Token Economics 3: Value

The implications of the changes expressed in the last video are many. But the first is that we are now no longer dependent upon centralized organizations to define value within society.

Because the maintenance of these databases, where value is recorded, has shifted to information networks, it is increasingly becoming possible for anyone or any group of people to set up one of these networks. It means that individuals and groups can define what they value, instead of that being defined for them. And who gets to define value within society is of critical importance.

Previously, only large centralized institutions got to define units of value. The largest of those institutions, the nation-state, got to define widely accepted currencies. But those tokens were always relative to a centralized entity. They only really defined what that centralized entity valued. A Starbucks gift card is a form of token, the RMB is a form of token, a share in Microsoft is a form of token, but all of those units of value are defined, created and managed by centralized entities according to their interest and needs.

What is changing now is that anyone, any group, can now define any form of value through the creation of a digital token on a blockchain.

That token doesn’t have to have value for some external centralized entity, it can simply represent the inherent value within a network of peers.

Tokens are generic units of value that can be used to quantify any form of valued resource. But more importantly, they can be used to define specific and distinct forms of value. This is why in a blockchain economy we have so many tokens: energy tokens, food tokens, transport tokens, social tokens and the list is ever expanding.

In such a way the token economy offers the potential to incorporate more and different kinds of value, thus giving value representation to what was previously excluded from being defined as economic activity.

The potential of this is that we may for the first time start to move towards an economic system based upon full cost accounting.

In recent years with the environmental sustainability crisis unfolding the idea of a full cost accounting economy has been presented as a solution. But to date the complexity of realizing that has been overwhelming and the tools for implementing it have remained limited.

Rapid advances in big data, complex analytics, and blockchain technology are starting to provide the technical infrastructure for an economy that may, in fact, incorporate all relevant event information and value sources, thus bring many areas of social and economic organization into token markets of change.

Tokenizing is the process of converting some asset into a token unit that is recorded on a blockchain. Anything of economic value can be tokenized and thus brought into the blockchain economy.

Today we are starting on a long journey of migrating our entire global economy to blockchain networks: real estate, commodities, supply chains, energy markets, accounting, mortgages, loans, insurance, special purpose vehicles and all kinds of derivatives are all going to migrate, one block at a time, into this new information-based economy.

As the venture capitalist Bradley Rotter Rivetz notes “everything that can be tokenized will be tokenized. The Empire State Building will someday be tokenized. I’ll buy 1% of the Empire State Building. I’ll get every day credited to my wallet 1% of the rents minus expenses. I can borrow against my Empire State Building holding. And if I want to sell the Empire State Building, I hit a button and I instantly have the money.”

With this new technology not only existing forms of valued assets will get tokenized but with advances in information technology we are quantifying and assigning value units to more and more aspects of our world and our social interactions. Token economics will be used to support these new forms of economies, whether we are talking about the emerging natural capital economy or social capital. It will be a number of years before we really have the underlining blockchain technology to do that on a large scale, but it is coming and the implications are enormous.

The point is blockchains aren’t simply extensions of existing financial and monetary systems but something truly different.

They allow us to define, quantify and exchange, new sets of values that emerge in a post-industrial economy. In so doing they allow us to expand market systems and economies as distributed management systems to coordinate more and more spheres of human activity in a decentralized fashion through peer-to-peer exchanges within digital token markets.

Token Economics 2: Distributed Ledgers

Blockchain is set to have a transformative effect on the very foundations of how our economies function. The study of this new form of distributed economy may be called token economics (also crypto-economics).

The primary factor to appreciate in understanding the significance of token economics is this: the most basic way in which economic data is recorded is changing.

With blockchain, the information layer upon which economies are built is changing. Therefore everything upwards of that layer will change, which is essentially everything we know about how our economies work.

Economics is, before anything, based on information. It is based on records of ownership that define who owns what and what is exchanged – what we call ledgers. Everything that exists within an advanced economy exists because it is in a ledger.

That ledger is currently maintained by those things we trust the most, which is the government and legal system.

The legal system determines who gets to make entries into those databases. It grants that power to various institutions that prove their trustworthiness to the legal system, as well as to the banks, insurance companies, hospitals, enterprises, institutional investors, etc.

These centralized authorities manage this complex set of records or databases and thus control how value is represented and flows within the economy – which is, of course, the foundation of their power and influence within society.

