Game Theory 1: Game Theory Overview

GAME THEORY OVERVIEW

We live in a world that exhibits extraordinary levels of order and organization on all levels from the smallest molecules, to human social organizations to the entire universe. We might say that it is the job of the enterprise of science to try and understand this extraordinary order and organization that we see in the world around us. And in many ways, we have been very successful in the past few hundred years in making progress in this project. We understand the workings of the atom, the structure of DNA, we understand the origins of the universe, how galaxies form and the precise elliptical orbit of the Earth around the Sun.

But what all these systems that we have been so good at describing and predicting the behavior of have in common is that they are inert. That is, they do not have any degree of autonomous adaptive capacity.

Here we can make a fundamental distinction between those systems that are composed of inert elements and those that are composed of adaptive elements.

Because these inert systems that are studied in physics and chemistry do not have adaptive capacity we can describe them through a single global rule. We can write equations about how elements will react when combined or how the solar system will change over time according to a set of differential equations in a deterministic fashion.

Unfortunately, this approach does not work when dealing with systems that are composed of adaptive elements that are non-deterministic in their behavior.

Adaptation gives the elements in the system the capacity to respond in different ways depending on the local information they receive. And the overall organization that forms is in fact not a product of a global rule, like we might have for a chemical reaction. Instead, the result is a product of how these adaptive agents respond to each other.

With these adaptive systems, the overall makeup of the organization is not necessarily defined by a top-down rule, but may emerge out of how the elements adapt and respond to each other locally.

There is no algebraic or differential equation to describe how international politics works, why families fall apart. or the success of a business within a market. The overall workings of these adaptive systems is an emergent phenomenon of local rules and interdependencies.

GAME THEORY

And it is these systems composed of adaptive agents that are interdependent that game theory tries to understand and model.

A game is a system wherein adaptive agents are interdependent in affecting each other and the overall outcome.

Game theory is the mathematical modeling of such systems.

These adaptive systems are pervasive in our world, from cities and traffic to economies, financial markets, social networks, ecosystems, politics, and business.

The central ingredients of these systems is that of agents and interdependency. Without either of these elements, we don’t have a game.

If the elements did not have agency and the capacity for adaptation they would have no choices and we would have a deterministic system.

Likewise, if they were not interdependent then they would not form some combined organization and we would then study them in isolation in which case likewise we would not have a game.

AGENTS

Games are formed out of the interdependencies between adaptive agents.

So what is an adaptive agent? An agent is any entity that has what we call agency. Agency is the capacity to make choices based upon information and act upon those choices autonomously to affect the state of their environment.

Examples of agents include social agents, such as individual human beings, businesses, governments, etc. They may be biological agents such as bacteria, plants, or mammals. They may also be technologies such as robots or algorithms of various kind.

All adaptive systems regulate some process and they are designed to maintain and develop their structure and functioning. For example, plants process light and other nutrients and their adaptive capacity enables them to alter their state so as to intercept more of those resources. The same is true for bacteria and animals, as well as for a basketball team or a business. They all have some conception of value that represents whatever is the resource that they require, whether that is sunlight, fuel, food, money etc.

This creates what we can call a value system. That is to say, whatever structure or process they are trying to develop forms the basis for their conception of value and they use their agency to act and make choices in the world to improve their status with respect to whatever it is they value.

As we can see this concept of value is highly abstract. And as we will discuss in a future module this value system can be very simple or very complex but it forms the foundations to what we are dealing with when talking about adaptive agents and games.

You can’t model a game without understanding what the agents value and the better you understand what they really value and incorporate it into the model the better the model will be.

Thus agents can also be defined by what we call goal oriented behavior. They have some model as to what they value and they take actions to affect their environment in order to achieve more of whatever is defined as value.

GAMES

In game theory, a game is any context within which adaptive agents interact and in so doing become interdependent.

Interdependence means that the values associated with some property of one element become correlated with those of another. In this context, it means that the goal attainment of one agent becomes correlated with the others.

The value or payoff to one agent in the interaction is associated with that of the others.

This gives us a game. Wherein agents have a value system, they can make choices and take actions that affect others and the outcome of those interactions will have a certain payoff for all the agents involved.

A game then being a very abstract model can be applied to many circumstances of interest to researchers. And it has become a mainstream tool within the social sciences of economics, political science and sociology but also in biology and computer science.

The trade negotiations between two nations can be modeled as a game. The interaction of businesses within a market is a game. The different strategies adopted by creatures in an ecosystem can be seen as a game. The interaction between a seller and buyer as they haggle over the price of an item is a form of game. The provision of public goods and the formation of organizations can be seen as games. Likewise, the routing of internet traffic and the interaction between financial algorithms are games.

To quickly take a simple concrete example of a game, let’s think about the current situation with respect to international politics and climate change. In this game, we have all of the world’s countries and all countries will benefit from a stable climate. But it requires them to cooperate and all pay the price of reducing emissions in order to achieve this.

Although this cooperative outcome would be best for all, it is in fact in the interest of any nation state to defect on their commitments as then they would get the benefit of others reducing their pollution without having to pay the cost of reducing their own emissions.

Because in this game it is in the private interests of each to defect, in the absence of some overall coordination mechanism the best strategy for an agent to adopt given only their own cost-benefit analysis, is to defect and thus all will defect and we get the worst outcome for the overall system.

COOPERATION

This game is called the prisoner’s dilemma and it is the classical example given of a game, because it captures in very simplified terms the core dynamic, between cooperation and competition, that is at the heart of almost all situations of interdependence between adaptive agents.

In the interdependency between agents there comes to form two different levels to the system: the macro-level, wherein they are all combined and have to work cooperatively to achieve an overall successful outcome, and the micro-level, wherein we have individual agents pursuing their own agendas according to their own cost-benefit analysis.

It is precisely because the rules and dynamics that govern the whole and those that govern the parts are not aligned that we get this core constraint between cooperation and competition.

This is what is called the social dilemma and it can be stated very simply as what is rational for the individual is irrational for the whole.

If you do what is rational according to the rules of the macro-level to achieve cooperation then you will be operating in a way that is irrational to the rules of the micro-level and vice versa.

If either of these dimensions to the system was removed then we would not have this core constraint. If the agents were not interdependent within the whole organization then there would be no macro-level dynamic and the set of parts would be simply governed by the rules of the agents locally.

