Tying tokenomics to crypto app functionality is just asking for trouble

Token incentives are just one more risk that protocols don’t need to build a successful product, says Reverie’s Myles O’Neil


Piscine26/Shutterstock modified by Blockworks


Ethereum’s DeFi ecosystem and its many components operate like a collection of blocks, built upon and interlocked with each other. When one block gets knocked out for whatever reason, the whole structure wobbles.

The past week’s Curve-Vyper exploit and subsequent knock-on effects got Myles O’Neil thinking about the role that tokens play in crypto applications. 

“I really don’t think it’s healthy,” he says, “when the functionality or utility of your protocol can be impacted by the price of your token.”

On the Bell Curve podcast (Spotify/Apple), the associate at the advisory and investment firm Reverie compares Curve’s relationship to crypto tokens with the investing app Robinhood and its Nasdaq-traded HOOD shares.

“Imagine,” he says, “if there was a market event that impacted HOOD and then all of a sudden, Robinhood…was less secure or services that were relied upon could no longer be relied upon. I don’t think that’s a healthy thing.”

Curve’s role is to be a critical piece of DeFi infrastructure, O’Neil explains. “Many of these DeFi protocols use Curve pools. They rely on Curve emission incentives to offset what would be otherwise pretty unprofitable [liquidity pool] positions.”

Podcast host Mike Ippolito explains that Curve (CRV) token holders are incentivized to lock up their tokens into a “vote escrow model,” directing emissions to stablecoin liquidity pools for rewards. Unlike the price of legacy finance shares in companies like Robinhood, “the price of the token matters a lot to the actual functioning of the product,” he says.

“If your protocol relies on incentives to keep all this scaffolding intact and the incentives are at risk of going to zero at any given point,” O’Neil says, “that’s one more risk that protocols really don’t need to introduce to build a successful product.”

Because Curve founder Michael Egorov’s position and the implications of liquidation “are very well known,” people are going to “hunt that position” for profit, O’Neil says.

“If half of the circulating market cap of CRV is liquidated,” he says, “I’m guessing that drives the price of CRV close to zero and then all of the scaffolding comes apart.”

Token successes

O’Neil mentions the decentralized exchange Uniswap as an example of a protocol that has taken the “opposite route” with tokens. “[Uniswap] doesn’t have the token play any role in the protocol, and instead relies upon this assumption that there’s a sophisticated supply side that will come in and actively manage their liquidity to be profitable.”

Ippolito pushes back on the notion that token incentives don’t work. “The major successes that we’ve had thus far in crypto also are these sort of circular, reflexive mechanisms. Bitcoin is one, Ethereum is one.”

Ippolito continues: “Whenever someone says, ‘We haven’t found the killer use case yet for crypto,’ I mean, haven’t we?”

“Non-sovereign money, an open smart contracting platform that anyone can build anything on. These are not ‘nothing’ use-cases. And Curve reminds me of that a little bit.”

O’Neil replies, “Some of the most successful apps that we’ve had today have no token functionality whatsoever. I just point to OpenSea and Uniswap as two of them.”

“But I will stay open-minded,” O’Neil says, “because if you don’t in this space, then you get left behind.”

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the On the Margin newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.


Upcoming Events

Salt Lake City, UT

MON - TUES, OCT. 7 - 8, 2024

Blockworks and Bankless in collaboration with buidlbox are excited to announce the second installment of the Permissionless Hackathon – taking place October 7-8 in Salt Lake City, Utah. We’ve partnered with buidlbox to bring together the brightest minds in crypto for […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research



Aerodrome is a "MetaDEX" that combines elements of various DEX primitives such as Uniswap V2 and V3, Curve, Convex, and Votium. Since its launch on Base, it has become the largest protocol by TVL with more than $495M in value locked, doubling Uniswap's Base deployment.


Plus, Imran Khan’s intriguing experiment on the speeds of crypto onramps


The SEC has signaled a timeline to issuers that could lead to a July 23 launch for the ETH funds, people close to the process told Blockworks


PayPal has unequivocally made a name for itself as a crypto adopter among fintech giants


Also, a look into how the highly-debated SAB 121 could end up shaking out for crypto custodians


Vance, an Ohio Republican, is largely seen as crypto-friendly


Plus, all the world is green as prices across the crypto space rally, with solana reaching a nearly two-week high