Token Functionality Framework
Editor’s Note: This article was published in May 2025.
Introduction
The Token Functionality Framework provides a structured methodology for classifying and analysing the diverse roles that tokens play within cryptoeconomic systems. As the blockchain ecosystem matures and token use cases multiply, there is an increasing need for clear, consistent frameworks that investors, project teams, and analysts can use to evaluate token functionality, value accrual potential, and long-term sustainability.
This framework distinguishes between seven core functionalities: Service Provision, Governance, Value Distribution, Membership, Payments, Collateral, and Asset Ownership. Each is characterised by distinct utilities or rights conferred upon token holders. By further categorising these functionalities as either originating from the endogenous system (built-in by design) or from exogenous systems (emerging through external interactions), this framework enables a nuanced analysis of how tokens generate and capture economic value.
Ultimately, the Token Functionality Framework is intended to help stakeholders better understand and communicate the strategic purpose and subsequent opportunities of tokens within complex economic systems, facilitating informed investment decisions, robust token design, and clearer regulatory assessments.
For a practical application of this framework, please see our Token Fundamentals dashboard.
Token Functionality Overview
A core principle of our framework is that a token's functionality encompasses the distinct roles that the token plays in enabling and delivering economic value within systems. Only those roles that require token ownership to engage and benefit from a system qualify as functionalities. In contrast, features that merely distribute value via tokens for non-token participation, such as Bitcoin miners receiving BTC rewards, do not meet this definition. In contrast, proof of stake validation participation relies on token ownership.
Our framework distinguishes between seven types of token functionality:
Service Provision
Governance
Value Distribution
Membership
Payments
Collateral
Asset Ownership
Originally, 'Signalling' was considered an eighth token functionality. However, it was excluded due to its highly subjective and context-dependent nature, which made it difficult to quantify value accrual from any such functionality.
Endogenous vs Exogenous Functionality
A key part of this framework is the distinction between functionalities embedded within the system by design (endogenous) and those that emerge through interactions with external economic systems (exogenous).
Endogenous functionalities are intentionally built into the system. They represent the roles and features directly integrated into the project.
Exogenous functionalities, on the other hand, arise through interactions with external systems or broader market dynamics. Although teams cannot explicitly design exogenous functionalities, there are design decisions that can influence the emergence of exogenous functionalities.
In the case of Ethereum, the endogenous functionalities naturally encompass those involving direct interactions with Ethereum itself. These include service provision, where validators stake ETH to participate in block production; value distribution, exemplified by the burning of base transaction fees; payments, involving users paying gas fees with ETH; and collateral, where staked ETH by validators is subject to slashing.
Conversely, ETH usage in applications, rollups, bridges, and real-world commerce represents exogenous functionalities. These systems operate independently, each with distinct economic designs, but they extend ETH’s overall functionality. When evaluating the value of a token such as ETH, it is essential to consider both the intrinsic value derived from functionalities within the endogenous system and the additional value contributed by these exogenous systems.
Service Provision
Service Provision functionality allows the holder to perform work or provide resources as a supply-side participant.
Endogenous Definition: Right to perform work or provide resources for the native system.
Exogenous Definition: Right to perform work or provide resources for an external system.
Comparables:
Traditional: Taxi Medallions, Bar Licenses, and Radio Spectrum Licences.
Web3: Right to participate and earn from the block production service (i.e. Ethereum’s ETH token or Solana’s SOL), the right to provide data indexing services (i.e. The Graph’s GRT), the right to provide transcoding services (i.e. Livepeer’s LPT).
Contextual Notes:
Revenue or minted rewards are typical incentives for supply-side participation.
Service Provision functionality excludes disincentives associated with malicious behaviour and underperformance, i.e. slashing.
Governance
Governance functionality gives the holder control of or input to the decision-making processes regarding the system.
Endogenous Definition: System governance rights exercised by the native token.
Exogenous Definition: External system governance rights exercised by the native token.
Comparables:
Traditional: Equity Shares in Private Investment Funds, Homeowner Association Memberships, and Co-operative Shares.
Web3: Right to govern protocol upgrades, technical & economic parameters, treasury allocation, and elect committee members (i.e. Optimism’s OP), the ability to suggest which tokens a centralised exchange should list (i.e. Bitget’s BGB).
Contextual Notes:
Governance functionality can be broadly categorised into two types: soft powers and hard powers. Soft powers involve making recommendations or sending signals to another entity to influence their decision-making. Hard powers, on the other hand, grant the token holder the direct authority to implement changes within a system.
Even in cases where token holders are financially rewarded for their governance service provisions, this is classified as governance functionality.