Equally, if each agent always acted in the interests of the whole without interest for their own cost-benefit analysis, then again we could do away with the rules governing the micro-level and we would simply have one set of rules governing the whole thus there would be no core dynamic of interest, things would be very simple and straightforward. The complexity arises out of the interaction between these two different rule sets and trying to resolve it by aligning the interests of the individuals with those of the whole.

SUMMARY

So we have outlined what game theory is, talking about it as the study of situations of interdependence between adaptive agents and how these interdependencies create the core dynamic of cooperation and competition that is of central interest to many. In the coming videos in this section, we will talk about the different elements involved in games and the different types of games we might encounter.



Game Theory Course Introduction

PREFACE

As we watch the news each day, many of us ask ourselves why people can’t cooperate, work together for economic prosperity and security for all, against war? Why can’t we come together against the degradation of our environment?

But in strong contrast to this, the central question in the study of human evolution is why humans are so extraordinary cooperative as compared with many other creatures. In most primate groups, competition is the norm, but humans form vast complex systems of cooperation.

Humans live out their lives in societies, and the outcomes of those social systems and our individual lives is largely a function of the nature of our interaction with others. A central question of interest across the social sciences, economics, and management is this question of how people interact with each other and the structures of cooperation and conflict that emerge out of these.

Of course, social interaction is a very complex phenomenon. We see people form friendships, trading partners, romantic partnerships, business compete in markets, countries go to war, the list of types of interaction between actors is almost endless.

For thousands of years, we have searched for the answers to why humans cooperate or enter into conflict by looking at the nature of the individuals themselves. But there is another way of posing this question, where we look at the structure of the system wherein agents interact, and ask how does the innate structure of that system create the emergent outcomes?

The study of these systems is called game theory. Game theory is the formal study of situations of interdependence between adaptive agents and the dynamics of cooperation and competition that emerge out of this. These agents may be individual people, groups, social organizations, but they may also be biological creatures, they may be technologies.

The concepts of game theory provide a language to formulate, structure, analyze, and understand strategic interactions between agents of all kind.

Since its advent during the mid 20th-century, game theory has become a mainstream tool for researchers in many areas most notably, economics, management studies, psychology, political science, anthropology, computer science and biology. However, the limitations of classical game theory that developed during the mid 20th century are today well known.

Thus, in this course, we will introduce you to the basics of classical game theory while making explicit the limitations of such models. We will build upon this basic understanding by then introducing you to new developments within the field, such as evolutionary game theory and network game theory that try to expand this core framework.

In the first section, we will take an overview of Game Theory. We will introduce you to the models for representing games, the different elements involved in a game and the various factors that affect the nature and structure of a game being played.

In the second section, we look at Non-cooperative Games. Here you will be introduced to the classical tools of game theory used for studying competitive strategic interaction based around the idea of Nash equilibrium.

We will illustrate the dynamics of such interactions and various formal rules for solving non-cooperative games.

In the third section, we turn our attention to the theme of Cooperation.

We start out with a general discourse on the nature of social cooperation before going on to explore these ideas within a number of popular models, such as the social dilemma, tragedy of the commons, and public goods games. Finally, talking about ways for solving social dilemmas through enabling cooperative structures.

The last section of the course deals with how games play out over time as we look at Evolutionary Game Theory. Here we talk about how game theory has been generalized to whole populations of agents interacting over time through an evolutionary process, to create a constantly changing dynamic as structures of cooperation rise and fall.

Finally, in this section we will talk about the new area of Network Game Theory, that helps to model how games take place within some context that can be understood as a network of interdependencies.

This book is a gentle introduction to game theory and it should be accessible to all. Unlike a more traditional course in game theory, the aim of this book will not be on the formalities of classical game theory and solving for Nash equilibrium, but instead using this modeling framework as a tool for reasoning about the real world dynamics of cooperation and competition.

What is Machine Learning?

Artificial Intelligence (AI) is a catchall term that refers to the science of computers with human-like capabilities

Machine learning is a sub-category of AI, or a way of doing AI.

Machine learning is not the same as programming. it’s a way of teaching computers what to do by way of example.

You give the computer a bunch of examples of what you want it to do and it figures out how to do it by itself.

This video provides a description of how machine learning could be used to individually identify ducks and geese in a barn without teaching them all about the details of ducks and geese.

Token Economics 22: Trust & Transparency

TRUST AND TRANSPARENCY

In a Facebook survey done in 2016 asking millennials if they trust banks, 92% of them said they do not trust banks.

In contrast to this, the blockchain is creating a new form of native digital trust that is significantly absent in existing institutions today.

This loss of trust in centralized institutions is one of the hallmarks of many post-industrial societies today. In a world of trusted centralized institutions, few would take interest in a distributed system that requires a paradigm shift in thinking.

These token economies are going to gain the trust that is lost from our existing institutions by being more transparent and the fact that they are auto-enforced by code.

Blockchains are a technology of transparency. Public ledger systems let us see all the interactions in the whole system – even if those interactions are anonymous – and this is very different to the world we live in today.

TRANSPARENCY

The closed nature and misalignment of interests within centralized institutions of today reduces their capacity for transparency.

Facebook does not tell you that they are making a profit out of you, with your data and the advertisements they deliver to you because there is a subtle misalignment of interests there and they don’t want that to be transparent. Likewise, their algorithms are black boxes, they don’t want others to know about them.

Centralized systems create many boundaries that block the flow of information across the whole network and increase its overall opacity.

Gavin Wood a co-founder of Ethereum describes well the kind of economy that we have created with centralization when he says, “the world is much like a set of walled gardens, within the garden you’re free to play, you are taken in if you accept the authority of the household that actually owns the garden. But it’s very difficult to get between the gardens in reality. This boils down to banks and various financial institutions making it very difficult and timely reconciling transactions that go between them. But the more important thing is that as individuals and small business owners it’s very difficult for us to interact with each other if we don’t yet know or trust each other. Instead we have to go to these guardians of society, these intermediaries, these trusted authorities the middlemen in order to interact.”

