What is an ICO?

What is An Initial Coin Offering? ICOs are basically blockchain crowdsales, the cryptocurrency version of crowdfunding. The ICOs have been truly revolutionary and have managed to accomplish many amazing tasks: They have provided the simplest path by which DAPP developers can get the required funding for their project. Anyone can become invested in a project they are interested in by purchasing the tokens of that particular DAPP and become a part of the project themselves.

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.