Value Distribution
Value Distribution functionality makes the holder eligible for a share of a system’s profit (surplus economic value). The right to surplus is not subject to meaningful system participation requirements or risk underwriting.
Endogenous Definition: Redistribution of native system value to token holders.
Exogenous Definition: Redistribution of value from external systems to token holders.
Comparables:
Traditional: Equity Dividend Rights, Share Buybacks, and Royalty Interest Rights.
Web3: Benefit from the burning of base transaction fees (i.e. ETH), benefit from an exchange platform using revenue to buyback and burn tokens (i.e. Binance’s BNB), receive extracted MEV (i.e. Jito’s JTO).
Contextual Notes:
Redistribution can take the form of direct payments (dividends), buybacks, buyback and burns, and other mechanisms that increase token holders' relative wealth in the system.
This functionality resembles traditional equity, which can lead to legal and regulatory implications for projects.
When token holders stake or lock their tokens to receive value distribution without performing work, providing resources or risking penalties like slashing, this solely represents a value distribution functionality.
Membership
Membership functionality gives the holder access to limited features and benefits by holding and/or locking tokens.
Endogenous Definition: Access to features and benefits provided by the system or community.
Exogenous Definition: Access to features and benefits provided by external parties/systems.
Comparables:
Traditional: Premium Credit Card Programmes, Cooperatives and Country Clubs, and Right-to-Use Timeshares.
Web3: Access to a platform’s launchpad sales (i.e. BNB), reduced borrowing rates on stablecoin borrowing (i.e. Aave’s AAVE), access to exclusive content and special tools (i.e. Story Protocol’s IP).
Contextual Notes:
Membership functionality grants access to exclusive platform features or benefits through active participation with the platform, such as participating in an exclusive sale or trading to make use of discounted fee benefits. In contrast, value distribution delivers automatic financial benefits (like dividends or buybacks) simply for holding tokens. This active versus passive distinction encourages deeper engagement with the platform.
Payments
Payments functionality allows the holder to use the token as a unit of account and a medium of exchange for transfers and transactions.
Endogenous Definition: Reliance of native system payments on the token as the unit of account and medium of exchange.
Exogenous Definition: Token is used as a unit of account and medium of exchange in external environments, including other dApps, blockchains, extensions of blockchains, such as layer two networks, and the real world.
Comparables:
Traditional: Fiat Currencies, Starbucks Stars, and World of Warcraft Gold.
Web3: Pays transaction gas fees in native token (i.e. Bitcoin’s BTC or ETH), used as a general-purpose payment token for Web3 commerce (i.e. Tether’s USDT or Circle’s USDC), layer two networks paying a layer one’s validators for data availability guarantees (i.e. Celestia’s TIA).
Contextual Notes:
Payments apply to services (e.g. blockspace or trading fees) and products (e.g. investments or domains).
Collateral
Collateral functionality allows the holder to do one of two things: either acquire financial leverage or to secure a system through cryptoeconomic disincentives based on the token’s effectiveness as a long-term store of value.
Endogenous Definition: Token allows the holder to acquire financial leverage within a system or to secure the native system cryptoeconomically.
Exogenous Definition: Token is considered a general store of value and thus allows the holder to acquire financial leverage from an external system or to secure an external system cryptoeconomically.
Comparables:
Traditional: Government Bonds, Real Estate, and Gold.
Web3: Validators stake tokens and get slashed if they act maliciously (e.g., ETH or Polkadot’s DOT), use token as collateral on CeFi and DeFi lending platforms (e.g., BTC or ETH), underwrite certain protocol risks by staking the token (e.g., AAVE).
Contextual Notes:
Store of Value recognition is complex, depending on social and reflexive market factors like asset age, market capitalization, and liquidity. Crucially, a token's store of value status requires external market validation, not just project claims. This relies on the assumption that the token will retain its value over time, making it suitable for underwriting economic security.
Slashing of collateral imposes a direct financial penalty on malicious behaviour by reducing the staked amount, ensuring that supply-side participants are economically disincentivised from compromising the system.
A native lending protocol can create leverage by accepting its token as collateral (endogenous collateral). However, this can introduce reflexive risk: liquidations may further drive down its value if the token's price drops. The Terra LUNA collapse exemplified this dynamic, where LUNA backed UST; redemptions required minting more LUNA, weakening its collateral value and triggering a ‘death spiral.’
A token can only have a collateral functionality if other functionalities already exist, since a token’s use as collateral depends on it already having a source of value.
Asset Ownership
Asset Ownership functionality confers a claim to the holder over physical or digital assets.
