The Importance and Challenges of Token Economics

In this panel at the Malta A.I. & Blockchain Summit, token economics is discussed. The panelists are: Sebastian Markowsky – GP Bullhound; Godwin Schembri – KnowMeNow; Wei Zhou – Binance; Sarah Olsen – Gemini; moderated by Olga Finkel – WH Partners;

Olsen discusses the importance of a stable coin and the challenge of regulation.

Schembri talks about security tokens.

Markowsky talks about what type of tokenization is attractive to investors and getting the incentives right. He advocates an interlinked multi-token model for the purpose of utility and security/investment.

Zhou talks about the “Binance Effect,” which he describes as contributing to the perception that a token is premium, since Binance only lists 3% of the tokens that apply. He emphasizes the need for clarity in regulation.

This discussion was part of the Tokenomics & Crypto Conference.

Token Economics 26: Token Prediction Markets

TOKEN PREDICTION MARKETS

Prediction markets are speculative markets, very similar to futures markets, which have been designed so that the prices can be interpreted as probabilities for events occurring and used to make predictions.

Put very simply, prediction markets enable users to trade shares in the outcomes of an event and in so doing to reveal the information that people have about the likelihood of an event occurring.

In a very elegant way, blockchain prediction markets use tokens to reduce uncertainty and find truths about future events. As they align truthful statements with token investments they create a way for people and groups to come to consensus about a shared conception of reality by using markets to create valid sources of information.

HOW IT WORKS

A number of blockchain based prediction markets now exist such as Augur, Stox or Gnosis. Using one of these networks anyone anywhere in the world can create a market for people to try and predict the outcome to some event, such as a sports match, an election, the weather, sales of a company, price fluctuations of commodities, the availability of almonds in Spain next year or the likelihood of a conflict occurring in central Asia at a given time.

Market makers provide initial funding for the market and for this receive some trading fees. Anyone can then buy and sell shares in the outcomes of that market.

Predictions are based on a binary event where something either will or won’t happen. The value of a bet will in most cases reflect the probability of an outcome materializing.

If you place a bet on a coin flip, the outcome will always be 50% heads, 50% tails. There are no external market conditions that will influence the outcome.

Luck plays a major role, and this is called gambling.

But prediction markets rely on the collective wisdom held by a group of people on the probability of a future event materializing. The current market price of a share is an estimate of the probability of an event actually occurring. The prices of each share add up to one dollar. So if you buy a share at even odds it will cost you 50 cents. If you end up being right, you’ll receive a dollar for that share. If you see a market price of 53 cents then it is reasonable to assume that there is a 53% chance that outcome will occur.

As an example, we can think about a market for the hiring of a new CEO of a company given just two candidates, Bob and Jane. In this market, one share for the Bob option pays you a euro if he is hired and pays you nothing otherwise. One share for Jane pays you a euro if you hold the share and she is hired, and pays zero if she is not. Now, suppose you think Jane has a chance of winning that position, how much would you be willing to pay for a Jane share? If a Jane share pays a dollar if Jane wins and she has a 70% chance of winning, then that share is worth 70 cents. You would be willing to pay up to 70 cents for such a share.

Suppose you enter this market and you find that Jane’s shares are selling for just 55 cents, well, that’s a buying opportunity. Something which you think is worth 70 cents is selling for 55, so then, you should buy the Jane option. In buying the shares, you would be pushing up their price. In this way, your predictions, your information, your opinions about which candidate is likely to win become incorporated into the price of a Jane share.

Imagine however you thought Jane had a 70% chance of winning but her shares were selling for 80 cents, then, you would want to sell Jane shares. Even if you really wanted Jane to win the position of CEO. To make more money you would sell the Jane shares and buy the Bob share. In this way we can see how prices come to reflect the market information.

The prediction market really boils down to one number and if there’s anyone in the world who thinks they would know better than this number they have direct financial incentives to trade this market and basically with every trade they make they feed the information into this market and in the end we have a better number from the market.

The outcome becomes more predictable over time. This is because the payoff depends on the accurate prediction of an outcome of an event. As a larger number of people do more market research to come to the most likely conclusion, the predicted outcome will lean more favorable to one side. Current share prices over time come to reveal information about the likelihood of an event occurring according to the information gained from the market participants.