This centralized approach can have many advantages in terms of simplicity, speed, and efficiency. But it also means that we have to trust those institutions and we have to continuously work to constrain their powers.

Throughout the latter half of the 20th century, we converted that information into a digital format. But the structure of the system remained unchanged.

Today everything that we turned into digital data we can now move onto blockchain records, which can be understood as a form of distributed database. With this system, people can now connect to the database directly and we can automate the maintenance and updating of that data.

The trust required to maintain societies’ records of value is thus displaced from formal centralized institutions and now placed in the mathematics of cryptography, computer code and the design of networks. This means that at least theoretically, we do not need these centralized institutions to manage the data in the way that we did in the past.

The profound implication of this is that society and its economy no longer needs to be architectured around centralized institutions.

The consequences of redirecting all of these flows of information, value, and power within society, away from centralized channels and into distributed networks, are almost unimaginable. Their ramifications are so profound that none could predict the outcomes.

The surprising thing though is that this is not the dream of some radical anarchist group, but simply the consequences of a revolution in information technology.

Such an extraordinary transformation happens very rarely in human civilization as it signals the true coming of age of the information age.

The blockchain is unlike other new technologies because it taps into a deep structural transformation brought about with the move into the information age. That is to say, the rise of distributed networks as a new organizational paradigm for society, economy, and technology infrastructure.

The blockchain is not magic – as it might appear – but simply builds upon existing information and communication technologies that are enabling this deep restructuring process.

Token Economics 1: Context

Economic forces are everywhere. They shape and structure our everyday lives. It’s how we organize people, resources, and technology to create and exchange value within society.

During the modern era those forces came to be channeled and structured within a particular set of centralized bureaucratic institutions based around the nation-state and the enterprise.

But today the proliferation of information networks is unleashing constrained economic forces.

Through ledgers and blockchain technology, the most fundamental rules governing our society are now open for redefinition, as was prior to the industrial age.

As advanced economies move out of industrial production and into a new form of global services and information economy, the economic model of the industrial age is becoming eroded.

This emerging global information and services economy will be coordinated through the internet running on an updated set of protocols that provides the secure distributed infrastructure for this emerging global token economy.

This transition builds upon major trends that began in the late 20th century which are today converging in powerful new ways. Privatization and globalization, financialization and the rise of online platforms are all converging as blockchain networks merge economics and information technology to take us into a new economic paradigm.

  • Privatization opened up more spheres of activity to markets.
  • Globalization expanded those market around the world.
  • Financialization connected up our real economy into an integrated information-based financial system.
  • The platform economy created new forms of user-generated networks.

Blockchain brings these trends together in synergistic, powerful new ways.

Hence, a new economic system is being established; one that is truly global, that reflects the underlying logic of services. This will be an economic model that is for the first time in harmony with its underlying technology of information.

These emerging token networks offer the potential to unleash a massive wave of creativity and innovation.

With trillions of dollars set to migrate to this global cloud computing and blockchain infrastructure in the coming decades, the stakes are high.

Financial and economic sovereignty appear to be slipping out of the fingers of nation states.

And the tensions are mounting.

Are we moving into a lawless chaos? Or are we moving to a historically new level of economic organization?

That will be decided by our capacity to understand this new economic paradigm coupled with our ability to design and develop new token networks of synergistic incentives.

Rethinking how we organize economic production and exchange is one of the major challenges and opportunities. Token economics is an opportunity to revisit the foundations of economic organization.

It’s an opportunity to reconstruct a new form of economy that is different from the industrial model that we know so well.

It’s an exercise that is of critical importance to the development of a sustainable model to economic development in the age of information, globalization and billions of people wishing to join a worldwide economic system, which is already showing major signs of stress.

This is no longer about politics, policies or protesting, the technology is reaching a maturity. We now stand at a point where we can design economic systems from the ground up. The success or failure of such systems does not rest with the actors in the network, but squarely with the design of the system.

Possibly for the first time ever, if we don’t like the prevailing economic system, we now have the option to design a better one.

What is so powerful about this revolution is that it is not really driven by idealism or politics but rather economic incentives. The global economy will switch to being based upon distributed blockchain networks with each actor seeing it as in their economic interest to do so.

This revolution does not require large-scale political coordination. It bypasses it. Instead, it employs a highly modular and granular transition.

