the willingness of the DAO token holders to spend it on
participating in the governance.

5.3 Token Distribution

According to [92], token distribution methods are in particular relevant for governance
tokens, as the latter determines the number of users who can exercise control over the
token economy. Chapter 5.3.1 elaborates on the most prominent distribution mechanisms
and Chapter 5.3.2 applies these in the context of Currynomics.

5.3.1 Private and public token distribution

There are several approaches as to what channels can be used for token distribution:

• Private sale involves selling tokens to a small group of investors before the
public sale, often at a discount [93]. Depending on the funding goals of the token
economy, a private sale may be a more appropriate option if the team is looking
to raise a significant amount of capital quickly. Also, this method can also be
beneficial if the token economy wants to maintain greater control over who holds
the tokens. For example, it might be good to attract strategic partners or investors
who can provide additional value beyond just the investment capital.

• Public sale is about selling tokens to the general public, for example via an ICO
[47] or Initial Exchange Offering (IEO) [30] [94]. Public sales can help to raise
funds for the project and provide early users with access to the tokens. Howell
et al. [93] add that collecting funds from customers through ICOs has the
potential to redistribute the profits gained from network growth from financial
intermediaries, like venture capitalists, to token economy developers and
consumers. Additionally, it can enhance brand recognition among customers and
offer the issuer an initial indication of demand. This has led some to view ICOs
as a way to democratise access to investment prospects in emerging enterprises

67
 [95]. Thus, a public sale may be better if the token economy is seeking to build
a larger community of supporters.

• Airdrop: This involves distributing tokens publicly for free to a large number
of users as a way to promote the project or increase adoption [43]. Liu & Zhu
[44] describe crypto airdrops as a market promotion strategy for startups and
new projects. Through airdrops, startups try to gain public awareness and emerge
victorious from the crowded market with thousands of tokens. Token holders
and users could boost the building of a community for the project, eventually
bringing a positive influence on token demand. Thus, airdrops can be used when
the token economy wants to create a large community of users and gain
awareness. However, if tokens were to be distributed via an airdrop, voting
power can go to the hands of token holders who might not be interested in voting
or do not possess the necessary expertise to take part in the decision-making
[64].

5.3.2 Token Distribution in Currynomics

The Redcurry token inherently requires that it is sold publicly, via licensed financial
institutions (Partners). Needless to say, a public sale helps to increase the demand for the
Redcurry token. The DAO token, however, is first distributed pre-launch in order to
reward early contributors such as developers (Currynomics Labs OÜ), who get 10% of
the token supply, advisors (2%) and founders & core team (10%). In the pre-launch phase,
the tokens are also sold privately - first via the Seed Sale (12%) to a selected group of
early-stage investors such as angel investors and venture capital firms at a significantly
discounted price; and later 10% to larger investors and strategic partners at a discount that
is lower than the one in the Seed Sale. In addition, there is a smaller public pre-sale (2%)
before the public sale, where tokens are offered to a broader audience. From the remaining
token pool, 14% is saved for liquidity purposes and 15% for future ecosystem incentives
such as paying bounties for bug discovery and rewards for community managers. Also,
another 15% is reserved for other rewards and marketing purposes (e.g., early birds can
receive more DAO tokens; Redcurry tokens can be staked to get more DAO tokens). The
last 10% is left for the general ecosystem reserve.

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5.4 Token Price Sustainability

Token price sustainability is a critical aspect of tokenomics that can impact the token's
long-term viability and user adoption. The sustainability of the token price depends
largely on the token's inherent value [50], which is further explained in Chapter 5.4.1. If
the token has a strong inherent value, it is more likely to maintain its price over time.
However, in light of the recent empirical examples of the large token economy collapses
in 2022, there is still a need for effective price management mechanisms to ensure that
the token price remains sustainable over time, even if the tokens have inherent value. The
latter is described in Chapter 5.4.2. Lastly, Chapter 5.4.3 illustrates token price
sustainability in the context of the Currynomics ecosystem.

5.4.1 Token Underlying Value

It is tempting to believe that tokens can have an intrinsic value in themselves, but this is
something that Allen et al. [50] and Kaal [71] argue against. Thus, to determine the real
underlying drivers of token value, it is helpful to bring a parallel to traditional corporate
finance where a company’s underlying value can originate from claims to its assets, future
earnings or voting rights [45]. Combining the findings in [30] [45] [71], these value
capture mechanisms for tokens can be of four types:

1) Governance rights. One of the most straightforward token designs belongs to

governance tokens, which have their value and utility thanks to enabling their
holder to participate in the ecosystem’s governance [45] [46].

2) Representing an asset. A token may gain its inherent value by representing a

claim to a real-world asset such as real estate, art, company stocks, commodities,
and other crypto assets [30] [71].Thus, the token price is closely tied to the value
of the respective real-life asset. A special case is stablecoins – tokens whose value
is tied to an external asset, typically a fiat currency, whose benefit is to reduce
token price volatility, as well as provide cost-efficient value transferring [48].

3) Value from the network. A token might also become valuable when the users
have built a high level of trust for the system and the utility that the system offers
[30] [71] - a concept similar to Metcalfe’s Law, according to which the value of a
network is relative to the square of the number of system participants [96]. For

69
 this type of value channel, the token price is heavily dependent on supply and
demand movements.

4) Claim to earnings. When a token acts as a share of the ecosystem’s earnings, its
value derivation is very similar to the one applied in traditional public stock
markets [30] [48]. The value of the work performed in the system is created by
third parties - but not token holders - meaning that the value is a representation of
expected future cash flows.