ADVANTAGES

Prediction markets are not a new invention. They are in fact centuries old and have proven their effectiveness many times.

One of the most popular current markets is the Iowa Electronic Markets. In over two decades of testing this market, in presidential elections, congressional elections, and state elections, the market prices from the Iowa Electronic Markets have turned out to be better predictors of the outcomes than have political polls.

The two key features that make them successful is that firstly, they draw upon dispersed information that is consolidated and averaged out. And secondly people have skin in the game, that is to say people are putting their own money on the line and this ensures a correspondence between what they predict and what they believe to be true.

Prediction markets work to align incentives by backing statements up with resources. They work to obtain truthful and relevant information through financial and other forms of incentives. With real money on the line, people have an incentive to think carefully when they’re investing and they have an incentive to collect, process and interpret all of the information available all over the world. The resulting market prices potentially reflect a lot of deep-seated and diverse information in a way which surveys or polling cannot.

Likewise because prediction markets rely on the collective view of many, not just one person’s research, they can efficiently aggregate a plethora of information, beliefs, and data.

These markets work on the principle of the wisdom of the crowd, which states that if you ask enough people something, their average answer is usually far more accurate than anyone expert, which creates a powerful forecasting tool.

The author James Michael Surowiecki posits that there are a number of necessary conditions for collective wisdom: independence of decision, diversity of information, decentralization of organization.

In the case of predictive markets, each participant normally has diversified information from others and makes their decision independently.

The market itself has a character of decentralization compared to expertise decisions. Because of these reasons, predictive markets are generally a valuable source to capture collective wisdom and make accurate predictions.

Equally the ability of the prediction market to aggregate information and make accurate predictions is based on the Efficient Market Hypothesis, which states that assets prices are fully reflecting all available information. For instance, existing share prices always include all the relevant related information for the stock market to make accurate predictions.

Prediction markets create a very dynamic system, as opposed to a seven-year plan or a yearly assessment, prediction markets can incorporate new information quickly and may be continuously updated.

BLOCKCHAIN

Using a blockchain as the IT infrastructure adds additional benefits to prediction markets. By creating prediction markets on a blockchain network we can ensure that the data always remains open and accessible to all parties. It removes the possibility for the centralized authority to alter results, it can thus be trusted, is secure and if designed well blockchain prediction markets may be difficult to manipulate.

Prediction markets may be used to provide liquidity and hedging around all forms of futures markets. We could have a prediction market for “will the price of bitcoin be more than ten thousand dollars on the first of January 2019.”

All futures markets could be migrated to the blockchain using prediction markets. Likewise, all betting, such as online sports betting, could be more securely and efficiently run on blockchain platforms.

Migrating all of these disparate betting, derivatives and futures markets, to the blockchain could create a much more interoperable system where different networks could automatically draw upon the wisdom of a given network through APIs that connect into the price of the token.

These prediction markets could work as networks that aggregate the best knowledge that we have about a given unknown event. With the knowledge in those networks then being accessible for automatic external use in smart contracts via APIs.

A smart contract ensuring a wedding event could plug into a token market predicting the outcome for the weather on a certain day and use the token price to calculate the likelihood and cost of a weather disturbance to formulate the cost of the insurance claim.

Token Economics 25: Initial Coin Offering

INITIAL COIN OFFERING

ICO, Initial Coin Offerings or first token sale, has become a new way to bootstrap a community, through pre-selling tokens that give users access to the futures services that the network will deliver. In an ICO, a quantity of the crowdfunded cryptocurrency is redistributed to investors in the form of “tokens”, in exchange for fiat currencies or other cryptocurrencies.

These tokens become functional units of currency when the ICO’s funding goal is met and the project launches.

The first token sale was held by Mastercoin in July 2013. Ethereum raised money with a token sale in 2014, raising approximately $2.3 million in just 12 hours. Today first token sales have become hugely popular within the blockchain community. At least 400 ICOs have been conducted as of August 2017.

According to Cointelegraph, companies raised around $6 billion via ICOs in 2017.

Already by February 2018, an estimated 46% of the 2017 ICOs had failed; proving how risky an investment they are.

Ethereum is (as of early 2018) the leading blockchain platform for ICOs with more than 80% market share. Tokens are generally based on the Ethereum ERC20 standard.

