Token Economics 17: Mechanism Design

MECHANISM DESIGN

Token economics represents the merging of economics and information technology. It shifts economics into a more technical realm.

In the past, we could really just tweak around the edges. But now we can really design economies like we never could before.

Once we shift business and economic organization into this more formal and technical realm, we can begin to bring very powerful mathematics and analytical tools to bear on what we are doing.

One aspect of this is using the models from game theory to design these incentive systems.

Game theory is the study of the strategic interaction between adaptive agents and the dynamics of cooperation and competition that emerge out of this.

A much more recent extension of this is mechanism design. Mechanism design is a field in economics and game theory that takes an engineering approach to designing economic incentives toward desired objectives, in strategic settings. Because it starts at the end of the game, then goes backward, it is also called reverse game theory. It has broad applications in the management of markets, auctions, voting procedures and is of particular relevance to token economics.

As an economic theory that seeks to determine the situations in which a particular strategy or mechanism will work efficiently – compared to situations in which the same strategy will not work as effectively – mechanism design theory allows economists to analyze and compare the way in which markets or institutions lead to certain outcomes, because of their inherent incentive structures.

With mechanism design, we are trying to design the system towards a certain desired equilibrium state. With this approach we first think about what outcome we would like to see from the system. We can then build a set of rules that will hopefully lead to those optimal outcomes.

Legal systems are a kind of mechanism, as they are a method for shaping human behavior. A particular set of laws is usually trying to shape a particular type of outcome through the imposition of a set of penalties, fines, rewards or incentives such as tax breaks, etc.

Of course, these existing systems are centralized in their design, but with token networks, we are looking for a mechanism design that does not depend upon
a centralized authority specifying and enforcing the rules, but instead some kind of peer-to-peer value exchange mechanism that is self-regulating through direct information feedback loops.

FEEDBACK SYSTEMS

As previously mentioned coordination within distributed systems, like token economies, is not achieved via centralized coordination, but instead by the interaction between members and the incentive structures created by the exchange of tokens. The primary dynamic for us to consider then is that of the feedback loops that are created out of people interacting peer-to-peer. We are trying to enable cooperative structures without imposing them and that is achieved through peer-to-peer interaction.

Creating optimal outcomes for the whole system means effectively linking the payoffs of the individual to those of the whole system and thus reducing negative externalities.

Every action that an agent takes has an effect and we can ask what are the repercussions of those actions and who bears the costs and benefits. When an actor gains from an action but the costs are born by others this is a negative externality.

Pollution is the classic example of a negative externality. So too, excessive inequality may be seen as a negative externality of people’s greed.

Negative externalities incentivize actors to overperform a given action as they are not bearing the cost and leads to unsustainable results overtime, as that cost is being born by someone else, the whole system or environment.

Building systems of cooperation in such a context means enabling ongoing interaction, with identifiable others. With some knowledge of previous behavior, lists of reputations that are durable and searchable and accessible, feedback mechanisms, transparency etc.

The development of current web platforms is good illustration of where we are going as they often incorporate many of these design components.

Sites like TripAdvisor and Yelp exist as standalone feedback platforms, while Amazon and eBay legitimize their products by allowing users to place feedback on their purchases.

Feedback systems are used to rate and rank content on social media like Reddit and Facebook.

All of the above have become an essential part of how we identify quality products and services that meet our needs.

But while the internet gives a voice to all, misinformation has become an accepted reality. Competitors may falsify reviews to discredit a product, while the review platforms themselves may modify or delete feedback that doesn’t fit their agenda.

The combination of blockchain tech and advanced analytics could take the possibility of bias and corruption out of current feedback systems, with an end-to-end process designed to pick out quality feedback and then safeguard it.

Revain is one blockchain platform that works to secure feedback systems. All incoming reviews will have to pass an initial screening test, with IBM’s Watson AI platform analyzing emotional and unconstructive language. Users are rewarded with RVN tokens for submitting a review, while companies can use the token to purchase quality feedback, direct from its customer base. And at the end of the whole journey, consumers have access to transparent, high-quality feedback to aid their decision-making.

Uber is an example of mechanism design. From this perspective, Uber just adds to the financial contract of paying someone to take you somewhere a reputation feedback system.

Uber adds reputation for both drivers and for riders and adding reputation into the system actually significantly influences the way that people behave within that system.

The goal is to shape the behavior of the participants and adding that additional reputation can have a significant impact.