5.4.2 Price Management Mechanisms

By managing the token price, token economy designers can ensure that the token's value
proposition is sustainable. Without effective price management mechanisms, token prices
can be highly volatile, which can erode trust in the ecosystem and undermine its long-
term viability. Li & Mann [91] and Mayer [57] specifically warn against speculators -
investors who purchase tokens with the intent to gain a profit from the token value
appreciation, but without making any transactions on the platform. Therefore, speculators
are less concerned about the token price stability, making them more tolerant towards
risk-taking. There is no threat from speculators to platform usage in normal conditions,
as the platform has high transaction volume, and thus low volatility in the token price.
However, it is in the case of high volatility where a “crowding out” effect emerges.
Namely, high token price volatility discourages platform users from making transactions.
Consequently, the token value depreciates, which in turn attracts speculative investors
who gauge a good opportunity for making high-return investments. Therefore, token
possession is dominated by speculators rather than platform users. The activity of
speculators or “whales” is also more likely when the token launch has a small market
capitalisation and thus low market liquidity [14]. In order to avoid excess token price
volatility, the literature suggests 4 mechanisms for managing token price:

• Token Burns: Token burns refer to the process of permanently removing tokens
from circulation, which can reduce the token supply and create scarcity [50]. This
can increase the token's value and incentivise long-term holding, which can help
manage the token price. However, the authors emphasise that a mere manipulation
of the number of tokens in circulation does not increase the underlying value of
the token per se.

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 • Token Staking: As mentioned in earlier paragraphs, users can stake their tokens
to earn rewards in the form of additional tokens or transaction fees. As staked
tokens cannot be sold, there is a smaller downward pressure on the token price.
However, Lommers et al. [46] warn that staking reduces the token supply in
circulation, which can lead to increased demand and higher prices. If, however,
the stakers suddenly decide to sell their tokens, it can result in a sudden increase
in supply and a drop in prices. Too high staking yields can also disproportionately
attract speculative users.

• Token Buybacks: Token buybacks involve buying back tokens from the market,
which can reduce the token supply in circulation and create scarcity [45] [50]. A
token economy can use its accumulated earnings in its treasury to buy back its
own tokens, thereby decreasing the number of tokens in circulation and signalling
that the ecosystem has sufficient cash resources and does not resemble a Ponzi
scheme.

• Token Vesting: Token vesting involves releasing tokens to stakeholders over

time, rather than all at once [60] [91]. Thus, vesting can help to manage the token
price by preventing large amounts of tokens from flooding the market and causing
a price drop.

5.4.3 Token Price Sustainability in Currynomics

The underlying value of the Redcurry token is directly tied to real assets - namely, the
real estate portfolio against which each Redcurry token is minted. Such an arrangement
enables the Redcurry token holder to invest their savings in a low-risk manner while
gaining from the token price appreciation that reflects the growth of the underlying real
estate portfolio. Another underlying value channel is network value - the more Users that
have trusted their investments in the Redcurry token, the greater the trust among new
prospective Users to join the ecosystem. The underlying value of the DAO token stands
in 1) the ability to participate in governance, and 2) claims to earnings. The latter comes
from the fact that in the future, a part of the transaction fees can be indirectly redistributed
among DAO token holders via token price appreciation.

The Redcurry token has an inherent token buyback and burn mechanism (“price control”)
when a large enough proportion of the Users decides to sell their tokens. In other words,

71
if the Redcurry token demand decreases, so must the underlying supply (real estate
portfolio), in order to ensure that the real estate portfolio NAV is the same as the Redcurry
token market cap. Also, Users have the option to stake Redcurry tokens and receive DAO
tokens as a reward. When a certain amount of Redcurry tokens is staked, it helps to
maintain the token price at a stable level. For the DAO token, a token vesting mechanism
has been applied to avoid a scenario where early contributors cash out in a relatively short
time after the launch of the system. An indirect mechanism to sustain the DAO token
price comes from the selected voting mechanism. Namely, in conviction voting, users
must stake their DAO tokens for a selected time period to participate in the voting - the
longer the token is staked, the greater voting power is allocated. Similar to the staking
mechanism in Redcurry, this helps to decrease token price volatility. The Currynomics
development team is still considering whether it might be necessary to add more price
management mechanisms for the DAO token once the ecosystem becomes more mature.

The design flow for establishing tokenomics is summarised in Figure 7 and comprises of
two main parts, the first one being the design of the token release schedule. To establish
the token release schedule, one must first understand the number of tokens to release (Step
1), whether tokens will be allocated pre- or post-listing (Step 2), as well as if the token
release will be public or private (Step 3). The second core component of tokenomics is
about ensuring token price stability, which again comprises of two sub-goals: making
sure that the token(s) have an inherent value in themselves (Step 4) and establishing
suitable price management mechanisms (Step 5).

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Figure 7. Goal model for designing token economy tokenomics

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5.5 Conclusion

The aim of Chapter 5 was to lead the reader through the process of developing tokenomics
for a token economy and to answer the research question:

RQ3: How to design token economy tokenomics?

It must be noted that the chapter did not provide details on determining the quantitative
parameters such as the relations between token issuance cap, staking yield, and the extent
of decentralisation among token holders. Quantitative simulations can be open to
investigation in the future. The sub-questions answered in this chapter are as follows:

RQ3.1: What are the aspects of designing a token release schedule?

A token release schedule can be viewed in two main dimensions: the number of tokens
issued and the timing of the issuance. A token economy can set a cap on the total token
supply, which is referred to as a deflationary token economy. A deflationary trajectory is
good for inducing token scarcity in the ecosystem, which is why it is most suitable for
store of value tokens that have a long-term retention target. In contrast, an inflationary
token economy issues tokens without a pre-determined cap. When drawing a parallel from
traditional monetary policy, inflation promotes ecosystem participants to increase
spending, as the purchase value of the token decreases over time. Also, an inflationary
trajectory might be more effective in adjusting the token supply in accordance with the
market conditions.

The question of token issuance timing can also be divided into two. Pre-launch token
issuance helps to secure a critical mass of early interested users, but it might be harder to
price the token as there is no exact indication of true token demand. Post-launch token
issuance can help to avoid oversupplying tokens and enables fair token launches, but it
might be hard to attract more users since the initial promotion period of the token sale is
over.

RQ3.2: What are the mechanisms for token distribution?

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Tokens can be distributed mostly via two channels: private token sales and public token
sales. In the former, the timeline is likely to be shorter, and the tokens can be distributed
to a controlled group of users. Public sale on the other hand helps to create a wider user
base with potentially greater demand. A subcategory of public token distribution is the
airdrop method, which is about distributing tokens free of charge to users that are
interested in the token economy. This way, the user base can be even wider, as the
airdrops come with a significantly greater promotion effect.