In contrast to initial public offerings (IPOs), where investors gain shares in the ownership of the company, in ICOs, the investors buy coins of the company, which can appreciate in value if the business is successful. These coins are sometimes “pre-mined”, eliminating the need for proof of work. Often contributions are capped at a certain value.

ICOs are a way for self-funding a project by selling future access to the service the network will deliver. As such they can be seen as an extension of the crowdfunding process, but different in important ways.

How do ICOs differ from IPOs or issuing shares? When you’re investing in stocks what you’re doing is you’re taking a piece of the equity, a piece of the operating company, all the cash flows. The holder of the equity owns a part of all of the profits that the company makes.

Generally speaking, tokens are different. You’re not buying a part of an operating company you’re buying the money supply of the future technology project.

With tokens, one is buying the tokens before the company has built the technology. But if the technology grows and if it’s well used then the value of the tokens will correlate with the value of the company. Most tokens do not actually provide any sort of claim to an underlying asset and that is different from traditional securities.

ICO DYNAMICS

The token may start as “magic internet money” but as the ecosystem matures and becomes more valuable in use the tokens start to look like and feel like “real money” to their end users.

Any one or group of people can launch a project where ever they see an opportunity for value creation through the coordination of people’s activities.

At first, people come together and define what the future service of the network will be and then create a token that will be the medium for accessing and exchanging that service.

At first, the project is nothing but an idea and a little bit of code on the blockchain for minting some new tokens during the initial offering.

Often when a token is first issued it has essentially zero value. The value of the token at this point is largely dependent upon people’s perceived future utility of the network. Thus the early purchasers of the token are both believers in the network and risk takers. But they give the token value through their belief in its potential and willingness to pay for it. Over time as people contribute to the project the network starts to materialize and at a point, it can be opened up to the community and start to deliver a service to the end user.

At this stage, the tokens that were previously just crypto equity, now become utility tokens which are used to benefit from the services in the ecosystem. Anyone who has contributed to the community, in the beginning, can now use the crypto-equity to benefit for free from the service that is provided. Those that did not contribute have no tokens and they now need to purchase those tokens which gives the token more value as more people use the network and it matures. At this mature state, the token should shift from being an object of speculation to the actual use-value determining its price.

So money which starts as “magic internet money” becomes “real money” as the community materializes and starts to deliver a real service that people would otherwise be paying for with fiat currencies. The token actually starts to feel like real money.

COMMUNITY GROWTH

Part of what blockchain technology enables is for our newly formed network systems of organization to mature and become greatly more autonomous.

ICOs are a way for these networks to become autonomous in their initial financing, to become self-funding.

Token offerings can provide a very agile development model. As with this model to funding it is now possible to set up an organization rapidly wherever there is a perceived business opportunity and for anyone to invest in that organization with limited friction. Unlike in traditional venture capitalism, contributors can transfer their assets instantly and easily to other people.

Whereas previously only projects that could pass through the formal financial system and look like profitable enterprises received financing, with token offerings people can finance the things that they value directly peer-to-peer.

Take for example the blockchain project ImpactPPA, that uses blockchain technology to provide a direct vehicle for people to invest in energy projects in developing economies.

ImpactPPA tries to use the power of the blockchain to bring together capital and consumers in a way that is direct, responsive, and expedient.

Energy financing and distribution are currently bottlenecked by large, centralized NGOs and government agencies that have established a lengthy financing system that can take years from proposal to product implementation.

ImpactPPA offers a system that permits anyone, anywhere, to create a proposal for a project of any size enabling the funding of clean energy microgrids in emerging economies around the world.

ImpactPPA CEO Dan Bates explained that the current funding process with centralized NGOs is “too cumbersome and costly for many developing nations… ImpactPPA’s use of the blockchain and the crowd dramatically changes this paradigm, tapping into the vast potential of the socially minded impact investor and concerned citizen, looking to benefit the well-being of others while mitigating climate change.” – https://goo.gl/NY9Gv4

EXAMPLES

With token offerings, suddenly it’s possible to create all these business models that didn’t exist before which allow us to monetize open data and open networks in a completely new way.

ICOs have the potential to unlock huge amounts of untapped resources and fund projects that would otherwise fall outside of the mainstream financing system as they can be used to provide resources for any kind of project.