But of course with blockchain systems, this can all be tokenized, and because tokens can represent any form of value exchange – natural capital, social capital, cultural capital, industrial capital etc. – we can build in many different forms of feedback loops and different forms of mechanism design.

Artificial Intelligence: Mankind’s Last Invention

This video posits that humans are on the verge of representing a minority of available knowledge, compared to the potential of superintelligent artificial intelligence.

Narrow AI is created to solve one task, such as playing games, speech recognition, suggesting songs or purchases, etc. It does this well.

Machine learning is an attempt to mimic the way humans learn: observation and gaining more experience and knowledge.

Neural networks take in info and provide an output. They are computing systems vaguely inspired by the biological neural networks that constitute animal brains. The neural network itself is not an algorithm, but rather a framework for many different machine learning algorithms to work together and process complex data inputs

Artificial General Intelligence (AGI) is AI with more than a single purpose. It’s an attempt to mimic human intelligence. AGI is the intelligence of a machine that could successfully perform any intellectual task that a human being can. It is a primary goal of some artificial intelligence research and a common topic in science fiction and future studies.

Technological singularity refers to such an advance in AI that there is an explosion of new intelligence, which may not be understood by humans.

Superintelligent AI is different from software we know today, which we program and which follows our rules. With advanced AI, there’s a point where it doesn’t need humans.

WISDOM AND INTELLIGENCE

Intelligence is more about making mistakes and acquiring knowledge and solving problems through that.

Wisdom is about applying the correct knowledge in the most efficient way. Wisdom is being able to see beyond the intelligence gained and being able to apply that to other things.

Superintelligent AI is the last invention mankind will make. Once it’s invented and it cannot be uninvented. It could be good or bad.

The video concludes by suggesting the viewer learn more at Brilliant.org

Token Economics 16: Incentive Systems

TOKEN INCENTIVE SYSTEMS

Incentives are a central part of economics and blockchain networks give us new ways to design and build incentive systems.

As Mike Goldin, a lead engineer at ConsenSys noted “Blockchain gives us programmable money. When you can program money, you can program incentives, and when you can program incentives you can program people.”

Programming people may sound a bit funny but in fact, it captures something of what is now possible. Like never before we have the capacity to rapidly build and implement large-scale structures for incentivizing human behavior towards certain ends.

We are increasingly moving into a world where we can analyze, design and adjust real-world economic and social outcomes by deploying new protocols on the internet. This is a new capacity that we now have, one that offers both huge potential and is at the same time frighteningly powerful.

How to create incentive systems that align the interest of the individual with the overall beneficial outcomes for the organization or economy, is a central issue of interest in business management and economics in general.

A central premise of economics is that people respond to incentives.

One of the key insights of Adam Smith was that overall beneficial outcomes for society and economy should not depend upon the virtues of the individuals within the system but instead, optimal outcome should be achieved by designing incentive structures that link the individual’s self-interest with beneficial overall outcomes.

This is captured in his famous passage “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities, but of their advantages.”

This is a very important insight and history will teach us time and time again that we should not depend upon the virtues of the agents within the system, if we wish for long-term stable functional outcomes. Over time the most virtuous of leaders can turn into the most brutal of dictators.

The only way we can assure long-term stable outcomes is by a clear analysis and design of the incentive structures in the system. The only way we are ever going to get really functional economic systems is by really understanding the incentive structures in the network and designing those so that they are aligned with the overall desired outcomes.

Every misalignment of incentives will over time turn into a dysfunctionality within the network.

The structure of the incentives within the system is critical to whether the economic system will thrive or fail. Capitalism has succeeded to a certain extent where communism failed precisely because of its incentive structure.

A good illustration of this is The Jamestown Colony, the first English-speaking colony in North America founded in 1607 in Virginia. The colonists spent the first 10 years of their existence hungry, they never had enough food, with over 80-percent of the colonists perishing in what became known as the “Starving Time”.

But then after those first ten years, the colony thrived, the colonists had plenty of food and their numbers increased and it took off. It was the same people using exactly the same techniques so what changed. Before 1615 they all went out to the field they all worked and then they took the output from that field and divided it up equally. In such a system people have no incentive to work harder than the minimum required; there was no linkage between individual incentives and overall beneficial outcomes. In 1615 they made a very simple change to the rules, they divided up the farmland so that each person had their own individual plot of land. You could now do whatever you wanted with the food that you grew, they grew their own food, they ate it, they sold it to each other, they gave it to their families and the colonies thrived.

It was a change in incentives that ended the starvation and brought about abundant food supplies.