When you remove the centralized component in these networks you also remove the wall around them that they create, which can work to greatly increase transparency across whole networks. By switching to a peer-to-peer model, you switch to a model based upon direct feedback loops between peers. To get that dynamic real-time information feedback loop you need transparency. The information has to actually flow directly instead of being mediated.

By aligning the interests of the network, you can make transparency possible as people have less of their misaligned incentives to hide from each other. When things are on the blockchain then everyone can go and audit what has happened. This is like finding bugs in open source software where “many eyes make all bugs shallow.”

Part of the problem with centralized systems is that they are vulnerable to a rich get richer lock-in effect.

The issue with the centralized model is that large organizations get capital easier, greater liquidity and they get to dictate terms because they are seen to be more efficient and stable. This makes it more difficult for new startups to compete.

When the Internet started it was built on open protocols like email or TCP/IP and everyone was able to create. It was easy to discover websites. That’s not true in the internet anymore.

Closed networks like Facebook or Twitter are gated communities that use their user data to gain an advantage.

If you are a startup they also have the potential to shut you down as soon as you compete with them or violate their terms of service.

Once a centralized organization of this kind has grown it is very easy for them to become extractive, because it is difficult for people to change providers. Any system that becomes extractive will not want you to know that it is such and this will again reduce transparency in the system.

FRACTURED SYSTEM

One of the major challenges faced by organizations today is rapidly escalating complexity within almost all domains.

As our environments become more complex bureaucratic organizations have responded to that by creating more subsystems – more specialized departments and domains – the result being that things have been broken up into these different silos.

These silos provide the organization with some of the specialized capabilities for it to respond to the increased complexity within its environment. But at the same time have the effect of locking information about what’s going on inside because they don’t want to share that information; because they’re afraid competitors or customers will take advantage.

The more complicated things get the more we basically break things up and the more fractured and siloed the system becomes.

The greater the resistance to the overall flow of information within the system and the greater the overall opacity.

Blockchain networks enable us to collaborate within large networks, connecting horizontally and replace proprietary technology with open source protocols, greatly increasing transparency on the network.

This transparency can be used to reduce risk and uncertainty and thus reduce costs. With the blockchain – because everything is digitally native – we can have the actual information about transactions within the network. And we can, for example, lend against that with minimal risk.

If there is a smart contract that an organization pays you every month then you can use that to get a loan against it with minimal risk and thus minimal cost.

Also because these may be smart contracts you could just adjust those contract so that the capital is automatically routed to the lender as payback. Also no one can run away with the money because it is controlled by the network which reduces risk again.

Likewise the network could control for bad actors routing the finance around them.

OUTCOMES ECONOMY

Just as the underlying technology is based upon a proof-of-work or proof-of-stake system, so to a true services economy that the blockchain enables should be based on outcomes delivered. Unlike selling products which are all about the promise of a functional system, services can be measured according to the actual functionality delivered; the work delivered instead of simply being given a product that may or may not function well. The proliferation of sensing and big data analytics will enable us to measure and quantify our economies in unimaginable ways and in so doing begin to track the actual functionality delivered, which is at the end of the day what people really want, or are increasingly wanting as the so-called “burden of ownership” of the industrial age product-based system starts to take hold within consumer societies.

An “outcomes” system of this kind is again just one more way that a blockchain based economy could work to better match the information layer of token exchange with the underlying flows of real value.

Token Economics 21: Automated Networks

AUTOMATED NETWORKS AND SMART CONTRACTS

The term used to describe the new forms of organization created by blockchain networks is “decentralized autonomous organizations.” But one could just as well term them “decentralized automated organizations” as the automation of basic organizational procedures will be a central aspect of this new form of economic organization.

Blockchain protocols build upon the capacities of telecommunication networks to interconnect, and of the capacities of the microprocessor to run complex software systems for coordination. But whereas the previous set of information technologies gave us digital platforms for organizing economic production, the blockchain promises to extend this model to fully automated distributed networks.

The promise of the blockchain since its beginnings has been to challenge centralized, top-down decision-making through, distributed consensus, radical transparency, and auto enforceable code.

Smart contracts on the blockchain disintermediate existing institutions and radically reduce transaction costs thus allowing for new forms of decentralized organizational structures that were not feasible before. More specifically, this business model “automates” the governance to a certain degree. It frees up more time to actually spend on getting work done, although it also requires a much larger leap of faith by all parties involved to trust in an automated “trustless system.”

As one commentator noted, we can call private blockchains training wheels for public blockchains and now public blockchains are in many ways just training wheels for these new autonomous decentralized networks, which just work and everyone can trust them. These are gonna be some of the most powerful networks that we have seen because the code is immutable and many functions are automated. In many ways, they will be unstoppable in the way that Bitcoin is automated and likewise in many ways unstoppable.

DECENTRALIZED ENTERPRISES

An enterprise can be defined by its business model as a system that operates within some environment, intercepting resources and processing those into some output of value, while capturing some of that value and redistributing it within the organization.

People work together to create value and then redistribute that value amongst members, what changes with the blockchain model is that we take out the centralized coordination component and replace it with code in the form of smart contracts.

Smart contracts on the blockchain radically reduce transaction costs and automate basic management operations creating the basis for a peer-to-peer economy; allowing for new forms of organizational structures that were not feasible before.

The enterprise can be converted into an automated plug-n-play model where anyone who can deliver a service can plug into the system and provide that service directly through a smart contract receiving tokens in exchange.

Brendan Blumer CEO of Block.one, the makers of the EOS network, describes this evolution in the enterprise when he says “what we’re really moving into is the era of open source companies and the types of innovations that you’re seeing with open source technology, the explosion in development and projects like GitHub… the core of open source allows us to all build on each other’s work. In the future when I wake up I may not even have an employee or employer. I may be able to just work for absolutely any company in the world that I can add value to. Imagine that you wake up and say I have a great idea for Airbnb, you examine the code you start writing something and you put it out there, the public accepts that, forks you into the network, pays you a bounty, now you’ve got a decentralized network a piece of code that has essentially just hired you, that has taken your ideas, that has incorporated them into the organization and you have been paid and they don’t even know who you are.”

When everything is open source and everything is able to be viewed anyone can add value to that business, anyone can connect and say what if we do this, or what if we add that feature. The past decades have shown how open-sourcing software and open-sourcing development can skyrocket the acceleration of technology innovation and service delivery.

