Discount tokens are one of the new innovations made possible at a large scale, within a blockchain-based token economy.
In short, discount tokens are digital assets that give their holders a specific claim to receive discounts on purchases of products or services from an organization — such as an enterprise, a cooperative, or a blockchain network.
Unlike gift cards, discount tokens are not invalidated when used but remain active and in possession of the holders.
The specific size of the discount that the token delivers for its owner is designed to grow in proportion with the overall utilization of the network. The discount token itself allows the holder to access the discount.
This can be seen as a royalty model. But instead of claims to a fixed stream of revenue, it’s rights to receive a proportion of total services offered.
Given the growth in economic activity on the network, the owner may utilize more discount on the service they receive directly or sell/share the surplus.
While simple in its essence, it has profound implications. In a discount token economy, creators and users of the network are clearly aligned. While passive investors and speculators find themselves at an economic disadvantage. This is because discount tokens are more economically valuable to users than passive investors and thus work to discourage unconstructive price dynamics seen in other classes of crypto assets.
The discount is fundamentally linked to the adoption and growth of the network. The discount grows proportional to the growth in network service delivered.
The overall returns to the active token owners surpass the returns to passive token holders: the investors.
The discount token enables next generation, technology-enabled mutual companies, and cooperatives while working to reduce speculation.
While tokens themselves allow for transactions, capital formation, investment, and speculation, the discount token model is an interesting way to incentivize the growth of a crypto-powered network.
The discount token is loyalty to the growth of the network. And not just for pure speculation because it is always better to hold a discount token if you are a user of the network rather than simply a speculator.
This creates alignment between the customer and the provider that doesn’t occur with shareholders, with loans or bonds or other classical financial instruments used.
The discount token model is applicable to a broad range of business models. Businesses that most benefit from it are those that desire and expect significant long-term business from its customers through ongoing subscriptions, recurrent fees, or frequent repeat purchases.
For such dedicated customers the discount that the token offers means real money to them. But for others that have no great interest or use of the network, the token will have limited value.
The SweatBridge blockchain project is one of the strongest proponents of the model of a discount token. In their paper, they write about the reasons for using a discount token over a simple utility token. “As creators who desire to be both responsible and compliant, we find ourselves in search of a class of token economics that would (1) underlie a broad range of decentralized organizations and networks; (2) align incentives between investors (both early and late), creators, and consumers; (3) be demonstrably distinct from securities and Ponzi structures in the incentives they generate; and (4) align with existing regulatory precedent.
The discount token framework is designed to meet these requirements. While simple at its core, it has profound implications.”
Discount tokens are a good illustration of the kind of economic and financial innovation that is being unleashed with token economics.
It is not just about making things faster and more efficient, but discount tokens illustrate how we can really think about basic economic structures and incentives and then build currencies that work in totally different ways to the ones we have today. In so doing try to solve major economic issues – such as excessive financial speculation and better rewarding those that are actually interested in the development of the given economic network’s functionality.
With major technological, social and economic processes of change underway we are fast moving away from the well-established model of the Industrial Age and into a new form of digital networked economy, where the traditional well defined parameters of economics are being once again revisited as we search for a new model better suited to this new reality.
One aspect to this is a reconceptualization of the very foundations of economics, that is to say, the idea of value. With token economies, we are really re-exploring what value is and how we quantify and exchange it.
Part of this equation is the differentiation between intrinsic and extrinsic value.
The economic system that evolved over the course of the modern era has come to be based on utility as a measure of extrinsic value.
Token economics is a more generic form of economic model that lets us define not just utility but also intrinsic value. To make sense of this we need to first look at what we mean by utility and intrinsic value.
Things can have value both in and for themselves and as means to other ends. For example, a tree has some kind of value in and for its role within an ecosystem. But it also has value in use as firewood for heating.
The first form of value we can call intrinsic value and the second extrinsic value or utility. It is important to make this distinction because the two have very different properties. For example, most of us recognize that having many friends and connections has a certain value. But we also recognize that this is different from financial capital. Buying friends is not the same thing as having friends. Why is this so?
