The blockchain is a new modality for organizing society and economy, as such it is often referred to as an institutional technology.
Professor Jason Potts talks about this as such, “this isn’t a story about how the economy grows because of this new technology, it’s a story about how we can now create new economies in ways that we could never create new economies. It used to be that you have to have a government and a nation-state and a money system and laws and legislation and all of these things, and you know there’s 193 economies in the world or however many nations there are. We’re about to enter a world where the number of economies in the world will change hourly, it may well be measured in the billions not the small hundreds and these things will be largely built on technologies like the blockchain. I think once you see that it’s a governance technology, an institutional technological revolution, that’s the interesting thing that I think has largely been missed.”
What is different about this institutional technology is that it is distributed by design, that means that unlike centralized systems that work to improve closed organizations, it instead improves opens systems of organization. This is a paradigm shift in that it runs very much contrary to the centralizing forces prevalent in the industrial age; it is something that we are not used to and that is why it is difficult for us to understand.
Blockchain networks are inherently designed for coordinating open systems, their innate distributed design is in fact inherently resistant to closure. Though private blockchains may deliver short-term efficiency gains for existing centralized organizations, the fact is that private blockchains remove most of the valuable benefits of using a distributed system and as soon as someone figures out how to develop a public blockchain for the same purpose it will harness more resources to grow faster and eventually replace it.
As Toni Lane Casserly, Co-Founder of Cointelegraph states it, “if you’re going to create a blockchain project, if you’re not creating a public utility you are fundamentally not creating a blockchain and you’re fundamentally not creating a new form, a new economic asset in a new series of token classes, because the entire point of blockchain technology is that we are creating new forms of economy as an open-source public utility.”
Blockchains are distributed systems with extreme network effects. They are designed to push outwards, the more people and organizations they bring into common systems of coordination the stronger they are. They are designed to network the intra-organizational space, greatly facilitating coordination within large ecosystems, across whole industries and economies. This is how they really create value and this is how they are going to disrupt existing systems.
Existing organizations won’t be disrupted by one of their competitors, they will be disrupted by protocols that network across whole industries to build ecosystems that are greater than the sum of any of their parts – just as Amazon, Uber, and YouTube did in the past, but this time these networks will be larger, distributed and increasingly automated.
Indeed the long-term vision of these token networks is as the infrastructure for a new form of global services economy. We think we know what globalization is about, we think we know what the services economy is, but the blockchain as an IT infrastructure is set to realize the convergence of these in new, unexpected and powerful ways.
In the past decades, we have wrapped layers of communication networks around our planet.
We first started communicating and exchanging media along this new infrastructure as social media went global, forming networks composed of hundreds of millions of people. We then started to build service applications on top of this shared IT infrastructure; services like car sharing, accommodation, and e-commerce, but that services layer is still quite fractured and very much dependent upon traditional centralized structures.
Blockchain provides this global communication network with the protocols to exchange units of value securely and with limited friction.
As the protocols mature and the blockchain becomes this globally distributed cloud computer that it promises to be, it will become extremely easy to build secure automated services on top of it that amass micropayments in a frictionless fashion. Those services will be borderless as they are running on a global distributed computer. Likewise, they will not be limited to just the traditional offerings of the private sector but will also now include public services.
For the first time in centuries, nation states will find that they are having to compete with global token markets when it comes to the provisioning of public services. It will be very difficult for individual organizations to compete with these global public utility networks that support whole ecosystems of users, particularly those that manage to align incentives in more productive ways and are able to harness the productive capacities of the many instead of the few along more dimensions.
Similar to the rise of Google and Facebook, these token networks will be very formidable actors in the global economy within less than just a decade.
Blockchain technology builds upon previous changes in how people work together to produce value in advanced economies. With the rise of the platform economy, information technology has already within just a decade or so changed the model for the production and consumption of value within advanced economies. But these newly forming token networks greatly extend those previous trends, with some major alterations.
Online platforms and blockchain are changing how we collaborate and work together across organizations and across society at large. Token economics is set to change the very structure of the Industrial Age enterprise as it now offers the potential to align the interests of stakeholders in new ways.
