Tokenomics Fundamentals Series: W5H framework for token design, Part I - Why token?

This article is part I of the following six-part series:

Tokenomics Fundamentals: W5H framework for token design

A beginner-friendly framework for token design covering Why, When, What, Where, Who, and How (W5H), with supply-demand dynamic and token evaluation.

inWeb3Charles Shen, PhD, EMBA

Editor’s note (August 2026): I first published this article in January 2023 and refreshed it in August 2026. The original examples have been kept, and what has happened since has been added.

Tokens are atomic units of Web3. The success or failure of token design often plays a large part in the fate of crypto projects. A key term the industry uses to judge the token design is its tokenomics, which is a portmanteau word from “token” and “economics”. Tokens with good tokenomics can enable the crypto project to form a thriving micro-economy and provide a flywheel that supports continued economic value creation. In contrast, poor tokenomics has, time and again, preceded a token’s collapse and undermined a crypto project’s sustainability. Tokenomics can be considered one of the three pillars in the blockchain-crypto infrastructure, along with distributed consensus and smart contracts.

Tokenomics is, however, a challenging topic to grasp, especially for people new to the space. The term is often used as a catch-all word that reflects mechanisms stemming from many disciplines, such as economics, engineering, psychology, and behavioral sciences.

In this series, I introduce a beginner-friendly framework for token design summarized as Why, When, What, Where, Who, and How (W5H). The backbone of the W5H framework is illustrated below:

W5H framework for token design (Backbone) by Charles Shen @ inWeb3.com

• “Why” examines the rationale for the token and sustainable value creation of the token’s underlying crypto-economy;
• “When” checks the best timing for launching a token;
• “What” investigates the type of tokens that is suitable for the use case;
• “Where” focuses on the blockchain network stack where the token should reside;
• “Who” looks into the appropriate parties in the ecosystem that should own the token;
• “How” talks about topics such as determining the number of distinct tokens needed, the token supply generation, allocation, distribution, and liquidity provisioning.

The W5H loop is then closed by the supply-demand dynamics of the crypto economy. The equilibrium of supply and demand ultimately affects the price of goods and services in the economy and the token itself.

The W5H framework provides a way to understand tokenomics in the context of the broader token design. It places us in the driver’s seat of the token project, guiding us through the rationales behind the most important aspects of related token mechanisms. Therefore, it can help builders who are designing a new token, and also investors or users who are evaluating an existing token.

A crucial principle when applying this framework is to first look through the lens of the business associated with the token and then place token-specific considerations. This is because a token is an integrated part of the crypto economy, and it derives its value from there.

We will cover our presentation of the W5H framework in a series of six articles. At the end of this series, we should have covered the topics illustrated below:

This is the first article in the series where we will focus on “Why token”.

Terminology review

Before we actually start, let us review the meaning of several key terms we will be seeing frequently in this series: “Token”, “Crypto”, “Crypto-economics”, and “Tokenomics”. If you are already familiar with them, feel free to skip this section. If you are new and want to review more of the related terms, please refer to the terminology page and the articles in the introduction to Blockchain, Crypto, Metaverse, and Web3 series.

Token: in a general sense, a token represents something of economic or social value. It could be a coupon, a movie ticket, or a stock certificate. In the blockchain context, we are concerned about “cryptographic tokens”, which are digital tokens created and managed through blockchains powered by cryptographic mechanisms.

Crypto: people commonly associate the word “crypto” with cryptocurrency. Since cryptocurrency may be considered a subset of cryptographic tokens, “crypto” may be used as a general term for cryptographic tokens, regardless of whether they have currency-like utilities.

Crypto economy and crypto-economics (aka cryptoecon): crypto projects typically involve various token transactions. These transactions form the basis of the economies surrounding those projects. We refer to these economies as crypto economies and the study of them as crypto-economics. Both endogenous and exogenous tokens could contribute to a crypto economy. In the author’s view, crypto-economics is more naturally applied at a project level rather than to an individual token.

Token economy and token economics (aka tokenomics): the token economy is a concept closely related to the crypto economy. While they are sometimes used interchangeably, there are subtle differences. The token economy and its associated tokenomics are typically specific to individual tokens. Great tokenomics requires great crypto-economics that creates sustainable value. But the reverse is not necessarily true, because the tokenomics needs to address whether and how the value created in the crypto economy is accrued to the specific token (which is a topic we have a deep dive into in Part V of this series.)

Why token

While the token design is critical to token-based projects, that does not mean all crypto projects must first create their own tokens to prosper. In fact, a prudent token designer should always start by asking: “Why would this project need a token in the first place?”