Because money is a measurement of utility while friendship and social bonds are seen to have some form of intrinsic value.
Though our traditional monetary system does not capture this form of social capital in some way token systems can. For example, likes on social media can be a form of tokens, with those tokens representing your social capital.
This subtle difference between intrinsic and extrinsic value and how we may harness and capture them through tokens is very complex and something we are just beginning to explore.
INTRINSIC AND EXTRINSIC VALUE
Our traditional financial system and the basis of neoliberal free market economics is the construct of value as utility.
Utility is the value that something gives to some person. Utility implies that it has a general and immediate usefulness that people would be prepared to pay for.
Utility is a measure of extrinsic value.
Utility is instrumental, like a tool or an instrument, we just use it for what it can achieve, we don’t care about the system itself.
Utility is always relative to what someone is prepared to pay for it.
Due to this we can measure the value of something by looking at its supply and demand curve to derive a single price, that is defined as the measure of its value.
In contrast to utility is intrinsic value. Intrinsic value is the value that something contributes to the maintenance and functionality of a whole system.
With intrinsic value, we have a unit that values the functionality of the whole network.
For example, the social capital contained in the bonds of a society that enables it to function as a community is a form of intrinsic value.
A mangrove swamp that preserves a local ecosystem and prevents coastal erosion is a form of intrinsic value. When we chop the mangrove down that may deliver something we can exchange on a market and utility, but it has lost its intrinsic value in maintaining the functional integrity of that ecosystem.
Utility is a measure of some derivative value, while intrinsic value is inherent to the network or system that delivers the value. For example we are able to quantify, buy and sell wood but not the functionality of an ecosystem.
We are able to buy care for elderly people but we are not able to buy with money a functioning community that might provide this service organically.
Intrinsic value is like a fixed asset, it is non-liquid. You can cash in the value of an ecosystem or of a community or culture, as we have done in many ways, but you lose a massive amount of the value when you do that. For example, research has shown that a mangrove swamp is worth orders of magnitude more when it is left intact than when it is cashed in.
As a metaphor, we can think of utility as the lowest denominator, being divisible into many things and easily exchanged.
Whereas intrinsic value is the highest denominator being non-divisible and non-exchangeable. Because it is intrinsic, it is inherent to the system and can’t be easily ported to other contexts.
TOKEN SYSTEMS
Traditional currencies and the free market system only let us quantify and exchange utility, they do not account for the value that may be inherent to a system that is not of immediate utility to any actor. But token systems enable us to expand economic activity beyond the realm of utility.
Token economies can be understood as a natural evolution to our economic system that responds to the broader set of values that people come to hold in post-industrial economies.
The industrial age was all about the provisioning of basic tangible products, which the market system and utility captured effectively.
A post-industrial economy – which all advanced economies are today – goes beyond this basic provisioning of goods as people’s basic needs are met they move up the hierarchy of needs and start to care about and value a broader spectrum of services.
The traditional model of utility tells us about the exchange and consumption of goods. It does not tell us about the quality of the social, cultural or natural environment within which agents exist. Thus actors can end up living in a severely degraded social, cultural and natural environment – which significantly reduces their quality of life. While still, the economy is churning through vast amounts of resources so as to make up for this, and our metric of utility – in this case, GDP – would still tell us that the system is in an optimal state.
The economy is supported by a vast heritage of natural capital – such as clean water, sunlight, oxygen etc – which stays providing the conditions for the inflow of natural Resources.
Whereas in the previous industrial age these may have seen infinite, today it is becoming more apparent that they are finite and we are increasingly looking for means to quantify and integrate them into market decisions.
Likewise, an economy is embedded within, and dependent upon, a massive nexus of social and cultural institutions that are required for it to function effectively. This value that is in social bonds that enables trust and frictionless exchange is called social capital and the economy benefits all day, every day, from huge complex networks of social capital that go unaccounted for. But again we are starting to take note of the value of social and cultural capital as important to the success of enterprises and economies.