Because we’re not reinventing the wheel anymore and anyone can come in and add a good idea and it can be adopted by the greater public. What happens when you do that to a company? When you’re competing with Uber with everybody as your employee? Every bit of your code is auditable, anyone can make suggestions, if those suggestions are good they can be forked right in that’s really what these decentralized autonomous corporations enable.

EMPLOYMENT

Blockchain networks will extend the recent development of the on-demand economy and online freelancing platforms that have enabled people to work as freelancers contributing to many different projects without one fix form of employment.

By digitizing everything, automating networks and enabling micro exchanges of value token networks will enable a new mode of production where tasks are modularized and made available for anyone with skills to pick up, perform and receive tokens in exchange. And of course, because token economies are multi-value economies this production process could be of any kind.

The influential blockchain thinker William Mougayar describes this when he says “We are moving from user-generated content that you are familiar with, which is really the cornerstone of social media when you post a picture on Instagram, when you write a few lines on Facebook or Twitter, that is called user-generated content. In the future, we are going to have user-generated work, but this is work that we are going to get paid for by the blockchain by all of these cryptocurrencies that will come into existence.”

A good illustration of this is initial bounty offerings (IBO) which are a more recent development to ICOs. IBOs are “a way to crowdsource human resources, business development, marketing and user acquisition for blockchain technology ecosystems, by offering network tokens in exchange for contributions to the ecosystem.” They represent a limited-time process by which a new cryptocurrency is made public and distributed to people who invest their skills and time to earn rewards in the new cryptocurrency. Unlike an Initial Coin Offering where the coins are sold, an IBO requires an exchange of skills and greater commitment by community members in the development of the technology.

UCash is one project using this method, you can earn UCASH tokens for doing tasks like, writing an article, blog post or producing a video about UCASH or translating the UCASH white paper into different languages.

The technologist Vince Meens talks about the potential at the intersection of virtual reality (VR) and blockchain for enabling these new on-demand token networks. Where anyone could put a bounty on something that they want to see done, whether that is having the lawn mowed in the park or feeding homeless people. With the use of VR goggles, one could walk around and see the digital currency bounties left all around us available for earning by performing valued tasks.

Indeed bounty hunting is a surprisingly general and powerful model which could be used to incentivise people to find and remove any unwanted phenomena. We could have bounty hunters that are going after rewards for finding bad transactions on the blockchain, for finding bad data on the internet, for removing spam messages or for finding violations of some law etc. We just simply post rewards for finding anything that we don’t want and it is a decentralized system anyone can go after the reward. Once again this is the power of being able to now design incentive systems.

SERVICE DELIVERY

Likewise, these smart contract networks will automate the provisioning of services. Entrepreneurs will be able to create an application and release it into the “wild” ready to be employed by anyone and everyone who needs that functionality. The entrepreneur in turn simply observes micro-payments accumulating in their wallet. A designer could release their design into the “wild” and end users could download that design to their 3D printer and have the product almost immediately, paying automatically with their download.

Likewise, music services will follow suit. Currently, music licensing relies heavily on paperwork and trust in a music industry dominated by centralized organizations that take the majority of profits at the expense of producers. These intermediaries between the producer and listener of the music can easily take 80% of the price of the good. Musicians hope and trust that sales of their music and merchandise are properly calculated and reported to them but have no way of really verifying. As streaming and digital downloads eliminate physical sales of media containing songs, the music would appear to be a great candidate for tokenization. If music ownership was represented on a blockchain, the many participants in creating the music could have their shares set electronically. The vision would be to have every listener of their music require “unlocking” the file and paying, with payment then being distributed to the appropriate holders.

This model could though, be generalized to the whole of the economy. Once a product has been turned into a service the terms of that service can be encoded in a smart contract, the contract is put on the blockchain and made publicly accessible through APIs. Tokens are then automatically streamed to a wallet in exchange for the usage of the service. That is a generic model that would apply to any economic good once it has been servitized.

SUPPLY NETWORKS

These automated blockchain token networks hold out the possibility to radically improve the efficiency across the supply networks that run our globalized economy. The founder of the Sweetbridge project describes well the role of supply chains in the global economy when he notes, “most people don’t know what supply chains are, but everything you eat everything you wear almost everything you own and everything we use on a day to day basis was processed by, moved, stored or created in a supply chain. Supply chains manage 2/3 of global trade, so that’s about 54 trillion dollars worth of global GDP. Supply chain is the science of managing the creation of something and the construction of it through value chains that have many, many parties involved in them, so the blockchain has an ability to affect the supply chain far more than I think most people recognize.”

Token networks will enable automated coordination and the flow of goods along whole supply chains. Supply chains that currently involve massive amounts of friction, in terms of verification, regulation, financing and various forms of information exchanges. These supply chains may work to a certain extent in developed economies, but 40% of exchanges are now between emerging markets. Take for example a rice farmer who wants to sell rice from Vietnam to Nigeria, this involves an exchange between Vietnamese dong and Nigerian pounds. Just to go from one of those currencies into the dollar – the international exchange currency – and then back into the other currency it may costs up to 20% of the transaction value.

Binkabi, is one blockchain startup that tries to replace this model with a direct peer-to-peer network for agricultural products, which automatically identifies the trades coming from the different countries in different directions and tries to match those of similar size so that the companies can exchange currencies directly between them. This can work to take out the centralized component and remove massive amounts of redundancy in the network.

But going forward we will start to tokenize whole supply chains. As we begin to understand supply chains not in terms of products and companies but instead as service networks or value networks that deliver a service and build token economies around that process of value delivery. Here again whole supply chains, just like enterprises and whole economies, will evolve into service-oriented networks where tokens reflect the service delivered and individuals and organization can plug in to deliver modular capabilities to the network receiving tokens in return.

IoT

The important thing to always remember in this respect is that much of the greatest potential of blockchain systems is only possible given the effective interaction between the token network and the physical world. Having highly efficient automated token networks that then bump into very slow, manual, physical procedures would be like driving a super fast Ferrari in rush hour traffic.

Blockchains are protocols for networks, they can only deal with what is inside the network. But for those networks to become the dominant mode for organizing society and economy, they have to interact with the real world of people, organizations, things, and physical environments.