When we ask this question, we typically mean a token that is specifically created for the project, also known as the project’s native token. This is to be differentiated from any other exogenous tokens that the project may be processing. For example, the decentralized exchange Uniswap has a UNI token as the project’s native token, but the exchange serves the transactions of numerous other tokens, which are all non-native to the project.

One possible answer to the “Why token” question is that tokens may help raise capital for the project, with additional benefits that allow early community members to invest in the project and gain upside. In contrast, early-stage equity investment opportunities are usually limited to accredited investors. Nevertheless, the upside of an early token project is never certain, and the practice long carried notable legal unclarities. The legal picture has become clearer, though not simpler. In the United States, the SEC’s current guidance is that a crypto asset which is not itself a security may still be sold as part of an investment-contract transaction, so an offering must either be registered or rely on an exemption. In the European Union, MiCA now defines which crypto-assets are covered and what a public offer requires. Either way, the conclusion holds: the fundraising aspect is one of the rationales, but should not be the only and core answer to the question.

My preferred way to address the “Why token” question is to treat it as a crypto-product-market fit problem, which we can examine in two steps: crypto-product fit and product-market fit.

Crypto-product fit: why integrate crypto into the business model?

Let us start with the crypto-product fit and take two complementary perspectives: one focusing on the role crypto plays in a product, the other looking at the economic sectors crypto may be integrated with.

Crypto’s role in crypto-product business models

Crypto and its underlying blockchain infrastructure are equipped with a few key technology pillars that enable their unique value proposition:

• Distributed consensus mechanisms form the basis for creating a distributed ledger that maintains transaction record immutability and transparency.
• Smart contracts capabilities offer programmability to realize arbitrary business logic incorporating various types of transactions.
• Tokenization allows the digital representation of values and enables them to flow through transactions across a global distributed ledger.

While every project may use crypto in different ways, the above characteristics make possible three most common types of crypto-product business models:

Type A: Processing external crypto assets (tokens that already exist), without the need to create their own token.

• Crypto exchange is an example that belongs to this type. Coinbase is a centralized crypto exchange and does not need its native token to function. Uniswap is a decentralized crypto exchange deployed as a smart contract on the Ethereum blockchain. It started without its token in 2018. Even though it later introduced a UNI token in September 2020, the token is for governance and is not required by the core exchange service. That remains true today: UNI’s role has since expanded - Uniswap governance has directed a share of protocol fees toward burning UNI, while still stating that holders have no claim on protocol revenue - but a user never needed to hold UNI to swap. The evolution is the lesson: a Type A product can add a token role later without that token ever becoming an input to the core service.

Type B: Creating new tokens through the tokenization of assets and enabling efficient transactions (e.g., transfer, exchange, verification, etc.) of these tokenized assets through a global distributed ledger. These assets could be of any type - financial assets, real assets, and intangible assets.

• For financial assets, USDC is an example that tokenizes the fiat US dollar and creates a stable cryptocurrency for spending in the crypto world and beyond. Circle describes it as backed by cash and cash-equivalent reserves and redeemable 1:1 for US dollars - an issuer commitment, which is exactly why the “Why token” answer for a stablecoin also has to name the issuer, the reserve, and the redemption route, not just the token.
• For real assets, the earliest efforts to tokenize real estate, agricultural commodities, and rare wines were experiments. They are more structured now, if still early: Dubai’s virtual-asset regulator is running a real-estate tokenization pilot whose second phase is controlled testing of secondary-market mechanisms; Agrotoken issues grain-backed digital assets in Latin America, with one token representing one ton; and Crurated uses blockchain-backed identifiers for provenance of fine wine at the bottle level. None of these yet proves that tokenization makes these industries more efficient overall - a pilot is a pilot - but the direction of travel is clearer than it was in 2023.
• Examples of tokenized intangible assets include BAYC Non-Fungible Tokens (NFT), which bestow club access rights in a unique social circle, and POAP NFTs that record people’s event attendance. BAYC is also a reminder that the tokenized asset and the governance token can be separate things: the related ApeCoin (APE) token got its own DAO in 2022, and in 2025 that DAO voted to sunset itself and hand operations to a company, ApeCo. The membership NFT carried on regardless.

Type C: Creating and leveraging tokens to enable decentralized autonomous coordination at scale. The tokens in this category typically have utility functions and/or governance rights. These tokens are often used as incentives to orchestrate the value flows toward the ecosystem’s collective objectives. There are several common product categories under this type: infrastructure, application, and human-oriented services.