Human beings have always been bad with incentives getting ourselves into all sorts of situations we don’t intend to because of how we try to direct the ways that groups behave.

We can look a what the incentive structure that a deregulated financial system has caused, or anonymous political donations of money. The reality of how incentive systems play out in the world is complex and typically beyond the designer of the system’s capacity to foresee. As a consequence we often just lurch from one model to the next as we react to the unintended consequences of the previous system.

The central aim of economies is to enable people to work together within a combined enterprise. To do this we have to align the behavior of the individual with the whole.

Blockchain networks are all about protocols that enable coordination between actors. The great innovation of blockchain networks is as a new system for incentivizing a network of autonomous nodes towards maintaining a shared infrastructure.

Token economics builds upon this underlying technological innovation. With tokenization, we are going to start to incorporate explicit incentive systems into more and more spheres of life. We are attempting to build these micro-economies around every source of value so as to align people’s individual incentives with delivering an overall functional ecosystem.

TRUST EQUILIBRIUM

In every socio-economic organization, there is the opportunity for collaboration and cooperation which leads to optimal outcomes for all and there is the opportunity for competition and conflict that will lead to suboptimal overall outcomes and unequal pay-offs for actors. The point of a social or economic institution is to achieve coordination and optimal overall outcomes.

Every game has two equilibria. There’s a good equilibrium where everybody cooperates resulting in everybody gaining and there’s a bad equilibrium when nobody cooperates, nobody gives in and nobody gets anything. The optimal overall equilibrium is typically very fragile. It’s enough for one person to deviate from the good strategy and the whole system can deteriorate. The bad equilibrium though is very stable. Trust is about our ability to stay in the good equilibria, what do we do to live in a society where we all benefit because everybody has a short-term incentive to betray the public good. But the moment people start betraying the public good things deteriorate quickly?

The traditional way that we have solved this equation is through a centralized authority that mandated that all act according to the economically or socially beneficial outcome. Token economics attempts to achieve this alignment through peer-to-peer exchanges of value that incentivizes the actors to operate according to overall effective outcomes.

To illustrate this dynamic we can think of the torrent file sharing system. In a torrent network, anyone can share their files with a decentralized group of peers. The idea was that people would download them and keep sharing the file with the network for others to download. If you were downloading a file, then you were expected to seed as well. This is what we would call an honor system, which is a system operating based on honor or honesty without having strictly enforced rules governing its principles.

The problem is that humans are not always the most honorable of creatures and without any economic incentives it made no sense for people to keep seeding a file which took up unnecessary storage space and bandwidth.

What token economics adds is the capacity to incentivize these peer networks. Unlike open source software, peer-to-peer file sharing or creative commons where the infrastructure is dependent upon the goodwill of the actors, tokens incentivize the peers to participate. So instead of a file storage system being dependent upon a centralized for-profit organization or people’s charitable willingness to provide the resource, it gives those members tokens to incentivize their provisioning of the resource.

The fact that tokens can be used to define and exchange any form of value means that these distributed organizations can be used to deliver all forms of services; both what has been previously delivered by private organizations but also services that have previously been the purview of the public sector.

Public services like cleaning up litter, maintaining parks, public security, care for the elderly, reduction in noise pollution, civic engagement etc. Indeed anywhere value could be generated by the coordination of members, we can define a token for that value and use it to incentivize the agents towards the coordinated behavior, thus enabling the delivery of the service through peer-to-peer token markets.

The Ethereum developer, Karl Floersch, summarizes the current situation well when he notes: “Incentives drive behavior and open access to programmable incentives sets the stage for radical change. This is a really unique moment in history, this change can be good or this change can be bad, we can program incentives which promote cooperation and equitability and general happiness, everyone’s goal, or we can create incentives which prop up a few people and give them way more power than they already have. This is like kind of terrifying, so we need to design mechanisms, test them in the real world and share our findings and do that over and over on a large scale.”

The Future of Management in an Artificial Intelligence-Based World

This video includes highlights from The Future of Leadership Development Conference Series, held April 19-20 2018.

The current technology revolution is reshaping industries, making business models obsolete, growing new companies with a different set of capabilities and creating disruption and social change.

In a digital, big data, machine-learning, robotics and artificial intelligence-based world, the role of general managers is more important than ever. The competencies that they need are changing fast.

At the same time, there are some classical attributes of the general managers’ functions – providing a sense of purpose, developing a long-term perspective, and engaging people and making teams functional, among others – that are still relevant, but that may take new dimensions in this new, changing business world.