RQ3.3: What are the mechanisms for ensuring token price sustainability?

The fundamental aspect of a sustainable token price is that the token has inherent value.
The token can either capture the value from the network effects, its governance rights,
and claims to potential financial earnings or the token can in a straightforward way
represent a real-life asset. Despite the token having an inherent value, the token price can
nevertheless be subject to token price volatility mostly due to speculators. To control the
token price, options include reducing the token supply via token burns or buybacks, or
incentivising users to hold the token for a longer period via token staking or establishing
vesting periods. The latter can also be fostered with the help of fair token launches as
explained in Chapter 5.2.2.

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6 Evaluation

This chapter presents an evaluation of the artefact that was constructed in Chapters 3-5.
Chapter 6.1 describes the selection process for suitable evaluation methods. Chapter 6.2
summarises the findings of the evaluation, which is followed by Chapter 6.3, where the
findings are discussed and linked with existing literature.

6.1 Methodology

Peffers et al. [97] have distinguished 8 types of methods that can be used in DSR
evaluation: 1) logical argument, 2) expert valuation, 3) technical experiment, 4) subject-
based experiment, 5) action research, 6) prototype, 7) case study, and 8) illustrative
scenario. They bring out that in IS journals, DSR studies whose aim is to provide an
artefact – such as the current thesis – most often select a case study as the evaluation
methodology. Hence, one of the evaluation methods for the design artefact in this study
is the case study method. However, as the case study object – the Currynomics ecosystem
– has not yet been launched at the time of writing this study, it is hard to fully assess
whether the developed design guidelines are fully effective based on real-world scenarios.
Hence, the case study method is supported by expert interviews, which are described
further in Chapter 6.1.2.

6.1.1 Case Study

A case study is an observational method of evaluation that is employed to examine the

designed artefact in detail within its intended business setting [98]. According to [99]
[100] [101], evaluation methods can be classified by asking three questions: how, why,
and when to evaluate. Respectively, evaluation methods can be either
artificial/naturalistic, ex-ante/ex-post or formative/summative. The case study method
used in this study follows the following attributes: 1) naturalistic, as the design artefact
is studied in the real-life business environment of Currynomics 2) ex-post, as the
evaluation is held after the application of the artefact on the use-case, and 3) summative -

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the aim of case study is to understand the design artefact in light of different contexts and,
in turn, determine which application types are most suitable for the artefact.

The case study process consists of two main activities, namely demonstration and
evaluation [102]. A demonstration is a simplified form of evaluation that exhibits how
the artefact can be used to solve a specific problem instance. The evaluation activity is
more formal and assesses the artefact's performance. The demonstration of how the
artefact is applied in the context of Currynomics has been provided in respective
subchapters throughout Chapters 3-5. For evaluation, two Currynomics representatives
with whom the demonstration was held are presented with questions regarding the five
qualitative evaluation criteria as outlined in Chapter 6.1.2 via semi-structured interviews
(see reference to the audio files in Appendix 2). The representatives are anonymised and
referred to as interviewees IN1 and IN2.

6.1.2 Expert Interviews

Expert interviews for DSR evaluation purposes are 1) artificial, as the artefact is studied
outside the business environment, 2) ex-ante, as the interviews take place prior to
applying the artefact on other cases than Currynomics, and 3) summative, similar to the
case study method. In artefact evaluation, interviews can be an effective research method
for eliciting expert opinions [103]. Interviews are a valuable means of gathering data by
obtaining insights from experts about their practices, beliefs, experiences, or viewpoints
[104]. The objective of conducting expert interviews in this thesis is to obtain information
about the artefact’s completeness, simplicity, understandability, and operational
feasibility – evaluation metrics that are popular in IS research where artefacts are
developed [102]. The selection of the four metrics was inspired by Pelt et al. [78], who
conducted a DSR study for developing a blockchain governance framework, which is
very similar to the aim of the current thesis, albeit having a narrower scope. According to
[102], the definition of the chosen metrics is as follows:

• Completeness - The extent to which the arrangement of the artefact includes all
essential components and associations among those components.
• Simplicity - The level at which the structure of the artefact incorporates the
minimal number of necessary components and connections among those
components.

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 • Understandability - The extent to which the artefact can be understood, both on a
broad scale and on a detailed level of the components and connections within the
artefact.
• Operational feasibility – The extent to which the proposed object will receive
backing and adoption from management, employees, and other stakeholders, as
well as be effectively utilised and incorporated into their daily operations.

Semi-structured interviews are utilised to gather comprehensive information in an

informal conversational format and allow the researcher to ask additional questions as
needed [104]. The interviews are then transcribed using online Transkriptor software1,
and thematic analysis is performed [105] using the coding function within the MAXQDA
software2. At the beginning of the interviews, the interviewees are informed about the
purpose of the study, the structure of the interview, and a request is presented to record
the interview. Then, in the first core part, the interviewees are introduced to the token
economy design framework and are able to express their opinions if they wish to comment
or elaborate on a specific design topic. In the second phase, the following questions are
asked to judge the artefact’s completeness, simplicity, understandability, and operational
feasibility:

1) How do you perceive the model’s completeness? Does it contain all the necessary
elements required to guide the reader through the first no-code steps in setting up
token economy incentive mechanisms, governance and tokenomics?
2) How would you comment on the model’s simplicity? Is it free from unnecessary
features and complexity?
3) How do you perceive the model’s understandability? Is the general model
structure as well as the details easily understandable for somebody with a no-code
background?
4) What are your thoughts on the model’s operational feasibility? Is it possible to
successfully integrate the model into the daily operations of designing the core
aspects of a token economy?

1
https://app.transkriptor.com/uploader
2
https://www.maxqda.com/

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When conducting thematic analysis, the need for considering an additional evaluation
metric emerged, namely accuracy - the level of concurrence between the results produced
by the object and the anticipated outcomes [102]. Specifically, accuracy refers to how
correctly are the details in the model explained to the reader.