• Bitcoin network is an example of an infrastructure product. It uses its native BTC asset to direct the value created by its network to a decentralized group of miners. This arrangement incentivizes the miners to contribute hash rates to maintain network security, which is critical for the Bitcoin system’s operation. Other infrastructure examples include Ethereum using ETH for its decentralized validators, who stake ETH to help secure the Ethereum blockchain under proof of stake; Filecoin leveraging FIL token to coordinate its decentralized providers to supply file storage services, with providers posting FIL as collateral; and Chainlink using the LINK token to orchestrate a decentralized group of operators to provide off-chain data oracle services. Chainlink is a good example of how the token’s role can be refined over time: its current economics combine LINK staking with a “Payment Abstraction” layer that lets customers pay in other assets which are then converted into LINK.
• Many Decentralized Finance (DeFi) protocols fall into the application product category. For example, AAVE is a lending and borrowing protocol. It originally ran a safety module that rewarded AAVE token holders for helping secure the platform in case of a deficit; that module has since been upgraded into “Umbrella”, which stakes deposit tokens rather than AAVE alone. AAVE holders (along with stkAAVE and aAAVE holders) continue to hold governance power to make decisions on the adjustment and improvement of the protocol. This type of governance structure is often used in Decentralized Autonomous Organizations (DAOs). Note, again, that a borrower never needed to hold AAVE to borrow - the token’s job is security and governance, not the core product action.
• Examples of human-oriented services include various types of DAOs. BitDAO began as an investment DAO that owned billions of assets, with BIT token holders voting to invest in builders of the decentralized economy. In 2023, the community voted to merge the brand and token into Mantle under a “one brand, one token” principle, and BIT was converted 1:1 into MNT - which now also serves as the gas token of the Mantle network. An investment DAO became a layer-2 ecosystem, and its token followed. DeveloperDAO is a SocialDAO formed by a community of builders with the goal of onboarding developers and building tools for Web3. It started with an NFT-based one-person-one-vote system and migrated into a fungible CODE token to differentiate the voting rights between different levels of contributors. In 2025 it went a step further, moving day-to-day operations into a leaner foundation while keeping CODE-holder oversight for high-level decisions - a pattern that recurs in the “When” discussion in Part II, because DAOs often discover that full token governance is something to grow into, and sometimes out of.

In summary, using the above three types as a starting point and mapping them into the project specifics can help us sort out what crypto can do and whether a native token is needed for the project.

Crypto for different economic sectors

Crypto products facilitate transactions that form crypto economies. Meanwhile, crypto economies are also the results of integrating crypto with our existing economic sectors, e.g., the real or financial economy, and the physical or virtual economy. Therefore, the other perspective of examining crypto-product fit is the relationship of crypto with these different economic sectors.

Crypto economies

The real economy involves producing and consuming actual goods and services (such as food, clothing, houses, and machinery). It is determined by the demand side (what people want about the goods and services) and the supply side (cost of producing those goods and services).

The financial economy deals with the transaction of money and other financial assets. These financial assets are often tied to real assets in one way or another. E.g., stock certificates represent claims to ownership of real economy sectors. Credits from the financial economy flow into the real economy to help grow its productivity.

Both the real economy and the financial economy can reside in the physical or virtual worlds. A prominent example of an economy in a virtual world is a massively multiplayer online games platform allowing virtual goods and services exchanges.

These different types of economies can be summarized in the table below. The two axes overlap rather than forming four separate boxes: a tokenized claim on grain is a financial asset tied to a physical commodity, and a stablecoin is virtual finance that can settle a very physical purchase.

Real vs. financial economy and physical vs. virtual world

Both the real economy and financial economy sectors, whether physical or virtual, may integrate with crypto. Crypto is one of the forces blending these different types of economies. The result of this process is a hybrid economic form that mixes real and financial assets both in the physical and virtual world, which I described in an earlier article as the Metaverse economy. Most of that activity still sits in the virtual financial economy, and the virtual real economy has a lot of catching up to do. That has held for years; the label “metaverse” has faded from the industry’s vocabulary, but the underlying observation has not changed.

Now, let us explore more details on crypto for the financial economy and the real economy, respectively.