What companies, people and society in general will expect from senior managers in a few years’ time will be different from their current skills and capabilities.

At the same time, technology is disrupting companies and communities, CEOs, board members and general managers, as the ultimate stewards of a company, need to reflect on how to manage this process and help come up with constructive solutions.

The purpose of this conference was to discuss these relevant issues for leadership, governance and management with an inter-disciplinary perspective. Speakers include leading management and leadership scholars, AI experts, CEOs and senior general managers, and deans of leading international business schools.

Some of the specifics that were covered include:

What creates long term value? That would be customer-asset building and brand-asset building since, so far, computers cannot build brands.

The parts of business that will change:
1) What they make
2) How things are made, or how businesses operate
3) Who businesses will form alliances with
4) How the people work are organized and managed.

Businesses and be broken down into projects and processes.

Processes will become an algorithm

We need to teach people how to use data.

Data and AI are important to all business units.

Management needs to know the right questions to ask the technical guys.

Decisiveness wins out over building the perfect model.

The most important ingredient for success is the power of imagination, which cannot be substituted.

AI can augment human intelligence, not replace it.

Token Economics 15: Decentralized Token Organizations

DECENTRALIZED TOKEN ORGANIZATION

Token economies can be understood as a new way of coordinating human activity in a decentralized fashion, this being done through peer-exchanges within market networks.

As Primavera De Filippi of Harvard puts it, “Today the blockchain is marking the beginning of a new digital revolution, whose focus is not just human communication but rather human interaction and cooperation. What the internet has done to achieve global interpersonal communication the blockchain could do today to achieve global and systematic collaboration.”

It is common to compare the invention of Bitcoin and the blockchain with the internet. In this respect, it is often said that the blockchain is Internet 2.0 The internet has been a powerful tool that has revolutionized the way we interact. But if anything this comparison undersells the significance of the blockchain. As the authors of a recent article on “The Blockchain Economy” suggested, a better metaphor for the blockchain is the invention of mechanical time. Before the modern mechanized measuring of time, human activity was temporally organized by natural cycles: the crow of the rooster in the morning, the gradual descent into darkness at night. The problem with this though was variability, there was simply too much variance in the measurement of time for it to function as a widespread system for synchronizing economic activities.

Mechanical time opened up entirely new categories of economic organisation that had until then been almost unimagined.

During the industrial revolution, the effect of the reduction in the variability of time measurement was felt in almost all areas. Mechanical time allowed trade and exchange to be synchronised across great distances. It allowed for production and transport to be coordinated. It allowed for the day to be structured, for work to be compensated according to the amount of time worked — and for workers to know that they were being compensated fairly. Working life became routinized around this new objective standard of time measurement.

The blockchain and token economics may well be such a systemic transformation in human coordination.

DECENTRALIZED COORDINATION

The blockchain is a new coordination technology that relies on a decentralized network of computers in order to coordinate individual actions in a decentralized manner.

We can think of token economies as a way for people to mimic the social dynamics found in certain highly social creatures like bees, ants, and termites as a way to promote and ideally achieve effective collective organization.

By recording individual actions on a distributed database the blockchain makes it possible for people to coordinate themselves indirectly and collaborate on a global scale, without any centralized authority or hierarchical structure. This is something quite new in human civilization. Until very recently the basic premise has been that order and organization are achieved by centralized authority.

CENTRALIZED INSTITUTIONS

Throughout history, we have achieved widespread coordination and economic organization via centralized systems that imposed common standards. The evolution of civilization can be understood as the rise and fall of ever larger more complex systems of human organization.

Economies are built around networks of trust and common protocols. Traditionally these have come from either a government institution or from some form of Church which are structured in a pyramid form.

In those power structures, you’re able to do business, you’re able to trust people who are not your immediate family because the centralized authority provides the common standards, the protocols, the regulatory and legal structures for you to trust each other and exchange; fiat currencies being one good example of that.

Although centralized systems have their advantages they also have their disadvantages and are inherently limited when it comes to the formation of very complex organizations.

ALIGNMENT OF INTERESTS

One of the primary issues with current centralized organizations is that they are not general purpose as each organization acting as an authority also has its own vested interests. This creates a misalignment of incentives between the centralized authority and users of the system. If we are lucky and we get virtuous members in the center of the organization the interests of the centralized authority may be aligned with those of the network, but equally, they may not.

As we will discuss in the coming module, there is really a misalignment of interests at the heart of centralized organizations.