Increasingly, what people in advanced economies want from their economies is not just GDP but quality of life, which is a much more complex thing involving many different forms of value. This is why a post-industrial economy is a services economy and the best model for a services economy is a token model. Because token networks can potentially capture and incorporate all the different forms of social, cultural, natural and financial capital needed to provide quality of life.
PROGRAMMABLE TOKENS
By excluding intrinsic value we have created the notorious divide within the industrial economy between the market and the public sector.
Markets were previously limited to utility exchanges and dependent upon public institutions to regulate the supporting social and natural capital. However, this is what changes with token economies as we can now begin to quantify, account for and exchange social and natural capital.
Going forward we will be increasingly able to express social values through tokens via their programmability. Because tokens are digital they may be programmed with certain rules and when you have moved assets on to the blockchain, those programmable rules can be used to define what kinds of activities the token network supports or does not support.
For example, if our society decided tomorrow that we no longer thought the eating of meat was a good thing and wanted to move away from it, we could do that by simply no longer purchasing meat products and the entire industry would disappear quickly.
In a digital token economy, we can put our money where our mouth is, as a proof of what we value. We could create a veggie token, that could be programmed so that it could not be used to purchase meat products. Or as another example, we may have a weapons-free token, which is programmed so that it can not be used to purchase weapons. If our societies only had tokens of this kind then weapons could not be purchased and they would disappear.
We could then see how much our society value peace by looking at how closely that token traded relative to another token that was the same but could be used to purchase weapons.
If there was a big difference and the token traded at a very low price then our society obviously doesn’t want the token and is not willing to lock itself into a weapons-free world.
We can see how this integrates social values with economic value in new ways and helps us escape from a world where people and politicians say one thing and do another. In many ways, it reflects the underlying blockchain proof of work or proof of stake system.
The way that we prove that we value something is by locking ourselves into it. The way that we express our social values through an economic token is by locking ourselves into networks that express those values.
This multi-value token system enables us to recognize and mobilize existing networks in new ways. Tokens help us to expand the economic system to incorporate more value systems and thus harness people’s motivation along more dimensions, rather than simply for utility-based profit.
Tokens, because they are more generic enable us to quantify almost any form of value, both extrinsic and intrinsic.
When you hold a currency to an asset you are making an investment in that network, by are saying that it has value to you. If no one wanted to hold Dollars then the Dollar would have no value. By creating all these little economies with their own distinct currencies we are able to say exactly what it is we value and invest our resources in that ecosystem.
By holding the Liverpool pound or the Bristol pound we are saying that we value that ecosystem and will invest our resources in it. When we cash our Liverpool pound in for a British pound we are saying that we don’t really value it; we are not prepared to restrict ourselves to making purchases only in that network and support the community value that it creates.
This is why it is important to not think of tokens as being like traditional currencies because they represent the possibility for a new kind of information services economy that is fundamentally different from the one we know and is a necessary evolution in our economic structures. Just a significant as the evolution from a pre-modern feudal system to a modern industrial economy.
Likewise, it illustrates the issues we are having surrounding regulation. A token economy is a different form of economy to the industrial economy. It will not fit inside the box of the industrial model.
Because token economies expand the nature of markets to include a broader spectrum of values they can be self-regulating, which stands in contrast to our existing industrial age logic of the utility based market, which always requires external regulation and support because of their incompleteness and narrow set of values that they incorporate.
The token economy offers the possibility of creating self-sustaining economies by incorporating all relevant value systems within multi-value tokens and multi-value markets.
While in the industrial economy all forms of value could be reduced to a single metric of utility. A services economy is inherently a multi-value economy.
While extrinsic value may be reduced to a single metric, intrinsic value is many inherent forms of value each requiring their own distinct token that is irreducible.
To really understand the significance of token economies is to appreciate that society and economies evolve and change over time and part of what is happening in the world today is an evolution in what people value and that is a very profound thing that in turn really requires a new economic model to capture and develop.