Crypto for the financial economy

The earliest prominent crypto projects emerged for the financial economy. E.g., Bitcoin, the first and foremost crypto project, set out to be a peer-to-peer electronic payment system. There are a couple of major themes in the crypto and financial economy intersection:

1. Creating a decentralized version of financial economies in the crypto world on top of blockchains. Numerous DeFi applications launched so far fall into this category. Examples include asset exchanges like Uniswap and Curve, and lending and borrowing protocols such as AAVE and Compound. Various stablecoins, such as DAI, are also notable cases in this category. DAI’s own story has moved on: its issuer MakerDAO rebranded to Sky in 2024, and DAI can now be upgraded 1:1 into USDS, Sky’s newer stablecoin, with MKR likewise transitioning to SKY as the governance token. DAI itself continues to circulate.
2. Connecting and integrating the new crypto-based financial economies with traditional ones. For example, Synthetix began as a crypto platform that enabled trading synthetic versions of real-world stocks and commodities in the crypto land; its current version has narrowed to perpetual futures, a reminder that “bridging to TradFi” is a product choice that can be reversed. The MakerDAO DeFi protocol in 2022 approved a vault with a $100M DAI debt ceiling for a community bank in Philadelphia, Huntingdon Valley Bank, marking the first commercial loan participation between a US regulated financial institution and a decentralized stablecoin; the relationship was still being managed through Sky governance in 2025. BlockTower Credit partnered with MakerDAO and Centrifuge to bring $220M of real-world assets to DeFi; according to Centrifuge, that structure ran its course and returned investor capital in October 2024. Both cases show that “real-world assets” on-chain are not a new idea in 2026 - they are a second or third iteration of something that was already being tried in 2022.

Crypto for the real economy

Crypto’s connection with the real economy can appear less straightforward than with the financial economy. Part of the reason is that by its nature, the real economy deals with mainly physical, tangible parts of the world, and crypto, on the other hand, is digital at its core. But there could still be plenty of use cases at the intersection of crypto and real economy sectors. The speed of various industries’ onboarding into crypto is expected to differ substantially. We can get some clues from how the overall digital transformation process has manifested in different sectors. According to a Harvard Business Review study, the ICT (Information and Communications Technology) sector is the most digitalized industry overall, and the agriculture & hunting industry is the least digitalized. These results are not surprising because the ICT industry happens to be the one that digitalizes all other industry sectors. Meanwhile, agriculture & hunting relies heavily on non-digital work. Aligned with these observations, we should expect more established real economy crypto projects to appear first in the more digitalized sectors, especially the ICT industry. That is broadly what has happened: the real-economy crypto networks with the most staying power are still the ones coordinating digital infrastructure - storage, wireless coverage, mapping - rather than farms or factories.

Similar to crypto for the financial economy, we are seeing two important themes in crypto for real economy projects:

1. Leveraging crypto-mechanism to create a peer-to-peer version of real-economy business models. For example, in the ICT sector, Filecoin and Arweave are building decentralized file storage service networks (with different economics - Filecoin charges for storage deals, while Arweave takes an upfront AR contribution into an endowment meant to fund storage for the long term); Helium is creating peer-to-peer wireless communications networks; and, a newer entrant, Hivemapper rewards drivers with HONEY for contributing street-level map imagery and burns HONEY when customers buy the map data.
2. Integrating crypto mechanisms into existing real-economy businesses. For instance, Brave is a web browser, and it built its BAT token into an opt-in Brave Rewards system that pays users for viewing its ads and lets them tip creators. The browser works without it - which is the right design for this type, and a useful contrast with Type C projects where the token is the product.

Product-Market fit: sustainable value creation

Crypto-product fit is only a necessary but not sufficient condition for a crypto product’s success. The other key test is whether it can achieve product-market fit. A product-market fit requires a healthy and consistent balance between the product’s supply and demand, resulting in sustainable economic value creation.

One common signal of a lack of product-market fit can be derived from the product’s demand situation. Helium is a high-profile crypto project that received top VC support. The project was building a peer-to-peer wireless Internet-of-Things (IoT) network service using token-based incentives. Yet in 2022 the weak demand for its network triggered a heated debate over whether it was a perfect crypto real economy use case that is faster and more capital-efficient than traditional telecom infrastructure, or whether its crypto-economics simply could not work. That year the team partnered with T-Mobile to provide 5G services, with a new token launch and a continued search for product-market fit. The search continued for several more years: Helium moved its ledger to Solana, launched its own consumer carrier, Helium Mobile, and today documents two networks - the original IoT network and a cellular offload network where deployers are rewarded in HNT. Then in June 2026 the company announced that the consumer carrier was being acquired by Noble Mobile, with Helium refocusing on the network infrastructure itself. Whether that is the product-market fit finally found or one more pivot, the 2022 debate was the right question to ask. Another high-profile real-economy use case was TradeLens, a collaboration between IBM and Maersk aiming to create a blockchain-based trading platform to streamline the supply chain industry. It was shut down in late 2022: in Maersk’s own words, the platform was technically viable but had not reached the level of commercial viability needed, because full industry collaboration never materialized. Technology working is not the same as the market wanting it.