Endogenous Definition: The token is a claim on assets controlled or managed by the system.
Exogenous Definition: The token is a claim on an asset other than that controlled or managed by the system.
Comparables:
Traditional: Property Title Deeds, Royalty Rights, and Gold Certificates.
Web3: Tokenised fiat currency (i.e. USDT or USDC), claim on underlying staked asset pool (i.e. Lido’s stETH).
Contextual Notes:
Establishing connections to legal titles, arranging secure custody, and involving trusted entities for verification and enforcement are vital to ensuring robust claims related to tokens representing off-chain assets.
Value creation and increased risk can result when the underlying assets are invested or used productively.
Utilities & Rights
Certain functionalities can be categorised into utilities, rights, or, in some cases, a combination of both. Utilities represent functionalities that require the token holder to actively engage with or use their tokens. This active engagement involves performing actions or services directly with the token. In contrast, rights represent functionalities that provide benefits to the token holder passively without requiring active participation. Rights typically confer benefits merely by virtue of ownership or control of the token.
This active/passive distinction is fundamental to understanding token functionalities clearly. By explicitly distinguishing between active (utilities) and passive (rights) functionalities, one can better capture the full scope of benefits available through engagement with a project's token.
For instance, a payments functionality exemplifies a utility because the token holder must actively use their token to purchase goods or services. Conversely, a value distribution functionality exemplifies a right, as the holder passively receives benefits simply through token ownership, without any meaningful active use.
| Functionality | Utility/Right |
|---|---|
| Service Provision | Hybrid (Utility & Right) |
| Governance | Hybrid (Utility & Right) |
| Value Distribution | Right |
| Membership | Right |
| Payments | Utility |
| Collateral | Utility |
| Asset Ownership | Right |
Mechanisms that Enable Token Functionality
A mechanism is the specific process or method built into a cryptoeconomic system that enforces or activates a token’s functionality. While functionality defines what a token does for its holder, the mechanism explains how that functionality is achieved in practice. In short, if functionality is the 'what' (the benefit or role), then a mechanism is the 'how' (the technical or procedural tool that implements it).
Core Characteristics:
Logic: Mechanisms represent the logic that triggers outcomes based on defined conditions, whether on or off-chain. For example, a 'buyback-and-burn' mechanism enables value distribution functionality and provides the concrete procedure by which value is redistributed to token holders.
Functionality-Agnostic: While some mechanisms are often associated with a particular functionality (e.g. staking is frequently linked with service provision), mechanisms are not inherently limited to one functionality. Their design is flexible enough to support various functionalities.
Examples of Mechanisms:
Conditional Staking: Tokens are staked under specific conditions, such as time locks, slashing, or exposure to impermanent loss.
Token Burning: The process whereby tokens are permanently removed from circulation, reducing supply to potentially increase the value of remaining tokens. This is often used as a mechanism for value distribution.
Time-Based Token Locking: Tokens are locked for a period(s) to incentivise long-term participation in systems or to impact supply dynamics. This mechanism can help maintain network stability and distinguish between token holders who are short—or long-term oriented.
Economic Restaking: The economic value that secures decentralised networks is rehypothecated to maximise yield. A process that is enabled by providing nodes with additional opportunities to earn and contribute to decentralised networks because of collateral risk.
Automated Liquidation: If a token used as collateral falls below a set price threshold, a predetermined percentage of the collateral is automatically transferred (for example, to a Uniswap pool) and sold. This enforces risk management in lending scenarios.
Slashing: Tokens are confiscated and possibly burned in the event of particular behaviour from a participant.
Mechanisms underpin the economy of a product or service: they create value when they connect token flows to productive activity or clearly activate a token functionality. Conditional staking that grants validation rights, for instance, directly ties tokens to service provision or collateral functionality and deepens its economic role. By contrast, popular mechanisms such as unconditional staking contracts (no expectations, no risk) merely shuffle tokens among participants and can be mistaken for providing net value to the economy rather than just redistributing value. Clearly distinguishing between mechanisms that meaningfully contribute to the development of an economy and those that do not is therefore critical to analysing a token’s value.
Value Accrual
Value accrual is primarily driven by token functionality and its associated mechanisms.
Understanding and communicating the depth of value accrual is essential to grasp a token's role within an ecosystem. For example:
A token that enables revenue distribution (value distribution) may only capture value from one of several products in an ecosystem, limiting its impact.
Likewise, governance functionality may be present, but if it is narrowly scoped, this also restricts the value accrual derived from the functionality.
The broader and more integrated the token's functionality, the stronger its potential for capturing and retaining value within its system.