At present virtually all of our newly formed networked systems are dependent upon traditional centralized systems of organization to support their existence in the physical world. The only way that these networks are going to gain their full autonomy is by interacting directly with physical technology and real-world environments. This is now made possible by the Internet of Things and advanced data analytics.

The blockchain and token economies exist within the context of this next generation of web technologies and they have to all be working synergistically.

If the linkage between IoT, big data, and the blockchain is not made then these new systems will remain – like the networks of web 2.0 – dependent upon industrial age institutions and the potential will be lost.

We will end up in the same situation as previously where networks like Twitter and Facebook gave people the tools to connect and start the protests of the Arab spring, but not the physical means to realize that change.

Both the Internet of Things and complex analytics are massive technological changes. If you simply focus on token economies and the blockchain without thinking about those other elements, you are missing the bigger picture. The platforms that manage to use all three effectively and synergistically will likely, for better or worse, dominate the world of tomorrow.

Token Economics 20: Token Service Networks

TOKEN SERVICE NETWORKS

In just the past few decades our world has been radically changed by the development of almost invisible layers of information networks that now wrap around the planet connecting ever more people into common exchanges.

Telecommunications has connected us. Online platforms have provided the coordination mechanisms for organizing more and more spheres of our lives.

But now a new dimension is being added to this as blockchains enable us to securely record and exchange value automatically and with low friction.

It is when we put all these components together that we get the infrastructure for truly rethinking and redesigning economic and enterprise structures based upon open dynamic networks.

Information technology, telecommunication networks, online platforms and blockchains are enabling us to create ever larger systems of organization for economic production and exchange. Enabling the switch from closed organizations competing to open networks with these networks being organized via market mechanisms.

The blockchain, through smart contracts, lowers the information costs and transaction costs associated with many interorganizational contractual arrangements. And so expands the scale and scope of economic activity that can be undertaken.

It allows markets to operate where before only large firms could operate. And it allows businesses and markets to operate where before only government could operate.

Previously institutional structures and technologies worked to strengthened coordination and cooperation within organizations leading to the formation of ever larger centralized operations.

Large-scale differentiation of labor was a key innovation in the enterprise that greatly expanded during the industrial revolution. With mechanized automation individuals could focus on repeatedly performing the same operation rapidly with those diverse activities being coordinated through production processes. Meaning that it was now not any one individual that produced things, but instead the whole organization.

We saw the development of the very large enterprises of the industrial age, such as the corporations that were hired to build the American railroads, with ranks of salary middle managers expanding as fast as the tracks were being laid down.

This industrial model for the generation of value is largely a product of two factors. Firstly, the centralization of production and economies of scale that is inherent to an industrial economy.

And secondly, it is also a product of the relatively high cost of collaboration and communication.

In order to achieve the mass scale that the industrial environment selectively favored, standardization and predictability were a key component. Within this model, there is a strong divide between producers of value and consumers.

On the one side, we have formal well-bounded professional organizations. By aiming to maximize their efficiency, they include only the people who are most productive.

On the other side, we have the consumers who consume the products and services made by the professional organizations. There is a strong divide between producers and consumers, professionals and amateurs, work and play.

Today information technology is changing the very foundation of this dynamic. Blockchains radically reduce the cost of interaction and collaboration between organizations, compared to within them. Thus, the natural size of an organization can be far smaller.

So, once large enterprises have tokenized, then it will also be natural for them to split into smaller and smaller entities, and to reform as needed.

The distinction between the inside of organizations and their external market economy will become increasingly eroded as networked forms of coordination span across traditional boundaries linking inside and outside in a greatly more fluid fashion.

This will have a very profound effect on the overall structure of our economies, as they go from many closed organizations competing within markets to the emergence of large ecosystems of collaboration along whole supply chains and within the provisioning of complex service systems.

Indeed the last few decades with the emergence of the internet has already seen the formation of large business ecosystems.

Eamonn Kelly of Deloitte consulting describes this transformation well when he notes “ecosystems today are doing nothing less than redefining the shape and structure of the economy. They’re increasingly determining business success and business failure. They’re enabling massive and rapid innovation around the world and essentially they’re playing a very, very critical role in shaping the future of our society… Essentially boundaries are blurring everywhere, the boundaries between what large firms and small firms can do. The boundaries between industries and sectors. The boundaries between organizations. The boundaries between technology domains. The boundaries between producers and consumers. Where consumers used to be passive recipients now they’re active participants in the economy… We’re now living in a world where there are more nodes across more networks with more specialized capabilities and above all this extraordinary ability to connect them, to collaborate, to co-create across these systems. That’s the fundamental shift that’s restructuring economies and I think is actually going to fundamentally change our society.”

SERVICE ECOSYSTEMS

Recently an important idea has been gaining acceptance within the business community, the idea that businesses of many shapes and sizes can thrive and serve customers better as participants in ecosystems. More diverse and collaborative, more adaptive and agile than traditional industry structures and supply chains.

The term “ecosystem” is a useful metaphor that points to a deep interdependence across players as they Co-evolve and together create and share resources.

Many of these ecosystems are built on top of powerful platforms that facilitate connectivity and invite the active participation of a large number of other players.

Businesses that understand ecosystems and how they work are discovering exhilarating new opportunities to co-create new value streams with multiple players often including customers. They achieve this by harnessing the new coordinating power of advanced technologies to create scale and serve untapped markets, faster than ever before, work with others to meet important human needs and by delivering complex services in ways that would be beyond the capacities of any single organization. They attract and activate passionate communities of talented individuals and organizations and accelerate learning and innovation. To understand the potential of this idea we need just think of one relatively trivial example.

Imagine all of the drug companies having the means and incentives to collaborate on producing a single best drug instead of 90% of their resources being wasted competing while only one gets to patent a new drug.

ARCHITECTURE

With the shift towards token economics, our economies will evolve from the traditional model of the industrial age, based around centralized closed organizations competing, to more user-generated systems that both collaborate and compete within large open networks.

The critical change that will come about will be the move towards a service-oriented architecture to whole macro economies and indeed the global economy as a whole.

As the strength of these open trusted networks grows and connectivity proliferates the centralized organization will become unbundled along many dimensions and the product based, push model of competition of the past will evolve into a dynamic, plug and play networked model that works to aggregate modular on-demand services around the needs of end users. Over time those service-oriented blockchain based networks will become increasingly automated through the development of smart contracts.