The expert interviews utilise a purposive sampling method, which is about the deliberate
selection of participants based on their qualities [106]. The experts are sampled based on
the criterion that they possess significant knowledge and experience in the field of token
economy design, either via practical experience or academic work for at least a minimum
of three years. Purposive sampling provides benefits such as higher participant
willingness to participate and the ability to communicate experiences and opinions
effectively [106]. The aim of the expert interviews is not to generate results that could be
generalised to the entire population but to obtain meaningful feedback from experts
during the design process to gather further ideas for improving the artefact. In total, semi-
structured interviews are conducted with three experts (see reference to the audio files in
Appendix 2). To safeguard the confidentiality of the participants, they are anonymised as
IN3, IN4 and IN5. These identifiers will be utilised throughout this section to reference
the corresponding experts and their views. The subsequent sections will present the
findings from the case study and expert interviews.

6.2 Results

Table 9 summarises the results of the thematic analysis applied to all of the five interview
transcripts with regard to the five evaluation metrics – completeness, simplicity,
understandability, operational feasibility, and accuracy. The table highlights the number
of the most prominent comments related to each evaluation metric. All 55 comments
correspond to the respective thematic analysis code labels created in the MAXQDA
software, which are summarised in Figure 8 and discussed in detail in Chapter 6.3. The
number of supportive comments (in green in Figure 8) shows how many times the
evaluation characteristic was strongly supported in a comment. Neutral comments (in
yellow) neither support nor oppose the model but indicate that the interviewee wanted to
elaborate on the details and offer ideas for future research. Opposing comments (in red)
highlight the shortcomings of the model with regard to the respective evaluation metric.
The arrows in Figure 8 indicate that one code label is a sub-component of a larger code

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block. There are five key code blocks, each referring to one of the five evaluation metrics
mentioned before. If the same comment occurs multiple times, the code label is
supplemented with brackets which contain the number of instances.

Table 9. Summary of interview comments on model evaluation metrics

Evaluation metric Supporting Neutral Opposing

comments comments comments

Completeness 3 4 2
Simplicity 7 2 -
Understandability - 2 3
Operational feasibility 6 8 -
Accuracy 4 11 3

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Figure 8. Summary of the code labels in thematic analysis

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6.3 Discussion

This chapter analyses the most prominent comments obtained from the semi-structured
interviews, which were summarised in Table 9 and Figure 8. To make the transcript
excerpts clearer and more concise, the author has modified them while maintaining the
interviewee's original statement's authenticity. Chapter 6.3.1 takes a look at the findings
from the interviews with Currynomics representatives (IN1 & IN2) in light of the case
study demonstration phase and Chapter 6.3.2 summarises how the artefact helped the use-
case to move from an as-is state into a to-be state. Chapter 6.3.3 considers feedback from
three industry experts (IN3, IN4 & IN5), whereas both Chapter 6.3.1 and Chapter 6.3.3
go through the chosen five evaluation metrics – the model’s completeness, simplicity,
understandability, operational feasibility, and accuracy.

6.3.1 Case Study

Completeness. Regarding the model’s completeness from the point of view of designing
Currynomics, IN2 comments, “I think it covers pretty well the different possible
approaches and why something works and does not work for us.” He adds that the next
crucial step for Currynomics would be to run simulations to evaluate the chosen
mechanisms in governance (e.g., conviction voting) and tokenomics (e.g., capped DAO
token supply and monetary reward mechanisms). For this matter, [107] showcase and
analyse 18 different blockchain simulators and offer a comprehensive overview of the
pros and cons of each simulator.

In general, IN2 believes that the model covers everything that is necessary to understand
before starting to implement some project-specific tokenomics such as quantitative token
release parameters. He adds, “[The model] is more than I've seen somebody summarise
and make it understandable, so I think it is complete.” IN1 believes that the model could
be expanded by providing more details on token distribution both before and after token
generation events, together with the best practices for getting the token price right. Cong
et al. [108], for example, have developed a token economy model that helps to understand
the economics of staking and the impact it has on token pricing.

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Simplicity. As to simplicity, IN1 comments, “I wouldn't say [the model] is too complex.
It just takes a moment to grasp because [the topic] is complex. But I think visually
everything makes sense and covers the important aspects that need to be actually thought
through.” Similarly, IN2 sees that all three core blocks of the model cover aspects that
the Currynomics team has also been thinking about during the past year with the help of
various experts and advisors. For IN2, the model is a good “abstract” that covers a broad
range of relevant topics without unnecessary complexity. IN2 elaborates that he sees
complexity and simplicity as two sides of the same coin: the model’s complexity could
always be expanded, but that would affect the simplicity. Overall, he sees that the model’s
simplicity is rather optimal – there are some levels that require the reader to do some extra
research, but the fundamentals are provided by the model.

Understandability. Both IN1 and IN2 claim that the figures that summarise the model
should be complimented with a more comprehensive legend that explains the exact order
of how the three core aspects and the sub-goals should be followed. According to this
feedback, these changes were already incorporated into the model (see Figure 5, Figure 6
and Figure 7). Further, IN2 believes that regarding the model’s understandability, it is not
even a question if the token economy designer has prior coding experience. Rather, it is
important for the designer to understand social sciences, because designing a token
economy is largely about understanding the different behaviours of the ecosystem
participants. In this regard, he believes that the model also does manage to guide readers
who do not have a social sciences background, as it introduces new and important
terminology, especially in the governance chapter.

Operational feasibility. As to operational feasibility, IN1 comments, “I think [the

model] is super helpful. It helps to understand how everything comes together.” He adds
that from Currynomics’ point of view, it would add more value if it included guidance on
choosing the most optimal tech stack for DAO design. He understands, however, that the
technical details are outside of the scope of the current thesis and believes that the model
provides a good theoretical underpinning for token economy design. IN2 notes that given
the current scope of the thesis, it is definitely feasible to design a token economy based
on the model. Yet, whether the economic design will be successful is another question.
As mentioned before, IN2 suggests that quantitative modelling and testing are crucial
aspects to add to the model in the future to ensure that the token economy design will be
viable.