What is happening today builds upon the recent development of the so-called collaborative economy: online platforms that function as two-sided markets matching producers and consumers. The collaborative economy is defined as initiatives based on horizontal networks and participation of a community. Blurring the lines between producer and consumer, they connect individuals into large peer-networks of exchange.
However, these large platform organizations that have arisen with the development of the internet are still centralized around the platform providers, creating many issues of security, data privacy, control, misalignment of incentives and concentration of wealth and power.
Blockchains let us design protocols that provide the same capacities for people to collaborate within large peer networks but this time without needing the centralized entity.
Through the use of tokens, the network is converted into a token market, with the market mechanism used to coordinate it in a decentralized fashion. By removing the centralized component this works to align the incentives of members better and turns businesses into something more like communities or ecosystems.
By removing the centralized component that is controlling the overall network and operating it for a profit, the individuals in the network become much more aligned with the whole. This alignment between the individuals and the whole network is realized through the token, because as the value of the whole organization increases, this increase in the value of the platform does not get sucked up by management and shareholders but in fact gets distributed across the network itself by accruing to all of those that hold the token.
This is how and why in a token economy the traditional business model of the Industrial Age – that was primarily designed to create a profit for its owners – is greatly reduced and replaced by these token networks which are more like public utilities as profit does not get taken out by the shareholders but instead is continuously reinvested and redistributed to the users of the network through the utility token that they must hold to use the network.
Thus unlike the centralizing forces of the Industrial Age where value was always getting pulled inwards and suck upwards, with these distributed networks – if designed properly – they can work to inherently push the value that accrues downwards to the infrastructure layer and outwards to the members of the network who hold the token.
With token economies, we now have the capacity to directly program incentive structures through tokens and this shifts the success of economies from the realm of policy and management into the realm of design and technology.
Today well designed token networks hold out the possibility to build new forms of incentive structures that really improve the alignment between the agents in the network and the whole system; potentially working to avoid a rich get richer effect and reduce the gap between owners and users of the economy.
We no longer have to place our hopes on the promises of politicians or protest against neoliberal economic policies but the future of our economies is now largely about designing token economies, programing blockchains and building communities that fuel them.
David Chaum describes the ethos of blockchain as about empowering individuals with the keys to control their digital future.
He describes another way which is about totally decentralizing the security and privacy mechanisms that are needed in the digital world to create a new version of the internet or the web. It’s the next generation of digital infrastructure, which would include decentralized security and privacy mechanisms that allow individuals to control their digital future.
Chaum is the CEO and founder of the Elixxir blockchain. He is a serial entrepreneur who first created blockchain technology in 1982 while a graduate student at the University of California Berkeley.
Chaum is also recognized as the inventor of digital cash, is a renowned expert in cryptography and secure election systems, and is a leading proponent of blockchain technology.
Chaum also founded the International Association for Cryptologic Research, the cryptography group at the Center for Mathematics and Computer Science in Amsterdam, DigiCash (issuer of eCash cyberbucks and fiat-backed digital currencies in the 90’s), and the Voting Systems Institute.
The implications of the changes expressed in the last video are many. But the first is that we are now no longer dependent upon centralized organizations to define value within society.
Because the maintenance of these databases, where value is recorded, has shifted to information networks, it is increasingly becoming possible for anyone or any group of people to set up one of these networks. It means that individuals and groups can define what they value, instead of that being defined for them. And who gets to define value within society is of critical importance.
Previously, only large centralized institutions got to define units of value. The largest of those institutions, the nation-state, got to define widely accepted currencies. But those tokens were always relative to a centralized entity. They only really defined what that centralized entity valued. A Starbucks gift card is a form of token, the RMB is a form of token, a share in Microsoft is a form of token, but all of those units of value are defined, created and managed by centralized entities according to their interest and needs.
What is changing now is that anyone, any group, can now define any form of value through the creation of a digital token on a blockchain.
That token doesn’t have to have value for some external centralized entity, it can simply represent the inherent value within a network of peers.
Tokens are generic units of value that can be used to quantify any form of valued resource. But more importantly, they can be used to define specific and distinct forms of value. This is why in a blockchain economy we have so many tokens: energy tokens, food tokens, transport tokens, social tokens and the list is ever expanding.
