Sir Israel5 min read·Just now--
The blockchain industry built a founding myth: every protocol needs a token. That myth made founders rich. It made retail investors poor. And it is still, quietly, happening right now.
There is a question the crypto industry doesn’t want you asking. But once you ask, the answer is obvious once you say it out loud
Does this blockchain actually need a token?
In most cases: no. And in many of the highest-profile collapses in crypto history, the token wasn’t the innovation. It was the exit.
The one test that changes everything
Strip away the whitepapers, the tokenomics decks, the Discord hype, and ask one thing:
What breaks if you remove the token?
If the answer is "nothing meaningful" then you’re not looking at infrastructure. You’re looking at a fundraising instrument dressed up in technical language.
This isn’t a cynical take. It’s an architectural one. Not all tokens are doing the same job, and conflating them is where both investors and builders go wrong.
Four kinds of tokens
I looked at a couple of networks and was able to narrow down their tokenomics into 4 main categories:
1. Structural (Security Tokens)
These are foundational to network survival.
If removed, consensus breaks or the system stops functioning.
Example: Bitcoin
Removing it collapses consensus entirely.
2. Essential (Execution Tokens)
These are required for running computation and preventing abuse within the system.
Example: ETH gas
Prices computation and prevents spam or resource abuse.
3. Contextual (Staking / Economic Security Tokens)
These enforce behavior through collateral and economic incentives, but are not always required for basic execution.
Example: Filecoin
Collateral is used to enforce honest storage and real-world behavior.
4. Optional (Governance Tokens)
These provide coordination and decision-making rights, but are not required for network execution or security.
Example: Governance tokens
Used for voting, upgrades, and treasury decisions.
Bitcoin’s token is non-negotiable. It incentivises miners, prices attacks, and aligns every participant in a system with no identity, no coordinator, no trust. Remove it and you don’t have a slower Bitcoin.
You have nothing.
Ethereum’s ETH occupies two of these categories simultaneously which is a genuine rarity, and a sign of compounding design rather than convenience. Gas must be paid in ETH. Validators stake ETH. Though it’s worth noting: account abstraction and EIP-4337 are steadily eroding the "gas must be ETH" argument for end users which shows a nuance that the industry rarely acknowledges.
Then you get to governance tokens. It is here the justification gets thin fast.
The Arbitrum problem
Arbitrum is one of the most instructive case studies in token design. Before ARB existed, the network was already processing transactions at scale, delivering real utility, and charging real fees. The system worked.
Then the token launched.
THE TRUTH ABOUT ARB
ARB didn’t enable execution neither did it secure the network. It transferred governance rights over a protocol that was still operating with a centralised sequencer. The "decentralisation" the token promised was, at best, a roadmap item. It is worth noting that ARB governance did transfer genuine chain-ownership powers away from Offchain Labs, and that a centralised sequencer does not, by itself, compromise the system’s safety but these nuances were rarely communicated to retail participants at launch.
That doesn’t make ARB worthless. But it does make it optional infrastructure and optionality has a price when you’re asking thousands of retail participants to assign it a multi-billion dollar valuation on day one.
The sad Terra story
The crypto industry tends to describe Terra’s collapse as a crisis of confidence. Incentives dried up. Demand was artificial. The peg broke.
This framing is incomplete, and it lets designers off the hook.
Terra’s death spiral was a mechanically exploitable flaw. The algorithmic relationship between LUNA and UST created a mathematically predictable attack surface. A sufficiently capitalised actor could apply pressure at the right point and trigger a self-reinforcing collapse. That’s not bad luck. That’s a broken system waiting for a sophisticated counterparty.
The lesson isn’t that token demand shouldn’t be manufactured. The lesson is that when your token’s entire stability model depends on circular incentives, you haven’t built a financial system. You’ve built a trap and when it sprang, roughly $45 billion in market capitalisation evaporated over the course of approximately one week in May 2022, with the most acute phase of the collapse occurring within the first three days.
The real problem: tokens come before products
Here’s the dynamic that explains most of crypto’s credibility problem in one sentence: in too many projects, the system didn’t produce the token the token produced the system.
A project creates a token. Sells it. Uses proceeds to build. Announces a roadmap. Calls it decentralisation.
This is efficient. It is also dangerous.
Because the moment you raise capital via token sale, you have investors and investors have expectations. The project is now optimising for token price alongside (or instead of) protocol health. These goals are not always aligned. During the 2020–2022 cycle, they were almost never aligned.
Projects reached multi-billion valuations with no corresponding usage. The token was the product. When speculative momentum reversed, there was nothing underneath to support the price because nothing underneath had ever been built to do so.
Governance tokens: the weakest justification, by far
Token governance sounds principled. Holders vote on protocol changes. Decisions are on-chain, transparent, auditable. Power flows to stakeholders.
The reality is messier. Voting participation is chronically low. Large holders dominate outcomes. Protocols stall on contentious decisions because quorum thresholds are never met. And the people most likely to vote are the ones with the most tokens. Which is to say, the ones who bought in earliest and have the most to gain from preserving the status quo.
The alternatives (multisigs, delegated councils, hybrid on/off-chain governance) are imperfect. But so is tokenised governance, and at least the alternatives don’t require you to sell a financial instrument to implement them. Newer experiments like Optimism’s bicameral Citizens' House model suggest the industry is slowly accepting this. It just isn’t advertising it.
Supply vs Usage
When token supply expands faster than meaningful demand, let us simply call it what it is: uncoupled issuance.
Supply goes up. Usage doesn’t follow. The gap gets filled with speculation, narrative cycles, and liquidity from the next cohort of buyers.
This isn’t unique to fraudulent projects. It’s the default state of most token launches because the incentive to issue early is overwhelming and the cost of doing so is borne almost entirely by later participants.
The question for the next cycle isn’t whether tokens can be designed into a system. Every competent team can do that. The question is whether they should be whether the industry will finally start penalising the ones that couldn’t give an honest answer.
Most tokens aren’t there to secure a network. They’re not there to run a system. They’re there to make a system investable. The sooner that’s treated as a red flag instead of a feature, the better.