Michel Bauwens of the P2P Foundation describes this well when he says “The three revolutions in human productivity: so the first invention is coercive labor that gave us civilisation, slavery, serfdom. That’s how we created castles and temples. In other words the motivation there is external negative motivation: I conquered you, I could kill you, but out of the goodness of my heart I let you live and you can work for me for the rest of your life. This is the social contract of slavery. I think capitalism introduces something new which is, well it’s not just about that, but also about self-interest. In other words positive extrinsic motivation: I’m doing something because I’m going to get something for it, which really give a boost to human science and technology, etc. I think we’re going through a third revolution now, which is about actually moving from extrinsic to intrinsic. So we are building systems — open contributory systems — like Wikipedia and others where people are actually there for variety of motivations but they are mostly intrinsic motivation: I want to create a global internet encyclopedia, I want to create this, I want to learn from it, there are various motivations.”
Token economies is a new way for us to try and represent intrinsic motives. It enables us to create economies that better reflect both peoples’ intrinsic and extrinsic motives, but that relationship between intrinsic and extrinsic motives is extremely complex and subtle. Figuring out exactly how that works is a long learning process ahead.
Jared Molko addresses the concern around AI and its impending impact and disruption of jobs.
He notes that anything that is repeatable can be automated, to illustrate the context of how AI will change employment.
He said that the longer-term impact is unknown, but that in the near-term, employment will likely be man working alongside machines for increased productivity.
Soft skills like empathy, communication and active listening will become even more important as people re-asses value.
Molko emphasizes that we will need to be perpetual learners in this new world.
We will need to develop resilience and responsiveness to manage the changes.
Having a specialist mindset has worked well when times are certain. But we now live in times of uncertainty and change.
What skills and knowledge is valuable for the 21st century?
We should be learning general, human skills, which are transferable to any type of job, particularly the 4 C’s:
Critical thinking
Collaboration
Communication
Creativity
We need to be generalists and specialists. But we’ve focused on specialization in the industrial age.
What is needed in this new age will be resilience, flexibility and the ability to transfer skills, perhaps many times.
In brief, to adapt to an AI world, we need to become more adaptable.
Jared Molko is an ex-Googler who has worked across Africa, Europe and the Middle East, where he had a variety of roles. During his seven-year tenure, he completed a Masters Degree in Analytical Psychology. He’s now back in South Africa and focusing his attention on the intersection between psychology and technology, with the aim of improving mass job placement and skill development for entry-level workers. This talk was given at a TEDx event using the TED conference format but independently organized by a local community.
A token is a generic quantified unit of value that is registered on a blockchain network.
Today tokens are understood to come in two kinds: utility tokens, and securities tokens.
Security tokens represent fixed assets of some kind, it may be a piece of property such as a house or a share in a company.
A utility token is a more liquid medium of exchange that gives one access to the value created by a blockchain network. Utility tokens really represent access to a service delivered by a blockchain based ecosystem.
To understand token economies it is best to think in terms of services and not products. Utility tokens represent the service delivered by a network. The utility tokens are quantified units of services that can be accessed within a given network.
Tokens are generic units of value. This means that they can represent any kind of value. Wherever there is a network delivering a service, a token can be created to define that value.
We can create a token for any different type of network and service.
For example, a community watch scheme where people look out for each other’s houses to make sure there are no trespassers or burglars. This is a community that is delivering a valued service of securing peoples houses.
We can then define an economy around that community, by creating a token that quantifies the service delivered and a blockchain system that keeps track of who is delivering the service and who is using it.
This utility token is then used as a medium for the exchange of that service. Those who consume the service have to give tokens to those the provide it. In this example, we can see how token economics works to formalize what was previously informal and merges economics and social communities in new ways.
The service can be of many kinds. Health care services, for which we might have a health coin; it could be cleaning services, a clean coin; a transport service.
For example, the DAV Token is a form of utility token. The DAV network is a blockchain platform currently under development that connects transport and logistics service providers with those who need those services – in particular, it focuses on connecting autonomous vehicles.