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Moreover, IN2 appreciates that every topic in the model has a good workflow but suggests
that it would be helpful to create a realistic timetable for implementing the theoretical
design developed with the help of the model. Interestingly, IN2 finds that the model helps
them to narrow down by determining the mechanisms and approaches that will not work
for the Currynomics ecosystem (coded as the “elimination method” in Figure 8). He
comments, “99% of the work, I would say, is just about understanding what is not for
you, and then going after the 1% is for understanding what works for you.” For making
the model more feasible, he suggests two additions: Firstly, the model could include a
pointer that informs the reader how long it will take to read the content. Similarly, the
chapters could include an estimate of how much time could it take for the practitioners to
develop an MVP of the respective design blocks of the token economy. Some aspects can
take a week, whereas some might require many months. Secondly, the reader could be
educated about the human resources and people skills that the token economy
development team must have, such as the requirement of having a code developer, an
economist, or simply creative people in the team. IN2 believes that the design could also
be put into place without code developers, but with at least a technical lead within the
team. The latter depends a lot on the blockchain that the token economy is based on –
applications based on Ethereum Virtual Machine allow for a slightly easier design.

Accuracy. The strongest comment about the model’s accuracy was put forward by IN1,
who feels that the benefits of having an inflationary token economy (see Chapter 5.2.1)
are not balanced with the potential downsides of the approach. Regardless of the fact that
an uncapped token release schedule promotes spending, IN1 sees that the price and
number of tokens is not the key driver for all ecosystem participants and might therefore
not act as a strong enough incentive to spend the token. He feels that inflationary
ecosystems can lead to unpredictable outcomes and should be designed with more
caution, “I think we shouldn't design inflationary [token economies] unless we exactly
know why we do that and then how it works.” This is reflected in the philosophy of the
Redcurry token, which is meant to act as an inflation-resistant stablecoin. As an example
of what could go wrong, he explains that when minting new tokens, the token price can
decrease (tokens get “diluted”), which might give a negative signal to the token holders
and launch a selloff cascade. It is only the long-term token holders who are compensated
for the inflation, but the more speculative users might decide to flee the ecosystem. He
explains, “These are the main arguments why I am super careful with designing the

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inflationary token in itself because I've seen inflationary systems crash so many times in
the space that they are really difficult to decide to design right.” Scepticism towards
inflationary token economies is also presented by Kaal [14], namely that unrestricted ICO
contributions can lead to significant challenges in determining the actual value of the
token.

6.3.2 To-Be State of the Use-Case

In general, the artefact performed well in helping the Currynomics ecosystem to move
from a determined set of problems within the business environment into a desired state
of having good token economy design fundamentals. Chapter 3 helped to extend the
existing stakeholder graph (Figure 1) by first mapping the stakeholders with the exact
functions that the latter await from the token economy, and secondly by identifying which
of the behaviours can be incentivised with the use of the tokens in the ecosystem (both
the Redcurry token and the DAO token). Given the nature of these desired behaviours,
the artefact helped to determine that the incentive mechanisms linked to the Redcurry
token ought to be mostly of monetary type, whereas incentives regarding the DAO token
should be mainly non-monetary in nature.

Chapter 4 defined the desired level of decentralisation in the Currynomics ecosystem by

mapping the pre-determined governance areas with stakeholders who can have a say in
the respective areas. After determining that the ecosystem aims to have high levels of
decentralisation, the artefact suggested applying mostly on-chain governance
mechanisms. The key contribution of Chapter 4 was identifying that the most suitable
voting mechanism for Currynomics is conviction voting. For this, it was necessary to
distinguish that simplicity is one of the most important properties for Currynomics in
choosing a voting mechanism. Thanks to the artefact, the Currynomics development team
identified that for the sake of simplicity and better community engagement, the chosen
voting mechanism will be upgraded to a more complex version using the support
mechanisms from Chapter 4.4.3 only once the ecosystem matures.

Chapter 5 helped to confirm that following an inflationary trajectory for the allocation of
the Redcurry token is a suitable option, as the literature suggests that inflationary
ecosystems promote user activity. As to the DAO token, the artefact could not convince
the development team to switch to an uncapped token release schedule, but nevertheless
informed the team that a deflationary, capped token release setup could cause the

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Community to hold on to the DAO token for financial gains rather than using it for taking
part in governance. Chapter 5.3 encouraged Currynomics to first have a private token
offering to reward early project contributors and strategic investors, and then allocate the
tokens via public sale to increase the demand for the DAO token. Chapter 5.4.1 helped
Currynomics to ensure that both tokens have an inherent value, which should mitigate the
risk of token price crashes. Namely, the Redcurry token is backed by the CRE portfolio,
whereas the underlying value of the DAO token stands in in 1) the ability to participate
in governance and 2) claims to future earnings. Chapter 5.4.2 confirmed that Currynomics
should take advantage of token staking and vesting mechanisms to avoid excess volatility
in the price movements of both tokens.

6.3.3 Expert Interviews

Completeness. IN3 sees that designing a token economy is closely related to legal
frameworks. Hence, he would add a guide for legal frameworks surrounding token
economies but understands that this is out of the scope of the thesis. This could be built
on the study by Momtaz [109], who brings together the concepts of economics, law, and
technology as they relate to asset tokens and STOs. Also, van der Linden and Shirazi
[110] examine whether the MiCA Regulation, if implemented, will establish legal
certainty that facilitates the wider integration of crypto-assets into financial services. To
illustrate the necessity of awareness on legal matters, IN3 explains that in some countries
such as the US, monetary token incentives immediately count as unregistered securities
which cannot be simply sold to retail investors. Also, IN3 finds that the model should
include a game theory perspective when designing incentives, “You are really in some
sense setting up a game and you need to think about how the motivations of different
stakeholders create like a meta-structure on top of it.” He brings an empirical example
of OlympusDAO, which crashed due to its prisoner-dilemma-like setting, where
everybody’s token price went up until someone tried to sell and unleashed a cascade of
selloffs. He would tie this with so-called Ponzi economics, “There is always this kind of
inevitable Ponzi element to a lot of token structures.”