In such a way the token economy offers the potential to incorporate more and different kinds of value, thus giving value representation to what was previously excluded from being defined as economic activity.
The potential of this is that we may for the first time start to move towards an economic system based upon full cost accounting.
In recent years with the environmental sustainability crisis unfolding the idea of a full cost accounting economy has been presented as a solution. But to date the complexity of realizing that has been overwhelming and the tools for implementing it have remained limited.
Rapid advances in big data, complex analytics, and blockchain technology are starting to provide the technical infrastructure for an economy that may, in fact, incorporate all relevant event information and value sources, thus bring many areas of social and economic organization into token markets of change.
Tokenizing is the process of converting some asset into a token unit that is recorded on a blockchain. Anything of economic value can be tokenized and thus brought into the blockchain economy.
Today we are starting on a long journey of migrating our entire global economy to blockchain networks: real estate, commodities, supply chains, energy markets, accounting, mortgages, loans, insurance, special purpose vehicles and all kinds of derivatives are all going to migrate, one block at a time, into this new information-based economy.
As the venture capitalist Bradley Rotter Rivetz notes “everything that can be tokenized will be tokenized. The Empire State Building will someday be tokenized. I’ll buy 1% of the Empire State Building. I’ll get every day credited to my wallet 1% of the rents minus expenses. I can borrow against my Empire State Building holding. And if I want to sell the Empire State Building, I hit a button and I instantly have the money.”
With this new technology not only existing forms of valued assets will get tokenized but with advances in information technology we are quantifying and assigning value units to more and more aspects of our world and our social interactions. Token economics will be used to support these new forms of economies, whether we are talking about the emerging natural capital economy or social capital. It will be a number of years before we really have the underlining blockchain technology to do that on a large scale, but it is coming and the implications are enormous.
The point is blockchains aren’t simply extensions of existing financial and monetary systems but something truly different.
They allow us to define, quantify and exchange, new sets of values that emerge in a post-industrial economy. In so doing they allow us to expand market systems and economies as distributed management systems to coordinate more and more spheres of human activity in a decentralized fashion through peer-to-peer exchanges within digital token markets.
Blockchain is set to have a transformative effect on the very foundations of how our economies function. The study of this new form of distributed economy may be called token economics (also crypto-economics).
The primary factor to appreciate in understanding the significance of token economics is this: the most basic way in which economic data is recorded is changing.
With blockchain, the information layer upon which economies are built is changing. Therefore everything upwards of that layer will change, which is essentially everything we know about how our economies work.
Economics is, before anything, based on information. It is based on records of ownership that define who owns what and what is exchanged – what we call ledgers. Everything that exists within an advanced economy exists because it is in a ledger.
That ledger is currently maintained by those things we trust the most, which is the government and legal system.
The legal system determines who gets to make entries into those databases. It grants that power to various institutions that prove their trustworthiness to the legal system, as well as to the banks, insurance companies, hospitals, enterprises, institutional investors, etc.
These centralized authorities manage this complex set of records or databases and thus control how value is represented and flows within the economy – which is, of course, the foundation of their power and influence within society.
This centralized approach can have many advantages in terms of simplicity, speed, and efficiency. But it also means that we have to trust those institutions and we have to continuously work to constrain their powers.
Throughout the latter half of the 20th century, we converted that information into a digital format. But the structure of the system remained unchanged.
Today everything that we turned into digital data we can now move onto blockchain records, which can be understood as a form of distributed database. With this system, people can now connect to the database directly and we can automate the maintenance and updating of that data.
The trust required to maintain societies’ records of value is thus displaced from formal centralized institutions and now placed in the mathematics of cryptography, computer code and the design of networks. This means that at least theoretically, we do not need these centralized institutions to manage the data in the way that we did in the past.
The profound implication of this is that society and its economy no longer needs to be architectured around centralized institutions.
The consequences of redirecting all of these flows of information, value, and power within society, away from centralized channels and into distributed networks, are almost unimaginable. Their ramifications are so profound that none could predict the outcomes.
The surprising thing though is that this is not the dream of some radical anarchist group, but simply the consequences of a revolution in information technology.
Such an extraordinary transformation happens very rarely in human civilization as it signals the true coming of age of the information age.