In a recent article from the RMIT Blockchain Innovation Hub, the authors write “for many industries, the blockchain will radically redefine the boundaries of the firm, allowing individuals to trade their talents and skills in an environment devoid of big business. The eclipse of the large public firm has been predicted before, of course, but this time we believe those predictions will eventuate for many, if not most, industries.”

The organizational paradigm of the token economy will be large service networks. Digital networking technologies enable networks to overcome their historical limits. They can, at the same time, be flexible and adaptive thanks to their capacity to decentralize performance along a network of autonomous components, while still being able to coordinate all this decentralized activity towards a shared purpose.

A huge structural change that is coming about as we move into the information services economy – base on these information networks – is the shift from static structures to dynamic flows of value as the organizational model.

Unlike the industrial economy that was based on fixed structure such as the formal hierarchy or products produced, a service and token economy is one that is fundamentally based on value delivered.

The organization is not based on fixed structures, roles or boundaries, but instead is based more upon value produced and exchange, this value can be defined in terms of services. From this perspective, the organization is a network of value exchange and the members of the organization are those that provide value, the service providers.

MICRO TRANSACTIONS

Existing centralized companies when they design their products they have to design around the constraints of the existing fiat currency system.

Although not often noticed this, in fact, has a lot of limitations as transfer costs are high. They are slow that’s why we pay employees at the end of the month. It is for this reason that we don’t pay every person, every second. That’s a constraint of the existing financial system and we build our products around those constraints. But this is going to change with the micro-transaction capacities of the blockchain.

When economic activity is moved to a blockchain, tokenized and servitized we can then begin to actually track the real flow of value exchanges and match those with token exchanges. Instead of buying a song you stream it and pay in tokens for what you stream. Instead of paying a flat rate road tax you pay as you drive, or instead of paying a fixed insurance rate you pay your insurance as you drive, etc.

GLOBAL SYSTEM

Digital communication networks are the backbone of the network society, as the electrical power networks were the infrastructure on which the industrial society was built.

Furthermore, because the network society is based on networks, and communication networks transcend boundaries, the network economy is global, it is based on global networks.

By reducing the border around centralized organizations blockchain networks morph into ever-larger systems as they provide the underlying infrastructure for the evolution of a new level of economic organization on a global level.

These token economies can be at once local, in that they enable anyone to set up their own micro exchanges of value, but also inherently global. These networks – because they’re living in this global computer network rather than inside of a specific cluster of servers somewhere – have a certain magical property, which is that they’re global by default, they’re everywhere from the day that you release them and the services are universally available. This is quite interesting because it changes delivery at the edges of the network. Currently, we are not very good at delivering services beyond the two billion richest people on earth.

The fact that these networks are inherently global, the fact that all the logic is kind of buried in the payments architecture, the fact that there’s no real recognition or international borders in these systems, because they all operate embedded in the internet, they don’t see the world as a set of countries they just see as an enormous global network, all of those things point to the possibility, currently quite far off, that we are beginning to see global service architectures that run on these systems. Not just the payments which we already have and are being used very successfully in a lot of poorer countries but also the possibility that the services which are built on top of those payments will turn out also to be global by default, which could have a huge democratizing effect on the global economy.

Token Economics 19: Token Markets

TOKEN MARKET SYSTEM

Openness is one of the key design features of blockchain networks, they are inherently designed to enable intra-organizational collaboration. As soon as you start to use a blockchain to support a closed organization, you start to find that there is no real reason to use a distributed ledger at all and that it is better just to use a centralized authority to maintain the database.

With closed centralized institutions the drive is to concentrate the most efficient resources in the center. Indeed the most valuable and effective centralized organizations are the ones that can concentrate the most efficient nodes in the center and exclude those that are less efficient.

Distributed networks, however, have a very different dynamic. Quite the opposite, they create the most amount of value by going outwards towards the edges to harness the resources of the mass of people within user-generated systems of exchange.

These open user-generated systems are what we would call markets.

One of the most effective ways to understand this shift into a token market economy is through looking at transaction costs, as it is the reduction in transaction cost and the increase in automated coordination that is now enabling us to convert centralized organizations into open networks. By automating transactions, automating compliance and trust and connecting people peer-to-peer, blockchain systems will radically reduce the friction within economic networks of exchange and make markets a primary mode of organization.

Markets can enable the decentralized coordination of large and complex organizations. One of the basic features of complex systems that we see in the world around us is that complex organization can, in fact, be the product of simple rules.

Markets engender this principle. Actors in markets can operate based only on very simple local information, if someone will pay me more for this car than it is worth to me, then I will sell it. If I get paid more at one job than another and I like the job then I will do it. The rules under which actors operate within an economy are often very simple, but through all the interactions we can get complex emergent behavior on the macro level without that organization being pre-specified.

Blockchain networks enable the shift in organization from formal structures to much more fluid structures based on value exchange via markets and those markets are organized through price signaling that alter people’s local incentives.

PRICE SIGNALING

Prices are the signals that coordinate economic activity via markets. A price is a signal wrapped up in an incentive. An increase in the price of oil signals users that oil has become more valuable in alternative use. But we don’t just want to signal to people we also want them to move in the right direction, to take the signal seriously, to adjust in the right way. The higher price does exactly this. It gives users of oil an incentive to respond to the signal. They respond by using less, by substituting a lower cost alternative. Suppliers are also incentivized by the signal to invest more in exploration, to look for alternative sources, to build more etc.

The price system economizes on information. It’s able to allocate resources in a decentralized fashion using all of the information available, but without collecting all of that information, without having to transmit all of the information, because it makes use of the information in a decentralized fashion. It uses the information which is in people’s heads via the local choices they make in the market.

Markets are linked. They are linked geographically across the world. They are linked across different goods. They’re also linked, through time. The market acts like a giant computer that arranges our limited resources over space, time, and across different goods so that we can allocate resources via a decentralized mechanism.