Members of the ecosystem can earn DAV Tokens by providing transportation services, by say, letting your self-driving car give rides to passengers when you’re not using it, or having your drone help with deliveries. While users of the service pay tokens to be transported anywhere or to send and receive packages through the network.
A utility token, such as that of the DAV Token, should then reflect the quality and quantity of the service that the network can deliver. The better the quality the more people will want it, and the greater the quantity of service delivered, the more tokens will be needed.
DIGITAL CURRENCIES
Some people classify digital currencies as a third type of token, but they can just as easily be understood as a utility token.
For example, we might think of Bitcoin. Ultimately, Bitcoin’s value comes from its capacity to be exchanged for some service or exchange for some other currency that can be used within a national economy, such as the Euro.
Currencies like the Dollar or RMB have value because we believe they have value. But ultimately they rest upon the fact that they are supported by the massive real economies of the US or China. Really they are utility tokens that give you access to the services delivered by those economies.
If the Japanese real economy disappeared tomorrow the currency would crash because people would stop being able to buy things with it.
Currencies are just mediums of exchange and agreements about what we value but they are supported by real economies and governments that make sure those currencies can be used to access the goods and services within their economy.
Bitcoin may not be directly linked to any one national economy, but at the end of the day, it is linked to the global economy in one’s capacity to exchange it for other fiat currencies that are linked to national economies.
Thus we can see how currencies are a form of utility token that provides access to the services created by a given economy. Whereas fiat currencies provide access to a national economy, tokens provide access to a blockchain based network economy.
ICO
Because tokens have a price, they can be issued and sold at the inception of a new network to fund its development. Similar to the way startups have used crowdfunding platforms like Kickstarter to fund product development. The money is typically received in digital currency form and goes to the founding organization that is developing the network and issuing the tokens.
In the same way that a company increasing sales is an alternative to raising money, token launches can be an alternative to traditional equity-based financing and as we will discuss in a future module, can be an effective way to fund previously unfundable shared infrastructure, like open source projects.
Utility tokens, also called app coins or user tokens, represent future access to an organization’s product or service. The defining characteristic of utility tokens is that they are not designed as investments. If properly structured, this feature exempts utility tokens from legal regulation covering traditional forms of securities.
By creating utility tokens, a startup can sell “digital coupons” for the service it is developing, much as retailers accept pre-orders for a good that may only be available weeks later.
Filecoin, for instance, raised over two hundred million by selling tokens that will provide users with access to its decentralized cloud storage platform. Thus we can see that the traditional divides that defined the industrial age financial system become blurred and redefined within the new model of token economics.
The question is though, why do we need hundreds or thousands of different types of tokens? Why can’t we just pay for everything in Dollars like we used to or even in bitcoins, wouldn’t that be simpler?
Answering that question goes to the heart of the distinction between token economics and traditional industrial age economic systems and we will talk about this in the coming module.
CNET senior producer, Dan Patterson, speaks to Ben Goertzel, CEO and founder of SingularityNET, about the future of artificial intelligence.
SingularityNET describes itself as letting “anyone create, share, and monetize AI services at scale. The world’s decentralized AI network has arrived.”
Its website furthers states, “We gathered the leading minds in machine learning and blockchain to democratize access to AI technology. Now anyone can take advantage of a global network of AI algorithms, services, and agents.”
Goertzel says this about himself on his LinkedIn profile: “My main focus these days is the SingularityNET project, which brings AI and blockchain together to create a decentralized open market for AIs. It’s a medium for the creation and emergence of AGI, a way to roll out superior AI-as-a-service to every vertical market, and a way to enable everyone in the world contribute to and benefit from AI.”
One thing is for sure, AI will disrupt the world in important ways.
As we have discussed, economies are first and foremost about value: what humans value and how we strive to achieve the things we value. To have an economic system the first step is to take account of this value that is in the system.