Building a new park in your neighborhood could be funded through an ICO. People come together to form a plan for the park, they then create park tokens on the blockchain, inform everyone in the area of the project and that to access its services they will need park tokens.

Tokens are distributed and used to remunerate those creating the park and maintaining it.

There doesn’t even necessarily need to be any fiat money involved; people who contribute receive tokens that they then use later to avail of the park’s services.

Although we often think about ICOs in terms of investment and monetary increases, the token offering can be used to fund any project that may or may not have monetary value. It is simply a way of recognizing the contributions that people have made to the development of a project and rewarding them with access to the service that the system delivers at a later date, thus creating a self-funding, self-sustaining system, that can be completely independent of traditional market financing or government support.

This model supports the idea of multi-value as it actually becomes now possible to have a variety of value systems in the sense that every organization can have its own tokens and those tokens are actually representing what is the value system of that community.

While it is always possible to exchange the token for a particular fiat currency it also becomes possible to create enough systemic exchange by which certain communities that see value in the token of another community can start exchanging between them and eventually you can actually create a really sophisticated system of exchange that could almost bypass the fiat currency.

Token Economics 24: Token Economic Development

TOKEN ECONOMIC DEVELOPMENT

Economies are large-scale systems for the production and exchange of value within society. One of the key functions of economies and economics is to figure out what might happen in the future and enable economic development by coordinating the efficient allocation of resources within that system.

An economic system has to aggregate large amounts of information and figure out how to allocate available resources in an efficient manner to support its future development. The same is true for all organizations, enterprises, and individuals. They also have to figure out how to allocate both their current resources but also where to invest their resources to enable future success and growth.

This can be done either in a centralized fashion or a decentralized fashion.

The centralized approach involves having a large bureaucracy that monitors the economy, bringing in information from the many different industries and employing an army of economists, statisticians, and analysts of various kind to try to forecast the future and figure out a plan for the economy. Then use subsidies, taxes and various forms of regulation to try to allocate resources according to some centralized vision. This we would call a command and control economy, as exemplified by the former communist system But it is also a key part of how most economies are managed today by their respective national governments.

This centralized approach has its advantages and disadvantages. We can look at China’s current rapid development which has to a large extent been a function of the central government’s planning.

But equally this approach has its failings. It is critically dependent upon the information processing of a limited number of people, who may be highly competent, but just as likely, they may be incompetent. Either way, they can only process so much information. Which means there are information bottlenecks, as the information is centralized. Likewise, the people are making decisions about other people’s resources, not their own, which can lead to a misalignment of incentives and many opportunities for corruption.

ADAPTATION

With fast-paced technological and market evolution and mass, automation innovation is moving to the forefront of what enterprises are required to do. At the relatively low level of change of the past, the enterprise could confine change and innovation to some small R&D department and could afford lengthy production cycles and change processes. The mass of the organization was built around a stable and predictable hierarchical structure, long production processes and product life cycles through which stable income streams could be maintained. But as the pace of change increases this model is becoming increasingly less viable.

We are living in a more and more complex and dynamic world. There are more things coming at us and they’re coming at us at a faster rate and it is not just that the pace of change is accelerating but we also have more extreme events, the so-called “black swans” that come at us out of nowhere and we’re part of nobodies plans. In this kind of world to think about the future is a waste of time, in that kind of world all you can focus on is how to adapt more quickly, sense and respond more quickly to what is going on in the world.

Blockchain networks and token economies are distributed. That is to say, they have no centralized component, because of this we can not develop the economy in the traditional top-down approach, but instead have to work with the innate peer-to-peer market dynamics.

Without centralized coordination, they rely on markets to predict the future and decide how to allocate resources and invest in response to that. It has long since been noted that markets themselves are decentralized systems for the processing of information and the distributed allocation of resources.

One of the key aspects to economies and markets is as information processing systems. They aggregate all the local information that people have and use it to formulate a price that indicates something about the supply and demand of a good or service, both now and possibly in the future.

Market prices are good ways of aggregating dispersed information and summarizing that information in a single key figure, the price.

Futures markets are good examples of this where traders bring their knowledge into the market about some future outcome with the price then reflecting that dispersed information.