IN4 has positive comments on the model’s completeness, “I think I feel very comfortable
with like the scope that [the model] covers.” He adds that a potential expansion to the
governance section is to guide the reader in designing different types of DAOs and
suggests developing a more detailed model in the future that has potential modules and

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plugins that can be integrated respective to the DAO’s needs, similar to the existing DAO
creation platforms such as Aragon. However, he acknowledges that not every token
design team needs an out-of-the-box solution. IN5 suggests that the governance chapter
could be complemented by introducing different stages of governance decision-making
such as proposal selection or “pre-decision deliberation”, voting, and execution, whereas
the designer could benefit from special tools that might be helpful at different decision-
making stages. This is in accordance with Laatikainen et al. [111], who state that
blockchain governance is a dynamic process that changes with time. During the formation
or design phase, also known as exploration or bootstrapping, the main concern of the
token economy is determining the optimal functioning of the ecosystem. Once the token
economy is operational, the focus shifts to how it should be maintained and operated.
Also, there may be instances where the ecosystem experiences a crisis, and the primary
concern is how to resolve conflicts that have arisen.

Simplicity. Regarding the artefact’s simplicity, IN5 comments, “I don't think there's
anything that was completely unnecessary in here. It is a very technical in-depth topic, so
it's hard to simplify at this stage further than I think what you have already.” Similarly,
IN3 claims, “I think [the model] is pretty good. Honestly, I would add more than less, but
I [personally] like having complete pictures and detailed descriptions, and I realise that's
not everybody’s cup of tea.” IN4 confirms that the model has a “clear frame” and is thus
“seamless and practical” for people that are new to the industry.

Understandability. Similar to the representatives of Currynomics, IN5 notes that at first

glance it is hard to grasp in which order the reader has to go through the model –
intuitively, he too would start studying the models top-down not bottom-up. Although all
the model components were described in the text preceding the figures, the figures
themselves should include a more comprehensive reading guide. As mentioned earlier,
these changes have already been implemented after the interviews (see Figure 5, Figure
6 and Figure 7). IN4 sees that the model requires the reader to do a lot of additional
reading to understand the details but believes this is not necessarily a bad thing.

Operational feasibility. In terms of operational feasibility, IN5 appreciates the

separation of voting mechanisms and support mechanisms in the governance chapter and
brings a parallel that the support mechanisms can act as practical “add-ons” like in the
WordPress software. Also, both IN5 and IN4 express their appraisal towards the voting

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mechanism matrix. IN5 adds that in essence the matrix can be summarised via two
dimensions on two axes: spatial and temporal. Spatial mechanisms (such as quadratic
voting) are about the number of tokens held by the people in the community, whereas the
temporal dimension takes in the time component. These dimensions are in essence
covered by Mohan et al. [39], albeit the latter defines these as “instruments”, namely
quantity of tokens and time commitment.

In the incentives chapter, IN4 would introduce the concept of “value flows” – a mind map
that helps to capture the ecosystem participants together with their behavioural feedback
loops, which have to be later tested in a quantitative simulation. This is related to a “stock-
and-flow” diagram as described by Khamisa [6] - a tool where “stock” refers to the
number of tokens created (and not burned) in the past, and “flow” represents the tokens
to be created in the future. The diagram would showcase how the feedback loops emerge
in between stocks and flows. Lastly, for individuals new to the web3 industry, IN5
emphasises that the model feasibility depends on whether one understands the necessity
of creating a token in the first place. The latter is in principle covered by Schubert et al.
[3], who propose a token economy design framework, where the first step includes a
“blockchain suitability” test, in which the practitioner should distinguish whether the use
case is appropriate for a blockchain-based solution in general.

Accuracy. In expert interviews, a large part of the comments related to the model’s
accuracy was given in the context of token economy governance. As to the debate on
decentralisation, IN3 claims that theoretically there can exist completely decentralised
token economies. This is, however, a rare case in practice, since full decentralisation leads
to an inflexible system. This is supported by Fritsch et al. [32], who prove the difficulties
in creating entirely decentralised blockchain governance systems. IN3 adds that we do
not have many real-life examples of well-performing token economies that are heavily
decentralised. On a similar note, IN5 adds that token economies need not have all
operations on-chain, as many existing and sufficient decision-making tools are less costly,
less technical, and less confusing. He claims, “So let's use those [off-chain] tools and let's
integrate these tools where we need them.” The impracticality of fully on-chain decision-
making mechanisms is also confirmed in [81].

There were quite several comments related to the voting mechanisms and their desired
properties. IN5 comments that quadratic voting is not necessarily a voting technique but

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rather an “optimisation type of how tokens are weighted within a population.” He
illustrates that quadratic voting is like “using the lens that magnifies the people with less
[tokens] and shrinks the people with more,” and adds that similar optimisation types can
be logarithmic voting, 3rd and 4th power cost functions. In contrast, Dimitri [79] defines
quadratic voting as a “voting method” rather than an optimisation method. Lastly, IN5
would add one more potential property for voting mechanisms – “proportionality of
consensus”, which would proportionately consider the popularity of a delegate instead of
allocating decision-making power equally among all delegates. Another term to
summarise this is true delegated voting, where IN5 comments, “I don't think we're quite
there yet with true delegated voting. We're still in very like discreet delegated voting
systems.” This matter is addressed by Fritsch et al. [32], who describe “liquid democracy”
as a setup in which token holders can delegate a desired number of tokens to a chosen
delegate so that some delegates can indeed have more voting power than others.

IN5 is particularly fond of the “intensity preference” property, which is especially a

problem in 1t1v mechanisms, as confirmed by Mohan et al. [39]. He brings several real-
life parallels as to why there are many governance areas where some individuals should
possess more decision-making power. He addresses the importance of polycentricity, “I
think, fundamentally, one-person-one-vote is like a fool's errand way to approach
democracy. We need to embrace polycentricity, and that means hierarchies where they
make sense.” He sees that we apply polycentricity in our daily lives, but it is hard to
represent this on-chain, which would require moving away from a simple 1t1v model.