The blockchain is unlike other new technologies because it taps into a deep structural transformation brought about with the move into the information age. That is to say, the rise of distributed networks as a new organizational paradigm for society, economy, and technology infrastructure.
The blockchain is not magic – as it might appear – but simply builds upon existing information and communication technologies that are enabling this deep restructuring process.
Economic forces are everywhere. They shape and structure our everyday lives. It’s how we organize people, resources, and technology to create and exchange value within society.
During the modern era those forces came to be channeled and structured within a particular set of centralized bureaucratic institutions based around the nation-state and the enterprise.
But today the proliferation of information networks is unleashing constrained economic forces.
Through ledgers and blockchain technology, the most fundamental rules governing our society are now open for redefinition, as was prior to the industrial age.
As advanced economies move out of industrial production and into a new form of global services and information economy, the economic model of the industrial age is becoming eroded.
This emerging global information and services economy will be coordinated through the internet running on an updated set of protocols that provides the secure distributed infrastructure for this emerging global token economy.
This transition builds upon major trends that began in the late 20th century which are today converging in powerful new ways. Privatization and globalization, financialization and the rise of online platforms are all converging as blockchain networks merge economics and information technology to take us into a new economic paradigm.
Privatization opened up more spheres of activity to markets.
Globalization expanded those market around the world.
Financialization connected up our real economy into an integrated information-based financial system.
The platform economy created new forms of user-generated networks.
Blockchain brings these trends together in synergistic, powerful new ways.
Hence, a new economic system is being established; one that is truly global, that reflects the underlying logic of services. This will be an economic model that is for the first time in harmony with its underlying technology of information.
These emerging token networks offer the potential to unleash a massive wave of creativity and innovation.
With trillions of dollars set to migrate to this global cloud computing and blockchain infrastructure in the coming decades, the stakes are high.
Financial and economic sovereignty appear to be slipping out of the fingers of nation states.
And the tensions are mounting.
Are we moving into a lawless chaos? Or are we moving to a historically new level of economic organization?
That will be decided by our capacity to understand this new economic paradigm coupled with our ability to design and develop new token networks of synergistic incentives.
Rethinking how we organize economic production and exchange is one of the major challenges and opportunities. Token economics is an opportunity to revisit the foundations of economic organization.
It’s an opportunity to reconstruct a new form of economy that is different from the industrial model that we know so well.
It’s an exercise that is of critical importance to the development of a sustainable model to economic development in the age of information, globalization and billions of people wishing to join a worldwide economic system, which is already showing major signs of stress.
This is no longer about politics, policies or protesting, the technology is reaching a maturity. We now stand at a point where we can design economic systems from the ground up. The success or failure of such systems does not rest with the actors in the network, but squarely with the design of the system.
Possibly for the first time ever, if we don’t like the prevailing economic system, we now have the option to design a better one.
What is so powerful about this revolution is that it is not really driven by idealism or politics but rather economic incentives. The global economy will switch to being based upon distributed blockchain networks with each actor seeing it as in their economic interest to do so.
This revolution does not require large-scale political coordination. It bypasses it. Instead, it employs a highly modular and granular transition.
Specific parts of the existing economic institutions can be upgraded and integrated into a new economic model.
Yet, this will be a profoundly disruptive transformation.
Enterprises will be automated. Whole industries will be upended by powerful new blockchain ecosystems. National governments will face mounting pressures from a global information services architecture.
This new economic paradigm promises the potential to build new forms of economic organization to deliver what people value.
It promises a more open and inclusive model that harnesses the efforts of the many instead of the few.
This video is an overview of a course on token economics, or crypto-economics, which is the study and design of economics based on blockchain technology.
The course touches upon distributed ledger technology and triple-entry accounting as well as the two primary categories of tokens: utility tokens and security tokens.
The course also addresses decentralized organizations, game theory and the design of incentive structures to align the interests of the individuals of the whole organization within user-generate networks.
As a result, token networks can be used to remove the centralized management structure of organizations while better aligning the incentive structures of producers and end users.
The course also addresses the formation of large-scale blockchain networks that span across organizations and industries to create powerful new ecosystems. Inn other words, blockchain as an infrastructure for a global-services economy.
Finally, the course addresses token networks as a way to fund their own establishment and guide their future development.