Specific parts of the existing economic institutions can be upgraded and integrated into a new economic model.

Yet, this will be a profoundly disruptive transformation.

Enterprises will be automated. Whole industries will be upended by powerful new blockchain ecosystems. National governments will face mounting pressures from a global information services architecture.

This new economic paradigm promises the potential to build new forms of economic organization to deliver what people value.

It promises a more open and inclusive model that harnesses the efforts of the many instead of the few.

Token Economics 0: Course Intro

This video is an overview of a course on token economics, or crypto-economics, which is the study and design of economics based on blockchain technology.

The course touches upon distributed ledger technology and triple-entry accounting as well as the two primary categories of tokens: utility tokens and security tokens.

The course also addresses decentralized organizations, game theory and the design of incentive structures to align the interests of the individuals of the whole organization within user-generate networks.

As a result, token networks can be used to remove the centralized management structure of organizations while better aligning the incentive structures of producers and end users.

The course also addresses the formation of large-scale blockchain networks that span across organizations and industries to create powerful new ecosystems. Inn other words, blockchain as an infrastructure for a global-services economy.

Finally, the course addresses token networks as a way to fund their own establishment and guide their future development.

Blockchain Art Exchange

The Blockchain Art Exchange, based in London, is seeking to establish a “more democratic art market.”

The idea is that when a digital artist sells work on the Blockchain Art Exchange they will receive Blockchain Art Exchange (BAE) tokens.

Holders of BAE will receive royalty payments from every artwork sale that happens on the BAE exchange. Hence, the more sales an individual accrues, the larger the share of royalties received. In theory, emerging artists will be supported by royalties from the sales of more established artists.

The sequence is as follows:

1) Submit digital artwork for analysis.

2) The digital work is graded and given an “objective price.”

3) The digital work is uniquely identified with a blockchain certificate to prove authenticity.

4) The digital work can be exchanged instantly on the BAE platform.

Can such an idea be executed for traditional (non-digital) art forms?

Token Economics via Personal Devices

Artificial General Intelligence (AGI) is in the process of rewriting what it means to live on planet earth.

AGI refers to the intelligence of a machine that could successfully perform any intellectual task that a human being can.

AGI is a goal of some artificial intelligence research, as well as a science fiction topic.

Kimera Systems, Inc. offers artificial intelligence technology to observe user behavior, context, and derive a common sense set of actions to apply under specific circumstances.

Mounir Shita, Co-Founder and CEO of Kimera Systems, speaks about AGI and a vision of how to develop an economic model that benefits people rather than a handful of powerful organizations or governments.

In this brief video he discusses using token economics and blockchain to pay individuals via the devices they use, which hold data. He says it’s about financially rewarding people for living their lives.

Description of a Two-Token Economic Model

This video outlines a parallel between token economic models and business models. The central idea is that the way business models are designed is to provide value for customers while extracting value for shareholders. In a token model, the design is intended to create value in the token itself and therefore reward those supporting the business, including customers and shareholders.

However, part of the problem of a single-token model is the inherent tension between those who want the token to rise in value, like an investment, and those who simply want to pay for services, as with a currency that maintains a stable value.

Hence, the design of this two-token model is intended to satisfy the needs of two groups: customers and business supporters. This model is comprised of three key principles:

  1. Reward value creators
  2. Align actor incentives
  3. Support business sustainability and expansion

Often blockchains are thought of as a way to disintermediate middlemen. However, some of them add value. Hence, this system is designed to reward all those who are adding value to the business, whether they are creators or traditional middlemen.

This specific 2-token system is designed for music blockchain Emanate. The two tokens are designated as MN8 and MNX.

  • MN8 is a governance token
  • MNX is a stable, internal cryptocurrency

Customers don’t care about MN8. They will swap money for MNX and use MNX to pay for services, just like traditional currency.

Different actors aligned with supporting the business will extract value from the system by receiving MNX as part of their provided services, according to pertinent smart contracts. They can then swap MNX for whatever currency they desire through an internal exchange.

However, they will need to stake some MN8 to participate in the system and earn MNX. Hence, they are buying into part ownership. Alternatively, they could be investing in the business itself.