IN5 agrees that it can be a difficult task to separate voting mechanisms and support
mechanisms since the many components of voting are interlinked. He brings an example
that delegated voting can be a sub-component of reputation-weighted voting because in
delegated voting systems, delegates are using reputation to attract votes for additional
decision-making power. IN5 is curious about potential combinations of voting
mechanisms and add-ons in the future. For example, the temporal dimension (time-
weighted voting mechanisms) could be blended with vote delegation and quadratic
voting, resulting in quadratic delegated conviction voting. He emphasises that it would
be “super interesting to see what context the different types of voting will be useful for.”
For example, Kiayas & Lazos [34] mention that a “approval voting” mechanism can be
combined with token locking: individuals who have a strong preference for a particular
proposal may choose to keep their vote tokens locked in an extended period, suggesting

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that this election holds significant importance for them. Approval voting on its own is
merely a voting mechanism in which each voter is allowed to approve any number of
proposals.

Regarding the support mechanisms highlighted in Chapter 4.4.3, IN3 would criticise the
proof of personhood (PoP) mechanism, as there might be instances where ecosystem
participants may borrow each other’s identification documents, which in essence allows
for vote-buying. This is supported by Siddarth et al. [112], who claim a protocol needs to
be established which can function independently of centralised entities such as countries.
This would enable blockchain ecosystems to govern themselves and prevent the
accumulation of power and control that exists in current proof of stake or proof of work
mechanisms. As a potential solution, IN3 suggests the use of proof of attendance
protocols (PoaP). However, there are yet no academic papers that address such protocols
in detail. IN4 confirms that proof of humanity mechanisms should be better analysed, as
they may cause problems that originally happened off-chain to now happen on-chain. For
example, some participants may characteristically win over the votes of other people.
Such polarisation issues could eventually lead token economies to a protocol fork.

Another block of comments related to the model’s accuracy was related to the design of
incentives. In Chapter 3, IN5 likes the focus on stakeholder mapping, as this is a crucial
step in enabling the token(s) to connect underprovided needs and overprovision of goods
in an ecosystem. The latter matches the views of Barrera & Hurder [29]. IN5 also
appreciates that the chapter stresses the importance of non-monetary incentive
mechanisms, as using only monetary incentive mechanisms can impose a “crowding out
effect” on other reasons to participate in desirable behaviours. The term “crowding out”
is also described in the given context by Sockin & Xiong [12], who explain that
speculators can increase the token price, but also overshadow the participation of other
stakeholders. Just like Liu et al. [42], IN4 agrees that monetary incentives have a less
impactful role in the long term and are more costly. He also brings out that is especially
important to focus on incentive mechanisms in post-launch token allocation, as the late
joiners might be more interested in speculating with the token in secondary markets
instead of acting out desirable behaviours such as participating in governance.

Lastly, quite a few comments about the model’s accuracy were addressed towards
tokenomics. IN5 claims that probably the hardest part in tokenomics is for the token

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economy designer to determine the token release amount. Thus, he would add that besides
inflationary and deflationary token trajectories, there exists one more approach -
“dynamic supply token”, which balances the trade-offs of both capped and uncapped
token releases. He explains that the number of tokens allocated should correspond to the
number of tokens the ecosystem needs, but not more. Dynamic token supply could be
established via the use of special smart contracts called bonding curves that help to
determine the optimal price for the token released. Bonding curves are well described by
Zargham et al. [113]. IN5 explains further that in the case of dynamic token supply, tokens
are only minted if some reserve asset (e.g., a dollar) is committed to the token economy
reserve pool in the first place. Similarly, the more tokens that are burned back to the smart
contract, the more reserves are released. IN5 explains, “It is essentially a system that can
expand and contract with the demand that is required of it. So, you don't have to set in
advance.”

IN5 especially agrees with the design step of determining the token’s inherent value, as
he sees token economies almost as a “supportive function” or “engine” for a project or
goal. The importance of understanding a token intrinsic value is also emphasised by
Carvalho [45] and Allen et al. [50]. IN5 relates it to traditional finance where one cannot
merely launch a stock without having an idea of what is the purpose of the underlying
company. He elaborates, “What are you going to do with the money that you raised from
the stock is really the question. People invest in stocks because there is a company that's
doing something that they think is valuable”. He claims that many token economies have
not figured this out yet.

7 Conclusion

Chapter 7 summarises the research findings of the thesis. Chapter 7.1 offers overall
conclusions, followed by Chapter 7.2 which addresses each research question introduced
in Chapter 1. Chapter 7.3 discusses the limitations of the research, and Chapter 7.4
outlines insights for future work.

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7.1 Conclusion

The focus of this thesis is on developing a step-by-step framework for designing a token
economy. The framework, also referred to as the model, guides an individual who is new
to the web3 industry in understanding the fundamentals of token economy incentive
mechanisms, governance and tokenomics. The thesis follows a DSR methodology,
according to which existing knowledge from the academic literature is gathered and
analysed to compose an artefact – the token economy design model. The model is first
evaluated using a case study approach based on Currynomics – a blockchain ecosystem
that is creating an inflation-resistant CRE-backed stablecoin named Redcurry. In addition,
semi-structured expert interviews are held with three industry experts based on the
following evaluation criteria: completeness, simplicity, understandability, operational
feasibility, and accuracy. In general, the artefact satisfies all of the five evaluation criteria,
since there are more supporting than opposing comments regarding the evaluation criteria
as summarised in Table 9 and Figure 8. However, completeness and understandability
are the two characteristics that received slightly more negative comments from the
interviews (see thesis’ limitations in Chapter 7.3). The interviews also included many
neutral comments that provide good insights for future work (see Chapter 7.4).

7.2 Research Questions

The main research question for this thesis is: How to design a sustainable token economy?
As explained in Chapter 1, this primary question is further broken down into three sub-
questions, which are outlined below.