We have this problem today where most of our most important economic and financial functions are provided by centralized for-profit organizations. The incentive of the organization is to create profit for its owners. The result of this can be that profit gets sucked into the center and upwards, reducing the quality of the network delivering the function and accentuation inequality.

BOTTLE NECKS

Likewise, centralized coordination creates bottlenecks. Resources are brought into the center, processed and then pushed back out to the edges. The system always works much better close to the center and then coordination drops off the further out you go.

This is why, for example, Zimbabwe is a much better use case for cryptocurrencies than say Singapore, because Singapore is close to the center of the global financial systems while Zimbabwe is out on the edges.

Centralized systems have problems delivering structure and functionality all the way out to the edge of the network. The result is that we end up with a trickle-down economy with the edges always being dependent upon the center, but the center not being properly incentivized to deliver services all the way to the edges. Those at the center get a good service but those at the edges don’t. The billions of people who are left out of the global financial system because they are not economically worth serving is illustration of this.

FRACTURED SYSTEM

Centralized systems end up forming either monopolies or a fractured overall system.

Centralized systems have a specific locus as their center and then push out until they meet another organization. The end result, is either a monopoly where one comes to dominate overall others or a fractured system, with lots of different patterns forming. The nation-state is a good example of this. Within a given jurisdiction we have a monopoly of public services but on the global level, we remain with a fractured system.

PEER-PRODUCTION

The alternative to these centralized systems is decentralized peer-to-peer networks. Without centralized authority being used to achieve coordination, this coordination is achieved via direct exchanges of information and value peer-to-peer, such as in a pure market, where the price is decided by the interaction between members.

Token economics turns these centralized institutions of the industrial age into distributed token markets. The critical change that is coming about is that we are now able to design token systems that work to incentivize people’s behavior towards coordinated outcomes, without that coordination being imposed by some centralized authority.

What is different now is that we have the technological means that we can design economies instead of just organizations. Economies that create the right incentive systems and feedback loops to coordinate the activities of the organization in a decentralized fashion.

Token economies build upon the development of peer-production, an alternative model to economic activity that has arisen with the development of the internet.

Peer-production is a process taking advantage of new collaborative possibilities afforded by the internet and has become a significant mode for the division of labor within post-industrial economies.

Free and open source software and open source hardware are two examples of peer-production.

With the development of web 2.0 technology, it became possible to coordinate a large number of people using software systems as the coordination mechanism instead of any centralized authority. This was exemplified by projects like Wikipedia.

But these networks were lacking the critical element of economic incentive. Token economics provides a new way to fund and incentivize these newly formed distributed networks.

Juan Benet, founder of Protocol Labs, describes well what is happening today, “One of the interesting properties here is the ability to create markets where there wasn’t a market before… what [blockchain] application platforms can do is suddenly cut out this huge middleman with a protocol and that is a massive cost-saving for the entire network… you can turn this into a protocol that will optimize the entire process much faster than any centralized company can do, because it turns it into a market. The moment you can take a very complicated process and translate it into a market where a whole bunch of different actors can vie for opportunities and just beat each other, you have this amazing optimization power, where it will just fit the function much better than a centralized entity could have.”

The blockchain provides the infrastructure of trust, secure record keeping and peer interaction required to create general purpose networks for the provisioning of economic and financial services via distributed markets.

The challenge of doing this though is one of designing incentive systems and this is what we will talk about in the coming module.

Token Economics 14: Physical Assets

BLOCKCHAIN PHYSICAL ASSETS

The blockchain originates out of the purely digital realm of Bitcoin. Thus blockchain networks themselves can only ever manage what is on the network. This is fine if the asset is simply a digital token. But going forwards we find ourselves increasingly wanting to use these networks to manage real-world assets. Thus these value networks will have to interface with the real economy and this interface between the physical and information realms creates major issues.

Economies are, at the end of the day, still very much physical systems of technology, land, natural resources, buildings etc. if we are serious about migrating our economic systems to the blockchain, major consideration has to be given to that interface to ensure that the tokens are securely and accurately connected to their underlying physical assets.

In a digital system like Bitcoin, there is always consistency. Transactions obey the rules of the software and there are no exceptions.

In the real world, there are often exceptions. Cars are stolen, houses destroyed, videos turn out not to be properly licensed, commodities fail to be delivered. Humans sometimes don’t obey the rules. Therefore the key challenge for any system that involves tokenizing real-world assets, is to ensure that the digital token stays linked to the real-world asset.