For example, after a hurricane, it’s quite common for the price of generators and chainsaws to become very expensive. It’s signaling that we need more of those resources. The higher prices in a hurricane-devastated region, that says, “Bring the resources here!” The high price is a signal saying that the value of generators, the value of chainsaws — it’s really high in this location, at this time. And that higher price is acting as an incentive. It’s telling entrepreneurs, “You can profit by bringing resources from where they have low value to where they have high value.” The price system is doing exactly its right job. It’s signaling and incentivizing people to respond to these shortages.

Jason Potts an economies at RMIT University describes well how tokens work similar to the pricing system. “The purpose of the token system is to publicly coordinate private actions and that’s the interesting part of this. It’s not a monetary system it’s not a price system per se but it’s still a system where you’ve got coordination going on where individuals are able to look at the tokens what they’re doing, the tokens are doing the coordinating, and adjust their behavior with respect to that and what you get then is emergent order. That emergent order is an economy, the proper word for it is catallaxy, not an economy. But the tokens are doing the coordinating and they’re not doing it because of their exchange value or they use value or the store value, value they’re doing it because of their coordination value… anything that can do that, use rules that can create private coordination using a public signal is an economy.

In this respect the best way to understand money and currencies is as “current” “sees” that is to say tokens allow us to see currents within the network. Jason goes on to note that “what [tokens are] about to open up is a whole new world of coordinating signals that didn’t exist before, that’s the big thing, that’s the game changer that we’ve never seen before” we are going to get a much more refined pricing system with all these tokens and automated exchanges “that means we can coordinate an economy so much better with all this new coordinating information which requires a token.”

LONG TAIL

This reduction in transaction costs that will be enabled by distributed blockchain networks will have a systemic nonlinear effect. It is not like simply altering one component or one section of the system, it will alter many exchanges within the economy, that kind of nonlinear systemic change can give exponential improvements.

Transaction costs are fundamental to wealth creation and economic well-being. Interestingly reducing transaction costs across an economy by just a small percentage can massively increase the wealth creation in that country.

The result of that lowering of transaction cost means that it will be easier to access resources out on the edges of the network.

What decentralization and the reduction in friction does is to enable access to resources out on the very edges of the network.

By shifting from closed organizations to open decentralized markets we have the opportunity to really build global networks that begin to include those right out on the edges.

Today, about two billion worldwide remain unbanked. In Asia 60 percent of the people are cut off from the world economy, they do not have bank accounts, they don’t have access to the financial system. In South America, it is 65 percent and in Africa, it’s 80 percent. The majority of the world’s population is cut off from the world economy. In most cases, they can only use cash which means they can only deal with the people that they see face to face, it’s a very small community of economic trade.

The average sub-Saharan African makes about 550 dollars a year. It is simply not financially feasible to expand a traditional banking system into remote countries that are sparsely populated with individuals that make only a little income.

The marginal cost of adding an account at that level with a protocol and open source community is marginally close to zero, so if we are able to build this decentralized economic infrastructure that is where the value will be, out on the edges of the network.

There are 4 billion under and unbanked individuals in the world and that is huge global growth potential.

With blockchain base token economies we are not just expanding what value types get incorporated into the economy but also by reducing transaction cost we are extending markets further out.

By converting centralized organizations with boundaries and borders into open networks we are making the networks of the global economy accessible to many more people.

These token networks are going to be incredibly global like we have never experienced before.

The infrastructure does not reside on a centralized server in silicon valley, but on computers around the world.

We can create protocols as peer networks that reside on a distributed computer network and simply provide the coordination mechanisms through which people interact without anyone necessarily owning or really controlling that system, thus reducing borders to entry and expanding markets to almost everywhere.

Token Economy, Curation Markets and Technical Solutions

This panel discussion was held at the Blockchain Connect Conference: Academic 2019, on Jan. 11 in San Francisco.

The panelists discuss some of the challenges of tokenization, costs and reaching critical mass, via incentivizing actors — such as content creators, or users.

They also talk about establishing an advertising equilibrium between content creators and consumers via tokenization. The central idea is that with token ownership, participants can be somewhat like shareholders in a company, except on a network. Tokenization also offers the potential for higher quality content, since clickbait is fostered by the current advertising model of driving eyeballs over value.

The discussion further included empowering developers via tokenization and blockchain.

Panelists:

Colin Harper – Staff Writer at Bitcoin Magazine
Henry He – Co-founder & CEO of SesameOpen
Sichao Yang – Co-Founder of Canonchain
Yi Lu – CEO of U Network, Co-Founder of SV Insight
Yilun Zhang – Co-Founder & CTO of NKN

How AWS Is Changing Businesses Using Artificial Intelligence

The term “artificial intelligence” (AI) has been around since 1956.

Scientists found that it was more efficient to teach computers to learn than to program every skill needed to perform every task. This became known as machine learning.

Deep learning is a subset of machine learning that uses neural networks, which is a set of algorithms modeled on the human brain.

This enabled AI to tackle even bigger problems.

Voice recognition, improved medical diagnosis and self-driving cars are examples of machine learning.

Machine learning and deep learning have the potential to improve every aspect of business and the economy.

However, AI can be hard to implement alone. It’s also computational intensive and expensive.

Amazon Web Services (AWS) presents itself as the solution to these problems.

Amazon SageMaker is their specific solution to getting started with and using AI.

Developers can use whichever deep learning frameworks they are familiar, including TensorFlow, PyTorch and MXNet.

Any business can accelerate machine learning in the cloud with AWS.

Token Economics 18: User Generated Ecosystems

USER GENERATED ECOSYSTEMS

As we have previously talked about the central aim in the development of an enterprise or economy is linking the individual’s interests with the whole organization in order to achieve optimal overall outcomes.

In very small communities it may not be very difficult to maintain that connection. In small communities, people can see that their efforts contribute directly to the overall value created and the overall value created is in turn linked back to the benefits that they will gain.

Likewise, there is limited need for centralized coordination. Thus no great concentration of wealth in the system and people may feel that it is fair.

The problem with this model is that it doesn’t scale and allow for more complex economic systems with specialization of work. As a consequence, over time larger more complex organizations come to subsume these smaller more basic forms.

If you want really good scientists, builders or teachers they are going to have to specialize in those activities, which will, in turn, require large systems of exchange.

We invented formal centralized institutions, monetary systems, large market exchanges so as to achieve specialization, mass production, and complex economic organizations.