7.2.1 RQ1: How to Design Token Economy Incentive Mechanisms?

Literature suggests that one of the first steps in designing token economy incentive
structures is to define the ecosystem’s stakeholders and the functions that the latter await
from the token economy. For those stakeholders whose behaviour can be influenced via
tokens, the next step is about identifying the desirable behaviours that should be
promoted. Next, Chapter 3.4.1 highlights some of the core differences between monetary
and non-monetary incentive mechanisms. The former is best suitable for tangible, short-
term results, but is more costly to the ecosystem. Non-monetary incentive mechanisms
are, however, more community-oriented and have a long-term effect. Lastly, some
specific mechanisms under both categories are explained.

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7.2.2 RQ2: How to Design Token Economy Governance?

Similar to designing token economy incentives, the first step in establishing token
economy governance is about understanding the relevant stakeholder groups. Mapping
these stakeholders with governance areas they can have a say helps to define the optimal
level of decentralisation in the ecosystem. When it comes to specific governance
mechanisms, Chapter 4.3 introduces the concept of off-chain and on-chain decision-
making mechanisms, whereas both previous studies and expert interviews held in this
study agree that it is not feasible to use solely on-chain governance mechanisms. As the
next step, the practitioner has to analyse which of the six desired properties of voting
mechanisms are the most relevant for the token economy. Only then can one move further
into establishing exact voting mechanisms. As the last step, the reader can adopt support
mechanisms to the chosen voting mechanism, which help to tackle issues such as voter
inaction and Sybil attacks, which might arise as the token economy matures.

7.2.3 RQ3: How to Design Token Economy Tokenomics?

Designing tokenomics entails two core steps. Firstly, one must determine the most
optimal token release schedule by deciding between 1) a capped or uncapped token
allocation, 2) a pre-launch or post-launch token allocation, and 3) a private or public token
sale. The second step is about maintaining token price stability as the ecosystem matures.
Here, understanding the token’s inherent value is of major importance. A token can either
directly represent a real-life asset, be valuable due to governance rights, or provide
exposure to future financial gains. After the token's inherent value is understood, one must
also think of possible price management mechanisms that might be necessary post-launch
of the ecosystem. These mechanisms can either come in the form of promoting token
holding (via token staking or vesting schemes) or reducing token supply (e.g., via token
buyback and/or burn mechanisms).

7.3 Limitations

One of the core limitations of the artefact is that it is not intended to guide the reader
through the technical aspects of designing a token economy. That is, the selection of
underlying blockchain protocol, token standards, and methods for quantitative test runs
and simulations are out of the scope of the model. Another key limitation revolves around
legal frameworks for establishing token economies, which are not covered within the

93
scope of the thesis. Lastly, as highlighted in one of the evaluation interviews, the model
ought to consider the fundamentals of game theory with regard to designing incentive
mechanisms, as blockchain ecosystems often have the threat to resemble so-called Ponzi
economics. All of these limitations can be mitigated by turning a focus on them in future
studies.

7.4 Future Work

All interviewees used the chance to elaborate on the accuracy of the model components,
especially in Chapter 4, which covers governance mechanisms. This is not to say that the
details in the governance section are the most flawed – rather that governance is a token
economy design aspect that is developing fast, and practitioners have different
understandings of particular matters. A practical way how the model could be adjusted is
to divide the voting mechanisms suggested in the voting matrix into temporal and spatial
mechanisms. The former refers to voting measures that require a time commitment from
the voters. The spatial dimension, on the other hand, is about the number of people in the
community who hold a number of tokens that can be optimised. Another component to
add to the governance chapter is to study the design requirements aimed at different types
of DAO such as social DAOs, protocol DAOs, investment DAOs, and more.

From a general perspective, the model could be expanded in the future by guiding the
reader in understanding the human resources needed to develop a token economy – e.g.,
the necessary proportion of developers, strategists, financial experts and alike in the
development team. Also, the operational feasibility of the model could be improved by
adding information on the likely duration of each design and development phase, e.g., the
time required for studying the stakeholder needs, identifying the most optimal voting
mechanism, or running quantitative simulations about tokenomics.

94
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Appendix 1 – Non-exclusive licence for reproduction and
publication of a graduation thesis1

I, Samela Kivilo

1. Grant Tallinn University of Technology free licence (non-exclusive licence) for my

thesis “Designing a Token Economy: Incentives, Governance and Tokenomics”,
supervised by Dr. Alexander Norta
1.1. to be reproduced for the purposes of preservation and electronic publication of
the graduation thesis, incl. to be entered in the digital collection of the library of
Tallinn University of Technology until expiry of the term of copyright;
1.2. to be published via the web of Tallinn University of Technology, incl. to be
entered in the digital collection of the library of Tallinn University of Technology
until expiry of the term of copyright.
2. I am aware that the author also retains the rights specified in clause 1 of the non-
exclusive licence.
3. I confirm that granting the non-exclusive licence does not infringe other persons'
intellectual property rights, the rights arising from the Personal Data Protection Act
or rights arising from other legislation.

07.05.2023

1 The non-exclusive licence is not valid during the validity of access restriction indicated in the student's application for restriction on access to the graduation

thesis that has been signed by the school's dean, except in case of the university's right to reproduce the thesis for preservation purposes only. If a graduation thesis

is based on the joint creative activity of two or more persons and the co-author(s) has/have not granted, by the set deadline, the student defending his/her

graduation thesis consent to reproduce and publish the graduation thesis in compliance with clauses 1.1 and 1.2 of the non-exclusive licence, the non-exclusive

license shall not be valid for the period.

102
 Appendix 2 – Interviewee List

Interviewee IN1: Male, Redcurry Representative, Audio Recording 10/04/2023,

“IN1.m4a”

Interviewee IN2: Male, Redcurry Representative, Audio Recording 11/04/2023,

“IN2.m4a”

Interviewee IN3: Male, Industry Expert, Audio Recording 05/04/2023, “IN3.m4a”

Interviewee IN4: Male, Industry Expert, Audio Recording 06/04/2023, “IN4.m4a”

Interviewee IN5: Male, Industry Expert, Audio Recording 05/04/2023, “IN5.m4a”

103

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