Even if the crypto-product has strong demand, the business model that serves the demand could still be unsustainable. A lesson we can draw from the crypto financial economy is the Terra UST stablecoin project. One of the most well-known crypto projects, backed by numerous respected VCs in the industry, it saw overwhelming market demand - the SEC later put the ecosystem’s market value that was wiped out in its May 2022 collapse at $40 billion. Yet it still collapsed due to fundamental flaws in its business model: an algorithmic stablecoin whose peg depended on demand for its own sister token. The aftermath has been as instructive as the collapse. The original chain lives on as “Terra Classic”; the relaunched Terra chain has no native stablecoin at all; Terraform Labs entered a liquidating Chapter 11 plan in 2024 after a civil fraud verdict; and in August 2025 its founder Do Kwon pleaded guilty to fraud, with prosecutors stating that the core Terraform products did not work as advertised. Demand, in other words, can be enormous and still be built on a mechanism that cannot hold.

Proving or evaluating whether a project achieves product-market fit is not an easy task. One way that can help shed light on this direction is by examining its financial data, e.g., through the fees, revenues, and earnings of the projects. Websites such as Token Terminal provide related information; do read their methodology, because which contracts count, which period you look at, and how token incentives are treated can change the picture considerably.

Note that it is not uncommon for crypto projects to experience negative earnings during their growth stage. In early 2023, leading DeFi protocols such as Curve, Convex, and dYdX were all operating with negative on-chain profits because of their token emission incentives, even while ranking among the top protocols by fees and revenues. They were acquiring users by subsidizing them. We see similar strategies used in non-crypto technology startups all the time - companies like Amazon and Tesla lost money during years of initial growth before becoming profitable - though the analogy has limits, because an equity-funded loss dilutes shareholders while a token emission dilutes the very holders the protocol is trying to attract. Eventually, the fundamental soundness of the business model and/or whether the team can pivot appropriately will determine the project’s success in the long term. (dYdX, for one, has since moved to its own chain where DYDX became the staking and security asset - a pivot that changed the “Why token” answer itself.)

Back to “Why Token?”

With a good understanding of crypto-product-market fit, we are ready to come back to the original question of why a project would need a token.

Recall that more precisely, the question is about “Why create NATIVE tokens” for that project? We actually addressed that question when we discussed the role of crypto in the three basic crypto-product business models in the earlier section, which we can summarize again below:

• Type A crypto products that focus on processing exogenous tokens do not need their own tokens for their core operation. However, they could opt to introduce a token for other purposes, as appropriate. For example, the Uniswap crypto exchange does not need a token to operate, but it introduced its UNI token for governance. This also makes it a hybrid Type A and Type C business model.
• Type B crypto products, by definition, require creating their native tokens. For example, if we are issuing a new fiat-backed stablecoin by tokenization of a fiat asset, the stablecoin is the required token because it is the product itself. Note that this says the representation token is required; it does not say the project also needs a second governance or reward token. USDC has none, and has done fine without one.
• For Type C crypto products, if its token serves a utility essential for the product, such as an incentive token that helps secure the infrastructure (e.g., ETH for Ethereum blockchain and BTC for Bitcoin blockchain), then it is required. If the token is used for other purposes such as governance, then the answer is “maybe” because many applications or human-oriented services may bootstrap without a token. But they can later launch the token when they are ready to decentralize. We will elaborate on this point in our subsequent “When token” discussions.

Conclusion

This article examines the “Why token?” question that token designers need to consider before launching a token. Addressing this question starts by studying the underlying business model associated with the potential token, particularly the “crypto-product-market fit”. We first explored crypto-product fit by looking at crypto’s roles in the products and how crypto integrates with different economic sectors. Then we discussed product-market fit which ensures sustainable economic value creation from the product. Finally, we summarized the rule of thumb on whether the common crypto-product business models need a token.

Over the past three years, what stands out is how many of these tokens changed jobs: BIT became MNT and picked up a gas-token role, AAVE’s safety module was rebuilt, UNI gained a fee-burn mechanism, DYDX became a chain’s security asset, and the ApeCoin DAO voted itself out of existence. The “Why token” answer is not a one-time decision; it is a question worth asking again at every major pivot.

“Why token” is the first “W” in the “W5H” framework of thinking, we will explore the remaining “W” in the next article.

This article is part of the six-part W5H framework for token design series, as listed below:

• Part I: W5H overview and Why Token (this article)
• Part II: When, What, Where, Who token
• Part III: How token
• Part IV: Token supply-demand dynamics
• Part V: Token value accrual
• Part VI: Token value assessment