EVOLUTION

These loosely-coupled evolutionary type systems are long-term much more reliable than highly structured centralized systems – whether it’s from biology or whether it’s even engineering systems. And we are entering a world where we can have business systems that have these properties and that means that it’s able to absorb and adapt to small and large changes on an ongoing basis.

With highly centralized systems you have a lot of internal fault lines that get covered up by the opacity and boundaries, they just sit and sit until things break massively and you get massive crashes.

When you open the door to identifying and adjusting to your small perturbations and letting systems evolve through interaction with the community you can actually massively reduce the probability of these mega like corrections because you’re making micro corrections all along the way.

As an example we can think about a large financial institution or enterprise going bankrupt. The internal dysfunctionalities and stresses within the system will not be revealed for long after they happen and it will take years to wind down the operation.

A token economy is a real-time economy, think about how hard-coded financial regulation into a decentralized autonomous organization would be.

Ten minutes after a bank started trading insolvent the automatic regulation smart contracts would kick in and that bank would just immediately shut down and redistribute its assets to its creditors. That whole process of insolvency, the minute it started trading insolvent and got to the threshold, would just automatically happen and we wouldn’t need agencies coming in and monitoring.

With these token economies a new form of economic development is emerging, one that is more organic and evolutionary. Key components of that are: initial coin offerings as means to bootstrap the token network; prediction markets as distributed mechanisms for bringing in the best available information and predicting what will happen in the future; and advanced analytics as means of optimizing the allocation of resources on the network through big data analytics.

As we will talk about in the coming video ICOs are a critical part to these distributed networks gaining their autonomy from the traditional financial system and enabling communities to start their own networks based around their own value system.

These decentralized token networks can be biologically self-sufficient, we can add inflation to a network every year, with say 5% more tokens distributed to the network, thus creating their own value with which to fund their own development, which is being taken out of the value of the whole ecosystem. The network inflates itself, to invest in itself, towards creating more value which will compensate for the inflation.

So anyone can join and say I will do marketing or I will do all of these things to the platform that will add value to the network in the future and if the network decides that they want to allocate value to that activity then just by a simple vote the network can decide to produce tokens and give them to the participant as an investment in its own development.

The network is self-sufficient in a sense that it creates its own value. It mints these new tokens and distributes them as needed for future growth.

In the case of Ethereum for example with something like a 50 billion dollar token valuation and maybe a 10 percent inflation rate, Ethereum is already allocating approximately 5 billion dollars a year in decentralized budgeting, to its own development. This is an incredible degree of biological self-sufficiency that we have never seen. These token networks do not depend on anything in this sense they are completely autonomous code.

Likewise, the blockchain exists within the context of the next generation internet, the so-called distributed web. A key part of this is advanced analytics.

When whole economies, supply chains, and enterprises are “on the blockchain” the potential for analytics becomes extraordinary.

One early example of this is the IBM Data Science Experience platform that is used to analyze and visualize supply chain data from a blockchain environment. They enhance the data with info taken from weather APIs and other sources. They then train and deploy a machine learning model that predicts shipping delays.

Blockchains open up data silos and expose them for running analytics over whole networks and systems. This provides new ways for us to determine the optimal allocation on a given economic network and even run simulations as to future outcomes.

Cryptoasset Regulation & Tokenization

Stephen McKeon, Associate Professor, University of Oregon, speaks with Greg LaBlance of US Berkely Haas, about the complexity of US regulation and jurisdiction overlap, in regards to asset tokenization.

Specifically, he touches upon the progress of tokenized securities, which represents a unique digital wrapper around an underlying security. He outlines how blockchain and tokenization will make it easier for regulators because it will reduce trading friction and automate compliance.

Token Economics 23: Plug and Play Enterprise

THE PLUG-N-PLAY ENTERPRISE

A central concern of economics is the question of how do people work together within some form of enterprise and then redistribute the value created by that collective effort, in a way that is optimal for the entire organization.

An enterprise is a structured project or organization designed to achieve valued ends.

What defines a business, enterprise or company is a business model. For something to be considered a business there must be some coherent business model which defines how the organization creates value, exchanges it and generates revenue and thus achieve its objectives.

A business model can emerge wherever there is the opportunity to create, exchange and capture value. If we discover a new source of mineral under the around that people need, then we can build a business model on top of it by extracting it, exchanging it and capturing some revenue from that value stream.