Very few people in the blockchain world have an appreciation for the complexities of the physical systems that run our economies and their regulation; such as containers passing through customs at a port.

There is a huge gap between this very light dematerialized culture of the blockchain and the very heavy culture of traditional physical assets and the national legal structures that they are embedded within.

Today this interface is secured by laws and ultimately the physical force of a government that backs those laws. If you have a legal document that says a piece of land is yours and someone comes and resides on it you can go to the government and they will physically remove that person from your property if need be.

Imagine a token that represents a fractional interest in a set of gold bars in a vault. If a gold bar is taken from the vault, how will that be reflected in the digital token? Who will make sure that the token value stays linked to the gold bars that should be in the safe? Who will bear the risk and how? If the buyer of a token can’t be sure that the token is properly linked to the real-world asset, then the value of the token will fall or even become zero if no one has faith in the correspondence between the two.

ARBITRATION

At present blockchain systems are still dependent upon traditional legal frameworks for this linkage between the digital representation of an asset and the asset itself.

Currently, arbitration is seen as one of the most effective ways of mapping between what is happening on the blockchain and what is happening with the physical asset and the legal systems it might be embedded within. Arbitration is a long since used method for creating legal agreements in international commerce where both parties agree to bind themselves into a legal contract of their making.

An arbitration award is legally binding on both sides and enforceable in the court of choice.

One way of linking legal systems to what is happening on a token network is through what is called a Ricardian Contract. A Ricardian contract places the essential elements of a legal agreement in a format that can be expressed and executed in software. The aim is to make the document both machine-readable and readable as an ordinary text document, such that lawyers and consenting parties may read the essentials of the contract conveniently.

From a legal perspective, the use of markup language embedded within a largely legal prose document leads to reduced transaction costs, faster dispute resolution, enhanced transparency and improved enforceability. From a computing perspective, the Ricardian contract is a software design pattern to digitize documents and have them executed within financial transactions, such as payments, without losing any of the richness of the contracting tradition.

It is robust through use of identification by cryptographic hash function, transparent through use of readable text for legal prose and efficient through markup language to extract essential information.

Mattereum is one such project that tries to use Ricardian contracts to create an effective linkage between records on the blockchain and the established off-chain legally binding dispute resolution of arbitration thus giving what happens on the blockchain full legal weight under natural language contract.

Mattereum is the first, what it calls “Internet of Agreements” infrastructure project for legally-enforceable smart contracts, enabling the sale and lease of physical property and other transfers of rights in assets. Mattereum is billed as a court that understands the nature of cryptocurrencies, making physical property and intellectual property transactable on a blockchain.

In a case where you might buy a physical asset using a fraction of a Bitcoin and the seller does not follow through, it is difficult to explain this to a judge in a small claims court. This is where Mattereum comes in, enabling technically competent arbitrators to make rulings in these cases instead of a judge. As the founder of the project, Vinay Gupta describes it “Mattereum.com is my bid to get the necessary legal frameworks in place to make direct control of physical property using the blockchain recognized in 150+ countries. I want to break the door open to the material world so you can change the status of a smart contract, and have a real-world court recognize that legal ownership of a fiat asset has changed hands. Fiddly, but it’s necessary infrastructure for all of our next steps together.”

TECHNOLOGY

The alternative to depending upon traditional centralized legal institutions is depending on technology. Code may be the law on the blockchain but outside of those networks, Big Data and IoT will be law.

Big Data is going to give us new insight into what happens when and where with high levels of statistical assurance. While at the same time IoT will put code into all of the technology around us that we are now so dependent upon and that is a new form of law enforcement. If you have the code that can stop a car or open a door lock then you control that system and can enforce whatever contract is on the blockchain.

As an illustration, we might think about a blockchain IoT securitization of gold. We create an automated warehouse, people are allocated secure sealed lots within the warehouse. We deposit a stock of gold in one area and when someone purchases a block of gold the system automatically moves it to the owner’s container and the owners gold token account is calculated by summing up the gold in their container. This is a simplified representation of a blockchain cyber-physical system where blockchain records and tokens are linked directly to the underlying asset through automated technology. By an extension of this model whole buildings, cars and other assets could be directly connected to blockchain tokens thus bridging the gap between the virtual token and the physical asset.

Sharding

Scalability is a critical issue that needs to be addressed before blockchain distributed ledger technology can attain adoption by financial technology companies and compete with payment networks that process transactions many times faster.

In a blockchain, transaction validation is much slower than block construction, hence the idea of increasing the number of transaction validator nodes is a key to scalability.

