Economics and Math of Token Engineering and DeFi : Fundamentals of Token Economics

by Lisa J.Y. Tan

Economics is a science. It primarily examines how decisions are made and which alternatives provide the greatest benefits to various stakeholders. Contrary to popular belief, economics is not solely about money. It is, and always has been, the study of allocation of scarce resources (behaviors). One of the key differences in token economics is to create rules around the allocation of scarce resources to affect people’s behaviors. We can enforce these rules through incentives and disincentives (punishments).

Just as Einstein's Theory of Relativity built upon, extended, and also limited Newtonian Physics, so too do new economic Web 3 models build upon, extend, and limit hundreds of years of economic theory that led us to this point.

While it is important to develop the technological infrastructure of Web 3 and explore ideas of what Web 3 can be, it is also necessary to examine the economics and incentives alignment of economic agents in Web 3 communities. It is easy to create a token out of the proverbial thin air, but the token only has real value if incentives make sense.

This book will dive into the foundational principles of Web 3 economics. We will examine the evolution of economics from Web 1 to Web 3, explore the relevance of traditional economic thought in Web 3 communities, and envision what economic and incentive models could exist in this new environment.

Finally, we will explore ways to apply the new Web 3 economics with token and tokenless models. Throughout the book we will also examine the mathematical principles that drive and underpin the various economic mechanisms we discuss.

While this book is informed by rigorous academic research, you don’t need to be an economist or a computer scientist to understand this book!

Genres: Finance, Economics

377 pages, Kindle Edition

Published November 13, 2023

About the author

Lisa is the founder and lead economist at Economics Design, a research focused consultancy for digital ecosystems. In the academia world, she contributes to research work in various fields like math and economics, while having the practitioner exposure with startups and global businesses. She’s also one of the leaders in a United Nations x Stanford University project on regulating digital currencies.

She was one of the first few to research and educate on token economics, starting in 2018 London. Since then, she has a weekly podcast on the economics of token ecosystems, online course and have educated regulators, government and organisations in London, Singapore, Seoul, Geneva.

Reviews

[D · Rating 5 out of 5]

Learned a ton from this book, look no further if you need to learn about the economics and math of token engineering and DeFi.

[Martin · Rating 5 out of 5]

I chose this book as I'm new into the Crypto space. I'm soaking up plenty of video, online and social media content on projects, DeFi, NFT's, and it's all incredibly expansive, full of potential and also intimidating.

Most of the information out there is bits and pieces, not all homogenous, and hard to find a single source to get a clear picture.

What this book does for me is put the crypto jigsaw puzzle pieces together. It is written not in an academic way. It flows, is easy to read and helps me understand what all the advanced crypto experts are saying.

Thanks Lisa, I'm enjoying your book and gaining a better, clearer picture of my financial future.

[Trevor Pownell · Rating 3 out of 5]

Helpful and, as one would expect, pretty dense. Took me a few "put it down for a few months" to finish it, by which point many of the examples & companies were slightly out of date (nature of the space). Of note, there are very helpful diagrams and frameworks to help better think through the game theory and incentive structures vying for business models in WEB3.

[Patrick Workman · Rating 5 out of 5]

One of the best resources for token design and economics

Lisa Tan’s book is a masterclass for anyone exploring and experimenting with token design. I appreciate how she uses common language to describe novel and complex subjects.

This is a must read for anyone who wants to discover the market design and mechanics possible with on-chain tokens!

[Kerry · Rating 5 out of 5]

Excellent read, content is complete and easy to follow, a reference manual I will use for many years.

[Phu · Rating 4 out of 5]

Eureka :)

[Tobias Dahlberg]

A good introduction

[Jason Nguyen · Rating 5 out of 5]

Absolutely incredible book to teach me about DeFi. Coming from CS background, I didn't know anything about economics or how traditional finance works.

It was available on Kindle Unlimited but I also bought the paperback version. I've read almost the entire thing and plan on having book close by my side for a while.