Introduction
Digital asset markets have evolved from experimental ideas into integral parts of the financial system. From cryptocurrencies to tokenized securities and stablecoins, tokens now play a role in payments, investment vehicles, and even corporate governance. Yet as these markets mature, they also expose us to familiar risks—volatility, wealth concentration, governance failures—but on a scale and speed that challenges traditional financial oversight. The question is now how we design and govern token economies to promote stability, fairness, and resilience.
This post explores an important step in that direction: a framework introduced in the 2023 paper “Decentralized Token Economy Theory (DeTEcT): token pricing, stability and governance for token economies” written by our academic board member Rem Sadykhov, Geoff Goodell, Martin Schoernig, Philip Treleaven, and myself. The framework offers finance professionals, policymakers, and market designers a structured way to model, simulate, and guide token economies—before capital is committed or risks crystallize. This is the first of four papers, with the third to be published in 2025.
Token economies: what’s at stake?
A token economy is, at its core, an economic system where tokens represent units of value, rights, or access. These tokens—issued and tracked on distributed ledgers—can serve as currency, securities, membership rights, or units of account. They underpin a wide range of use cases: decentralized finance (DeFi), tokenized funds, stablecoins, supply chain solutions, games, and digital loyalty schemes, to name a few. Tokens can be designed to govern not only transactions but also incentives, access, and participation in decision-making, and can be earned at different rates by different actors in different cases.
Unlike traditional currencies or securities, token economies are programmable. Their rules can be encoded in smart contracts, which automate and enforce behavior according to predefined conditions. This programmability opens remarkable possibilities for innovation. But it also introduces complexity. When incentives, monetary supply, and governance mechanisms are set in code, unintended dynamics can emerge—sometimes quickly, and at scale.
We have seen this in practice: from token wealth becoming dangerously concentrated, to market manipulations that destabilize entire ecosystems, to governance processes captured by a small number of participants. These risks pose not only technical challenges but also economic and regulatory ones. As finance professionals, we need tools to analyze these systems with the same rigor we apply to traditional markets.
The challenge of designing and governing token economies
Token economies are complex, fast-moving, and global. Their wealth distribution evolves as participants interact, trade, and shift roles—often through automated mechanisms that respond to market conditions. Prices can swing rapidly, incentives can misfire, and concentration of wealth can create vulnerabilities. Traditional tools of monetary policy or financial regulation were not built for this environment.
For those involved in designing, investing in, or overseeing token economies, the key challenge is anticipation. How will a new token design behave under realistic conditions? What policies—such as transaction fees, incentives, or supply controls—can promote stability or fairness? Can we test these ideas before they become costly to unwind?
A structured approach: the DeTEcT framework
The 2023 DeTEcT paper offers a systematic way to address these questions. Rather than relying on intuition or piecemeal analysis, it introduces a framework that models token economies as dynamic systems. The approach reflects both economic theory and practical needs: it allows market participants, designers, and regulators to simulate how wealth and power flow through a token economy—and to test how different policies or conditions might influence that flow.
In DeTEcT, participants are grouped into broad categories such as consumers, producers, or a control mechanism (the entity that governs token supply and policy). The model defines how these categories interact (for example, by exchanging goods or services), and how participants might change roles (such as a producer becoming a consumer). Wealth flows and role changes are tracked mathematically, creating a clear, quantitative view of the system’s dynamics over time.
Two core capabilities: simulation and design
DeTEcT provides two distinct but complementary capabilities:
- Forward simulation: This allows users to test how a token economy might evolve under specific assumptions. For instance, what happens if transaction fees are set at a given level? How does wealth concentration change over time if certain incentives are applied? Forward simulation provides insight into the likely outcomes of a proposed token design or policy before it is implemented.
- Inverse design: This approach works backward from a desired outcome. Suppose you want a token economy where wealth is more evenly distributed, or where prices are less volatile. DeTEcT can help calculate what policies, interaction rates, or controls would be needed to achieve that outcome—providing a roadmap for structured intervention.
Both capabilities move beyond guesswork. They allow designers, investors, and regulators to explore scenarios, anticipate side effects, and adjust parameters with a clear view of the trade-offs involved.
Pricing and policy setting: beyond trial and error
One of the framework’s notable innovations is its approach to pricing and policy setting. DeTEcT introduces a concept the authors call a “price hyperplane”—a way to map out all the combinations of prices for goods, services, or interactions that would satisfy both market demand and the system’s broader objectives (such as fairness or stability). This makes it possible to assess not only whether a given pricing structure will work, but what range of prices would keep the system balanced.
The same method applies to other forms of economic control: transaction fees, subsidies, or taxes. Instead of setting these through intuition or external benchmarks, DeTEcT offers a way to compute them based on the system’s internal dynamics and desired outcomes. For finance professionals, this means a path toward data-driven governance of token economies.
Applications in practice
DeTEcT’s potential applications are broad. For example, it could support:
- The design of digital asset markets that are robust to shocks and manipulation
- The testing of token governance structures to ensure they do not inadvertently concentrate power
- The planning of monetary supply strategies (such as token issuance or burning) to manage inflation or deflation risks
- The simulation of wealth dynamics in new tokenized funds or stablecoin ecosystems
- The development of regulatory proposals backed by quantitative evidence rather than assumptions
By providing a tool for structured analysis, DeTEcT helps ensure that new token systems are designed with clear, measurable objectives—and that those objectives can be evaluated in advance, not only in hindsight.
Limitations and next steps
It is important to acknowledge that DeTEcT is a framework, not a turnkey solution. It requires thoughtful setup: defining participant categories, specifying interactions, and setting clear objectives. As of the 2023 paper, the model is best suited to systems with a fixed money supply. The authors’ follow-up work in 2024 extends DeTEcT’s capabilities to handle dynamic money supply, probabilistic elements, and more complex governance models—bringing it closer to real-world conditions seen in systems like Ethereum or other smart contract platforms.
Nonetheless, even in its 2023 form, DeTEcT represents a significant advance in our ability to design, simulate, and govern token economies systematically. It bridges economic theory and applied finance, offering a practical tool for a domain that has often been marked by experimentation without adequate foresight.
Why this matters for finance professionals
Token economies are no longer on the periphery of the financial system. Their influence is growing, and their design choices increasingly have real-world consequences—not just for investors and issuers, but for markets, consumers, and regulators. As professionals in finance, we have a responsibility to ensure that these systems are resilient, fair, and aligned with broader economic goals.
DeTEcT offers a means to meet that responsibility. It provides a structured, quantitative way to model token economies, explore policy options, and design systems that work as intended. By moving token economy design from intuition to analysis, it helps us shift from reacting to crises to proactively shaping stable and equitable markets.
At Fund Guardian, my colleagues Dr. Angelina Pramova, CESGA®, Guillem Liarte, and I, support firms in executing their AI and oversight strategies — offering tools, analytics, and expertise to accelerate implementation, reduce risk, and build long-term governance capability. Contact us here.