Sharding is one of several technologies being explored to increase transactional throughput.

Simply stated, sharding is a way of spreading out the computational and storage workload across a peer-to-peer network so that each node isn’t responsible for processing the entire network’s transactional load. Instead, each node only maintains information related to its partition, or shard.

The data contained in a shard can still be shared among other nodes, which keeps the ledger decentralized and secure because everyone can still see all the ledger entries. However, the individual nodes do not process and store all the information.

Since sharding mechanisms are still in the development-and-testing phase, much work needs to be done to create standardized methods that address not only scalability but security. That challenge must be resolved before sharding can be considered a solution.

Token Economics 13: Security Tokens

SECURITY TOKENS

The first application of blockchain technology may have been in currencies, but people are becoming increasingly aware that a secure distributed ledger system of this kind could in fact potentially support all economic activity one day.

Today startups around the world are feverishly building new frameworks for migrating ever more spheres of financial and economic activity to distributed ledger technology.

Many believe that the next stage in this process is the conversion of capital markets to token networks as it is becoming increasingly apparent that the management of securities of any kind, from stocks and bonds to real estate, could be brought into the age of information through tokenization.

There is currently great interest by financial intermediaries and technologists in figuring out how to move real-world assets onto blockchains to gain the advantages of distributed ledgers, while keeping the characteristics of the asset.

The conversion of capital markets to token networks would create many efficiencies. It could take the somewhat elite world of high finance and make it accessible to any and all. Creating new opportunities for investors and new sources of equity for organizations.

Our capital markets of various kinds today hold trillions of dollars of assets that are being used far from their potential. Locked up by high transaction costs, low transparency, layers of middlemen and bureaucracy.

The tokenization of this system could radically improve the efficiency of transaction processing by removing the layers of bureaucracy created by centralization. It could unlock vast amounts of currently locked up fix capital. It could create a quantum leap in transparency, opening up capital market data to advanced analytics in unimaginable new ways. Likewise distributed ledgers are tamper-proof making them less susceptible to fraud.

CAPITAL MARKETS

Our world is full of different forms of assets: oil, basic foodstuff, stocks, carbon credits, real estate, gold, etc. Many of these assets are difficult to subdivide or physically move around. So buyers and sellers instead trade pieces of paper that represent ownership of part or all of those assets.

However this existing system composed of paper and lengthy legal agreements is cumbersome. Assets are difficult to transfer and can be hard to track.

Tokenization of securities is the process of converting rights to an asset into a digital token on a blockchain.

Any asset that is currently traded on a capital market as a security, such as commodities, shares, bonds, or various forms of derivatives, could be tokenized by linking them to a blockchain register.

Indeed any asset at all could be securitized by linking it to a digital token. This might include any form of property, such as a house. It might include loans or mortgages, all of these could be converted into security tokens and traded on markets.

The most obvious use of this system is the raising of initial funding for a new project. Already huge amounts of funds have been diverted from traditional forms of venture capital in to directly funding projects through ICOs.

Many industry observers believe that mainstream companies will one-day issue shares through ICOs, either in place of or in addition to traditional public offerings.

ICOs are a good example of where we are heading as we shift more of capital markets onto the blockchain. They illustrate the capacity to open up these markets to the many, as venture capital has gone from the domain of a few investors, to being accessible to anyone on the planet with internet connection and a few dollars.

They illustrate the direct peer-to-peer nature of token economies. But what we have seen so far is really just the tip of the iceberg as what has happened to venture capitalism could literally happen to all of capitalism. As all capital could be tokenized. A number of platforms are currently in operation or being built to do exactly this.

TOKEN PLATFORMS

LAToken is one such platform. LAToken is an asset tokenization platform that allows users to convert tangible assets, such as real estate or precious artworks, into tokens, thereby making them sellable in fractions. You can tokenize your asset on their platform and sell it in fractions to investors. Investors may then sell the tokens on a secondary market and you can buy back the asset later on, or sell it on the settlement date.

Imagine an artwork by a famous artist with 100 copies. The art prints could be tokenized by having ownership held by a company that has a standing offer to the public to redeem tokens for either a single art print or a fraction of one copy. In this way, buyers could obtain an easy-to-transfer token and a secondary market could transact in fractions of the art prints.

This could potentially be a source of financing for the artist and a way for the broader public to participate in the art market that is currently inaccessible to most.

Likewise, commodities could be converted into security tokens and traded.