The foundations of economics is being able to securely represent the underlying resources and exchanges within the real economy in some information system and then being able to exchange, analyze, distribute or otherwise alter it in various ways.
The critical aspect of this process is that the information accounting layer remains true to the underlying assets and exchanges within the real economy. Of course, many people will wish to alter these records to their advantage and thus we need some trusted source for maintaining and verifying them. Previously we have relied upon centralized institutions to take account of and vouch for the authenticity of these records of value.
However, the secure and trusted nature of blockchain networks makes it possible for us to directly associate the value of a real-world asset with a programmable asset and we call this tokenization.
“Tokenization is the process of converting rights to real-world assets into a digital token on a blockchain.”
Previously we could not create trusted records of value without the support of centralized institutions. Creating token systems at large scale has previously been the purview of states and empires.
The implication of having an automated distributed system like the blockchain is that everything could be securitized by everyone, as we greatly expand our capacity to define, measure and exchange value of all kind.
We can now set up blockchain networks that can store records of value and be trusted by members involved without anyone actually controlling or really owning the network.
IMPLICATIONS
The implications of this are many fold. Firstly we are no longer dependent upon lengthy and often expensive bureaucratic procedures for the registry of valued assets. People can literally securitize their own assets and have them validated by the network.
Secondly, we are no longer confined to assets that are large enough to be worth some centralized institution recording and tracking them. With digital technology, the cost of doing this is so low that we can securitize almost anything and with personal and mobile computing people can do this themselves.
Thirdly with parallel advances in big data and pervasive sensing, mobile computing and social networking, we are now able to track more types of value that previously went unaccounted for and assign tokens to them.
Lastly, the implications of blockchain tokenization should be considered, as token economies shift the locus of power both outwards to the individual and to the networks that manage these economies.
Previously we invested a massive amount of power and control within centralized organizations as they were the ones that got to define value within society and economy, but with token economics, the management of value records and exchanges shift to information networks with huge implications.
FORMAL ORGANIZATION
Centralized systems of organization for the recording and validation of assets have advantages, but they also have many limitations. Because they are centralized they create bottlenecks; there are a few people in the center trying to serve a large population.
If the administration is well developed this can work to a certain degree. Land registry in places like Germany and Singapore may work well but for most of the world it does not. In places like India or Africa centralized institutions are overwhelmed and under-resourced to provide for the mass of people and as a consequence, the majority of our global economy is undocumented and informal; not having access to legal rights, financial services, etc.
Likewise, centralized systems require many layers of hierarchy and regulation to ensure that people are acting according to the mandate of the organization. As the system gets larger more and more layers of bureaucracy build up. Take for example the administration of organic farming in a country like Ireland, there may be an organization for assessing and certifying the farmers, which will be assessed in turn by some national body which may, in turn, be assessed by the European Union. These different layers of bureaucracy create high overhead costs and over time create inertia.
COST OF TRANSACTION
The formal proceedings of large bureaucratic systems is often overbearingly complicated and expensive for people to avail of them.
For example, If you look at the administration that lies behind trying to issue 100 million shares and all the different institutions, you have to pay to keep shares and register them, to distribute them, keep track of them and regulate the whole system. It takes an enormous amount of work effort and cost. Thus most companies don’t get to access global capital markets via the offering of shares.
With the tokenization of assets, they move on to digital exchanges where they can exchange a very low cost and in very small increments.
Something like a building can be tokenized and instead of having to buy the whole building with huge legal and regulatory overhead costs you could now purchase one square centimeter of the building in seconds with very little overhead cost.
MULTIVALUE
Thirdly, information technology is expanding our capacity to quantify value and tokenization enables us to capture different forms of value; social capital, natural capital and financial capital. The thing to appreciate is that this is not just about the blockchain, this paradigm shift in economics is possible because of very fundamental changes in information technology that go far beyond the blockchain itself.
A key aspect here is datafication, the fact that we are quantifying and turning more and more aspects of our world into data.