This business model is realized through the construction of a business or enterprise. Enterprises then operate on top of some value stream, intercepting, transforming, exchanging and retaining value.

These enterprises enable the specialization and division of labor within economy and thus the production of complex products and services.

Previously we found that we have to typically be inside of one of these formal structured organizations to be able to be productive in this way. But the proliferation of connectivity and reduction of transaction costs taking place bring about a deep structure transformational in the economy from closed organization defined by their boundaries to open networks defined by their protocols. And this offers new ways to really unlock and harness the assets and creative potential of people around the world within new larger and more complex networked organizations.

PLATFORMS

With the rise of the internet has come a new way for structuring the division of labor within the economy through on-demand, networks or what have come to be called platforms.

Platforms are information networks that enable two-sided markets, for producers and consumer to connects and exchange value. These web platforms like Alibaba, Amazon, Google or Facebook have today already risen to the top of market capitalization within the space of just a decade or so to replace the corporations of industrial capitalism.

These platforms differ from the traditional organization as they are designed to be dynamic and event-driven. Where providers and consumers can couple or decouple from the network on-demand instead of having fixed roles, like Uber drivers, or Airbnb hosts.

They are modular, tasks and service provisioning are broken down into small modules that can be easily produced and consumed, like on-demand videos on YouTube or blog posts.

They are scalable, a seller on Alibaba can easily and rapidly go from a few hundred dollars in sales to a few million.

They are based around interactions and the exchange of value in real-time instead of fixed structures and procedures. Much of the platform’s operations are automated through software running on centralized servers.

The advent of blockchain technology will overtime extend these previous trends into the world of fully automated and autonomous networked platforms. On a more technical level, this will create a new architecture for our enterprises and entire economies. This new design paradigm is best captured in the term service-oriented architecture.

SOA

Service Oriented Architecture (SOA) is an approach to distributed systems architecture that employs:

  • loosely coupled services
  • standard interfaces
  • and protocols
  • to deliver seamless cross-platform integration

It is used to integrate widely divergent components by providing them with a common interface and set of protocols through which they can communicate within what is called a service bus.

Over the past few decades, service-oriented architecture has arisen as a new systems architecture paradigm within I.T. as a response to having to build software systems adapted to distributed and heterogeneous environments that the Internet has made more prevalent.

There are many definitions for SOA, but essentially it is an architectural approach to creating systems built from autonomous services that are aggregated through a network.

SOA supports the integration of various services through defined protocols and procedures to enable the construction of composite functions that draw from many different components to achieve their goals. It requires the unbundling of monolithic systems and the conversion of the individual components into services that are then made available to be reconfigured for different applications.

Over the course of the latter half of the 20th-century enterprises consolidated their IT infrastructure within Enterprise Resource Planning systems (ERP) behind firewalls.

Over the past decade or so those IT systems have started to migrate to the cloud, but now they will be moving increasingly to this distributed cloud of these next-generation blockchain networks.

As today’s enterprises face new challenges of having to collaborate across large networks, foster innovation within their organizations and as information technology is greatly accelerating the pace of change, reducing the barriers to entry, shorter and shorter product life cycles are the norm.

These enterprises have to respond to fast-changing environments by becoming more agile and the most advanced and forward-looking of these enterprises are already moving towards a platform model to achieve this.

EVENT-DRIVEN ENTERPRISE

The enterprise of tomorrow will unlikely be based on the static structures of today. But instead will be event-driven networks as we go from a push model of industrial production to the pull model of the services economy.

Service-oriented blockchain based networks will use advanced analytics to pull together resources when and where needed on demand.

The enterprise of tomorrow will be more like an ever-evolving swarm rather than a structured machine, with value being created in micro-interactions dynamically within networks of peers; some large, some small.

Enabling this rapid coupling and decoupling from blockchain networks – of people, resources, and technology – when and where needed will require plug-n-play, API like interfaces.

With the confluence of the services economy, blockchain, and analytics for the first time, we can actually identify what people are contributing to an enterprise, what economic value they are creating, and begin to reward people in real-time.

The enterprise will need to be inherently designed to be able to plug in any capacity to the network as required. The most successful of these networks will be those that are able to harness the efforts of the many, along multiple dimensions, in a frictionless automated fashion. When we start to combine these capabilities we start to see a new and very different architecture to the enterprise and economies.

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.