Imagine a group of companies that want to trade aluminum with one another. Normally they’d exchange paperwork and keep their own lists of trades. If they could move to a blockchain-based system for trading their aluminum, they could potentially reduce paperwork and have more robust record-keeping.

SELF-SECURITIZATION

One of the fascinating aspects of distributed ledger networks is that they can enable people to securitize their own assets.

Tokenization is an extension of the more traditional process of securitization, which is the conversion of an illiquid asset into a record that can be traded to increase liquidity.

Whereas previously the creation of securities was the domain of large highly regulated centralized organizations, blockchain networks can automate this process and make it accessible to all. People and organizations of any kind could securitize any asset that they own. They simply lock it on the blockchain and receive liquidity in return, when the liquid capital is returned the illiquid asset is unfrozen.

Sweetbridge is one token platform that is essentially enabling people to be their own banks when it comes to loans. This is done through creating a blockchain network where people can register and lock up their own assets as collateral, against which they can borrow money at low-interest rates or even no interests rates at all.

Users are essentially lending themselves money without a credit check because they are lending it against their own assets they have locked up.

What is happening is that when you lock an asset into the network, the network grows in value and gives you the tokens equal to that growth in its value, which you can then exchange for other tokens of fiat currency. Because you are creating the currency and not renting it from somebody else you don’t need to pay much interest on it or even no interest at all.

Where this gets exciting is not in developed economies, it is in places where you have a highly ineffective and inefficient formal economic system and a high level of informality, such as the developing nations of Africa and Asia.

In these environments, interest rates tend to be very high and loans tend to be very difficult and yet these are the roots of the supply chains of the world. This is where the food is grown, where the minerals come from. In these frontier markets it can be really tough to get financing of any kind and if you do it’s very expensive. It may be 10 to 20 percent. With a security token platform like that of Sweetbridge, no credit rating would be needed. You just lock up some asset and get liquidity in return at a low-interest rate.

This can be revolutionary, making a massive difference, not just for global trade but in the lives of the most vulnerable.

REAL ESTATE

Real Estate is another asset class that is set to move to token networks in the coming years.

The stock of real estate assets is enormous, it is the biggest asset class in the world, valued at well over 200 trillion dollars.

At just 1.4 trillion in transactions every year, most of this market sits stagnant and does not really trade. Real estate is a very illiquid market and one of the least transparent. Buying and selling property especially on the global market across borders is full of frictions, middlemen, and lengthy procedures.

You can hold a piece of a corporate or a government debt in a bond, but it is very difficult to hold a piece of property and there is a lot of friction to trading property. While at the same time for many assets in real estate people will pay up to 20% more for one that is liquid versus one that is not. So tokenizing these assets could release huge amounts of untapped or underused resources.

Atlant is one platform that is working to tokenize real estate. It does this by linking the property to a special purpose vehicle (SPV) which is then converted into tokens. The property is purchased and transferred to the SPV. The SPV is split into many shares that can then be traded on the platform with almost no friction. Now a person sitting in Taiwan can at the click of a button invest in the creation of a new factory in Poland or a section of an office space in Mexico City.

Likewise, through this tokenization of property, the physical asset can be split up into extremely small units of equity, that make the whole market greatly more liquid. Say for example you have a shopping center, the platform can tokenize it by dividing it into a million centimeters of floor space. People can then exchange those small units or rent the property they own out.

PHYSICAL LINKAGE

In all of this conversation around the tokenization of real-world assets remains one big elephant in the room, which is the question of how exactly do you put assets on the blockchain?

The linkage between the information software layer of the blockchain network and the physical real-world asset is of course of critical significance and in many cases remains an unanswered question as to how exactly that linkage is secured. So in the next module we will pick up on this very topic.

Ben Goertzel – Artificial Intelligence: Past, Present and Future

Ben Goertzel speaks at TransVision 2018 (October) in Madrid Spain. Goertzel introduces the current state of Sophia Hanson, which describes itself as an early stage transhuman robot.

TransVision 2018 explored artificial inteliligence, human enhancement and other technologies and future trends. The first TransVision conference was held during 1998 in The Netherlands.

The first keynote speaker at the event was Sophia, which is also the first humanoid robot awarded citizenship in 2017.

Transhumanism is an international philosophical movement that advocates for the transformation of the human condition by developing and making widely available sophisticated technologies to greatly enhance human intellect and physiology.

Goertzel demonstrates Sophia and describes the various AI systems currently in use.

He further discusses transhumanism as a natural evolution to become greater human beings.