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The Token Paradox: When Incentives That Build Platforms Also Hold Them Back

The Token Paradox: When Incentives That Build Platforms Also Hold Them Back


Every platform faces the same painful dilemma at launch: how do you attract users when there’s not yet anyone to interact with? Buyers won’t show up without sellers, and sellers won’t join without buyers. Economists call it the “chicken-and-egg problem.” Marketers know it as the growth trap that can stall even the most

promising digital ventures.

Blockchain technology seemed to offer a clever fix. Instead of begging users to join early, why not pay them—through tokens that rise in value as the platform grows? For a moment, it looked like the perfect alignment of incentives. Between 2017 and 2018, investors poured more than $17 billion into token-based projects built on this logic.

But there’s a catch. As it turns out, the very mechanism that fuels early adoption can later choke the system’s growth. Token incentives are not one-sided; they’re two-faced. Understanding this paradox is crucial for anyone designing tokenized ecosystems or marketing digital platforms.

The early magic of tokenized growth

Platforms thrive on network effects. The more users participate, the more valuable the platform becomes for everyone. In early stages, however, these effects don’t yet exist, and early adopters face uncertainty. Blockchain-based “utility tokens” were meant to solve this.

A utility token is both a currency for using the platform and a financial asset that can appreciate in value. When issued before launch—often through Initial Coin Offerings (ICOs)—these tokens give early users a stake in the platform’s future. If the platform succeeds, the limited token supply ensures rising demand and therefore higher token value.

That prospect creates a powerful financial incentive to join early. It transforms users into investors and evangelists. Their self-interest in the token’s appreciation aligns with the platform’s growth. This is how blockchain communities from Ethereum to Golem attracted critical mass long before their services were fully operational.

For startups, this approach offers two immediate advantages. First, it sidesteps traditional funding bottlenecks by letting the market finance development. Second, it builds early loyalty and community advocacy, since participants literally have a stake in the outcome.

At this stage, tokenization looks like a marketer’s dream—solving user acquisition and fundraising in one move.

The hidden flip side of token incentives

Once the platform launches, however, the dynamics change. The same token that spurred growth begins to behave like a deflationary currency—one that rises in value when users hold it instead of spending it.

Here’s why. As more people join and activity increases, the token’s value tends to rise. Rational users, expecting future appreciation, start hoarding their tokens instead of using them for transactions. They treat the token as an investment rather than a means of exchange.

This creates an unexpected consequence: the platform’s internal economy slows down. Buyers delay purchases, waiting for the token’s price to climb higher. Sellers face shrinking demand. Over time, the system that once promised acceleration begins to stagnate.

It’s the digital version of what economists call a deflationary spiral. When people expect money to be worth more tomorrow, they stop spending today. For tokenized platforms, that hesitation translates into reduced engagement and fewer transactions—the exact opposite of what network effects require.

The self-defeating cycle of token growth

To visualize this paradox, consider a blockchain-based freelance marketplace. Early participants buy tokens during the launch phase, expecting them to gain value as more freelancers and clients join. The anticipation drives token sales and builds buzz, which helps the platform cross its early adoption threshold.

But once the platform is operational, the calculus shifts. Every token a freelancer spends to access work or services is a token that might be worth more next month. As a result, both buyers and sellers become reluctant to transact. The marketplace starts to freeze under the weight of its own incentive system.

The study behind this analysis models that exact scenario. The authors find that tokenized incentives do indeed spark early participation—but later undermine platform usage by encouraging saving over spending. In other words, the mechanism that overcomes the “chicken and egg” problem at birth creates a “golden cage” later on.

The strategic lesson for platform designers

The core insight for leaders is simple: tokenization works best as a launch accelerator, not a permanent business model. Tokens can successfully mobilize early adopters, but without careful design, they eventually discourage the very activity they were meant to promote.

For marketers and executives exploring token-based ecosystems, several strategic principles emerge:

  1. Separate investment and transaction functions. Don’t rely on one token to do both. Use distinct mechanisms—one for community ownership and another for everyday use—to prevent hoarding behavior.

  2. Design for velocity, not scarcity. A token that rarely circulates becomes a dead asset. Encourage use through transaction rewards, time-based incentives, or gradual inflation tied to platform activity.

  3. Align token value with utility. The more a token is spent, the more valuable it should become. That flips the incentive from saving to participation.

Think of it as designing an economy, not just a currency. Tokens should move, not sit idle.

The broader takeaway for marketers and investors

The “two-faced” nature of token incentives reveals a broader truth about digital economies: financial motivation can’t replace real utility. If people join only to profit, they’ll leave when the profit slows. Sustainable engagement comes when the platform delivers lasting value—through convenience, creativity, or community—not just capital gains.

For investors, the lesson is to look past the hype of token sales and ask harder questions about usage patterns. Does the platform’s design encourage spending or saving? Are participants rewarded for transactions or speculation?

For marketing strategists, tokenization offers an experimental toolkit—but also a cautionary tale. Incentives can spark momentum, but they can’t substitute for genuine engagement. The token economy promises a new way to fund and grow platforms, yet without sound economic design, it risks turning enthusiasm into inertia.


Original article: Drasch, B. J., Fridgen, G., Manner-Romberg, T., Nolting, F. M., & Radszuwill, S. (2020). The token’s secret: The two-faced financial incentive of the token economy. Electronic Markets, 30(3), 557-567.


Disclaimer: The content on this website is for marketing innovation and education purposes only and should not be considered investment advice.


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