All of the MN8 stakeholders can vote on the direction of the business. Those who own the most MN8 will have the most votes and the greatest vested interest in the success of the business and MN8 token. As the business becomes more successful, the MN8 tokens would be anticipated to rise in value, in the same way the value of stocks rise in a traditional, publicly traded corporation.

A Glimpse into Token Economics

Security Token Academy Host, Amy Wan interviews Dr. Stephanie Hurder, partner and founding economist at Prysm Group about token economics and tokenizated assets.

Token economics, also known as crypto economics, is the study and design of economic systems based on blockchain technology.

Hurder express the importance of understanding the rights and governance of what a token provides.

There are two primary types of tokens:

1) Security tokens
2) Utility tokens

The major difference is the intended use and functionality of the tokens. Security tokens are created as investments. Users holding the security token also get ownership of the company.

Utility tokens, on the other hand, are not intended to give their holders the ability to control how decisions are made in a company. They merely enable users to interact with a company’s services.

However, both security and utility tokens can increase in value, hence some people may find it difficult to differentiate them.

Hurder talks about the tension inherent within a utility token when people are desiring that it go up in value, vs the stability required for its use of value exchange.

Token economics includes designing a token as a functioning part of an overall economic platform. In other words, ‘what’ do you tokenize so that everything works well together?

What is Blockchain Tokenization?

Tokenization

Tokenization is an intrinsic part of the Blockchain technology that serves the purpose of platform identification and accessibility.

For example. Bitcoin is a token.  And so is Litecoin, Dash, and other currencies that function over a blockchain. While tokens can represent money, as in the examples above, they can also represent other things.

The demand for a particular blockchain product or service is usually the main determinant of the value and eventual market price of its token. This is why there is a variation in the prices of different altcoins in the Blockchain environment. For example, Bitcoin is more readily accepted by merchants than Litecoin, and is consequently more valuable.

Broadly speaking, tokenization is the process of converting some form of asset into a token that can be moved, recorded, or stored on a blockchain system. That sounds more complex than it is. To put it simply, tokenization converts the value stored in some object — a physical object, like a painting, or an intangible object, like a carbon credit — into a token that can be manipulated along a blockchain system.

Blockchain tokenization is powerful because it has the potential of  tokenizing everything from “gas” on the Ethereum blockchain (GasToken), to fine art, real estate, or even “attention” (Basic Attention Token), which have applicability in social media and advertising. There is also the possibility of tokenized governance — making 1 token worth 1 vote in meetings for some organizations.

The Tokenization of Things

In October 2017, Matthew Roszak discussed how we’re transitioning from an old model where money is used to equal power; changing to “money becoming technology” via the rise of cryptocurrencies and tokenized assets on the blockchain; and ultimately becoming “technology equals power.”

In brief, a token is a scarce, digital asset. Bitcoin was the first.

Roszak states that Bitcoin is one of the greatest inventions of our time. More specifically, it’s one of the greatest technological, financial, political, industrial and humanitarian inventions of our time.

Blockchain is like the rails for Bitcoins (tokens), which represents the cars that run on the rails.

Roszak discusses how things can be tokenized, not just money, resulting in new opportunities for businesses and entrepreneurs.

Blockchain and tokenization is one of the greatest generational opportunities for entrepreneurs and investors. 

He notes how technology generally outpaces regulation and that the early phase of technology adoption includes some risk and uncertainty.

Matthew Roszak is co-founder and chairman of Bloq, a leading blockchain enterprise software company. Mr. Roszak is also founding partner of Tally Capital, a private investment firm focused on digital assets and blockchain-enabled technology with a portfolio of over 20 investments, including Block.One, Civic, Factom, Rivetz and Qtum.

Mr. Roszak is a blockchain investor, entrepreneur and advocate. He has spent over 20 years in private equity and venture capital with Advent International, Keystone Capital Partners, Platinum Venture Partners and SilkRoad Equity, and has invested over $1 billion of capital (from start-up to IPO) in a broad range of industries. Mr. Roszak is a director and beneficial owner of Eboost, Enter Financial, MissionMode, Neu Entity, Onramp, SolidSpace and TrueLook.

Mr. Roszak serves as chairman of the Chamber of Digital Commerce, the world’s largest trade association representing the blockchain industry. In addition, Mr. Roszak serves on the board of BitGive, a no This talk was given at a TEDx event using the TED conference format but independently organized by a local community.