However, as we did scale, there came to form a disconnect between the individual’s contribution and the value to the whole. Which creates the potential for both negative externalities, large concentrations of wealth, extraction and inequality.

As the scale of the economic systems that we are engaged in has increased, the interconnectivity and interdependence between any two random members has decreased – because they are farther apart in the network. This has worked to disintegrate traditional cooperative institutions that are based on local interactions and interdependencies. In the absence of tools for interconnecting everyone within a large national society, we have had to create the large bureaucratic centralized institutions of today.

But these centralized institutions have created notorious divides within the modern capitalist system, between owners and workers, between producers and consumers.

With the rise of information technology and globalization, we are creating organizations that span the entire planet, creating massive divides between producers, owners, and consumers, with the interests and incentives becoming increasingly misaligned.

Clothes are produced in Bangladesh by people who get paid half nothing. Revenue is sucked up into a global financial system to pay shareholders. While end users have no loyalty or care for the organization from which they buy their products.

There is a massive misalignment of incentives that creates a hugely inefficient overall system.

MISALIGNMENT OF INTERESTS

We can analyze the incentives structures of this organization by looking at the centralized technology platforms of today. Here we see on one side we have value creators and the other side we have value consumers, they’re all coming together through some type of central server platform.

For example, with Uber you would have the value creators on one side, being the drivers, sending their information to a central server and on the other side you’d have the riders that are using the transport service from the platform. In the middle you have the platform and of course the reason that these companies are doing it is for-profit. So a portion of the profit or all the profit goes up to shareholders.

The users of the system do not care if the value of Uber goes up or down, all they care about is getting from point A to point B. That is their involvement with the organization and that’s the limited vested interest that this centralized structure is able to take advantage of.

The drivers likewise don’t care about the value of the overall organization, they just want to get paid and the shareholders and management are only interested in the quality of the service and the conditions of the workers to the extent that it affects the profits of the organization.

Likewise, we can look at Facebook and see that it is at odds with its users. Facebook’s founders and shareholders have made massive amounts of money.

Yet its users didn’t, despite contributing the key personal information and content that is the central value proposition of Facebook.

Profits are drawn inwards and upwards to the top management and shareholders. With its billions of users and high engagement, Facebook has become enormously powerful in our world. Yet it’s controlled by a small handful of people. This is dangerous for society. Especially given the fact that it is not really structured to handle such
responsibilities.

The only reason that these companies or shareholders are putting forth the products is for the money that they can make and that is the entire business plan. It is to maximize profits and that drives our whole economy.

What you have here is a split between the users and the beneficiaries rights and that creates a huge degree of misaligned interest. Not only this, but there is no user vested interest, the users don’t really care about the success of the company in which they’re using that product. That really leaves a lot of value on the table, because the user’s engagement can be hugely beneficial.

TOKEN SYSTEM

Token economics offers the potential to reintegrate this whole system. Break down divides between users and producers, between workers and owners; working to align their incentives within a whole ecosystem.

By connecting people peer-to-peer and automating the operations of the network, blockchain technology enables us to take out the centralized component and reintegrate producers and consumers into a much more functional ecosystem of exchange.

As illustration, we can think of the production of a movie. Currently, this is achieved through a centralized organization for-profit that then hires producers, directors, and actors to make the film which people then pay to see with profit going to the investors.

But this could be turn into a token network. We use a blockchain network to create a token, call it a “movie coin.” Actors, directors, and others get paid in that coin that viewers have to buy in order to see the film. People can purchase the token before production to raise the initial capital to fund the project, thus cutting out the intermediaries.

As another illustration, we can think about the fact that the average tenure of an employee in Silicon Valley is less than two years. One of the causes is the lack of alignment between employees and the owners. This is called the Principal-Agent Problem. Every group of people has principles, which are the owners, and agents, which are the employees, and it is easy for them to become misaligned. What may be good for the employee may not be good for the company.

In startups, principals and agents are the same. That’s why they are all really motivated to work together and can create a great amount of progress rapidly. But as the organization grows there becomes a growing gap between owners and employees and growing potential for the misalignment of their interests.

By creating micro-economies we can work to reintegrate the two. Distributed organizations have no centralized management structures for controlling and coordinating the organization. The architecture of the code is the rules of the organization and people may have an input on how that code is altered. The aim is to have autonomous actors who feel integrated with the organization to create true user engagement. By functioning as both equity and currency the token can work to link the value of the ecosystem with the value that people exchange within that market.

Moving to decentralized ecosystems you really have the same parties involved but, you removed the centralized entity completely, thus closing the economic loop of that company with a peer-to-peer token exchange. Instead of sending money to a centralized body with fixed fees on both sides taking off a profit margin, these companies can introduce a token.

Because of the linkage between the value of the exchange token and the value of the network, in the token system, the value generated gravitates not upwards within the hierarchy but naturally propagates to the token layer that reflects the value of the whole ecosystem and goes into the pockets of anyone holding the token.

Because it is also a utility token it means that the value goes to those using the network, the producers and end-users.

In the example of Uber, imagine every single user paid in a native currency or a native token of the actual organization itself and then every driver receives that token and then they sell it back to people that need to have rides. This closes the economic loop and aligns the interests of everybody in the organization. You now have unprecedented vested interest, every single person involved in that corporate ecosystem is now invested in the success of the organization.

Just as everyone holding a Bitcoin will promote the digital currency to their friends, anyone holding the token of any network will be incentivized to promote the use of that network, so you are turning the users into evangelists.

Another example would be Brave. Brave is a new token network for the digital advertising industry. It pays publishers for their content and users for their attention. This service creates a transparent and efficient Blockchain-based digital advertising market relative to the traditional model.

An Ethereum based network that radically improves the efficiency of digital advertising by creating a new token that can be exchanged between publishers, advertisers, and users. By connecting all parties involved directly via a token market, publishers receive more revenue because middlemen and fraud are reduced. Users, who opt-in, receive fewer but better-targeted ads that are less prone to malware. At the same time, advertisers get better data on their spending and more engaged users.

What we start to get are economic networks that are really like a cross between private enterprise and public utility. We are getting a hybrid of the community system with its vested interests, where the work you produce is connected to the value of the ecosystem, but also getting the option to exchange within broader systems involving high levels of specialization and complex coordination.