In a world of scarce information, we were limited in what types of value we could quantify and how much we could keep track of. But in a world of pervasive information and communications, we find that we are spontaneously quantifying and tracking all sorts of new forms of value that previously when unaccounted for. Social networking is one good example of this.
Token systems enable us to ascribe value to everything that we value and create markets around that.
One of the great advantages of token economies is that we can create token networks for the things that people value.
In our existing economy, we are fully dependent upon centralized institutions to define value. Centralized institutions will only do things that are in their interests. If something is not in the mandate or interests of a centralized organization we find that it will not get done.
We may find that it is not in the interests of any centralized organization to remove the trash from the side of the road but by creating a token system, we could incentivize people to clear the rubbish.
In a traditional free market system, we may not be able to place a value on the functionality of an ecosystem, and the government authorities may have every incentive to simply sell out the nations natural resources. But by creating an eco token we could try to capture and manage that value via the token network.
Take for example Plastic Bank. The Plastic Bank creates social and environmental impact in areas with high levels of poverty and plastic pollution by turning plastic waste into a cryptocurrency. By enabling the exchange of plastic for Blockchain secured digital tokens, they reveal the value in plastic. This empowers recycling ecosystems around the world and stops the flow of plastic into oceans by creating a market that connects those who can use plastic waste for recycling and those who have time to collect it.
DECENTRALIZATION
The capacity for communities of people to directly define what they value and create economies around that without depending upon a centralized institution to do that for them is truly revolutionary.
It is truly a restructuring of the very fabric of our civilization with massive implications and repercussions that will take decades to play out.
It removes current bottlenecks that have limited the availability of formal economic and financial structures to a small minority of the global population and makes it possible to extend the most advanced and sophisticated legal frameworks and market systems to anywhere on the planet.
It enables us to extend the exchange of value and market mechanisms to very small, high volume exchanges, such as between machines and computers.
It allows communities to define what it is they value instead of that being decided by a centralized authority.
And as we will discuss it allows us to incorporate a broader spectrum of values into market exchanges.
“So everyone has different value systems. And every community or every organization, embodies those values system. But today we only have one way of actually transferring this value around and that’s through fiat currency. The idea is actually to have multiplicity. So right now we have a monopoly of value sets, which is the market value set. And if we can create new values with a new value system which are basically represented by those tokens on the blockchain but in fact what it is, is the ability for communities to express what they value by transferring tokens” – Primavera De Filippi, CNRS & Harvard
One of the great innovations made possible with the advent of blockchain technology is the development of triple-entry accounting.
Triple-entry accounting is a term for a new method of accounting, that was proposed in the 1980’s. It was more recently popularized when Ian Grigg associated it with blockchain technology. Triple entry accounting is an enhancement to the traditional double entry system in which all accounting entries involving outside parties are cryptographically sealed and linked through a smart contract to a third entity. But to understand the value of this we need to appreciate a little bit the history of accounting systems and where we are coming from.
SINGLE-ENTRY ACCOUNTING
There is evidence that even during the Mesopotamian era, some four or five thousand years ago, a fairly complex accounting of property, purchases, and expenditures existed on tablets.
Extensive accounting methods also existed in Greece since the fifth century B.C.
By the middle ages a fairly advanced system of accounting had developed, but before the advent of double-entry accounting, accountants relied on a chart of balance sheet accounts to record financial transactions. This single-entry accounting system is a method of bookkeeping relying on a one-sided accounting entry to maintain financial information. This creates a system that is very difficult to examine for accountability.
Consider the extreme problems such a system would pose today. Companies would publish balance sheets without Income Statements. There would be no way for investors to scrutinize the changes in equity.
With a single-entry system, all you have to do is remove a line in the ledger and that money no longer exists. There was no way to verify, no way to audit, no way to reconcile, for people to agree. Likewise, it would be nearly impossible to build a single entry system, that by itself supports the reporting needs of public corporations, companies that sell shares of stock to the public.
DOUBLE-ENTRY ACCOUNTING
The development of double-entry accounting opened the realm of accounting into a whole new world.
Double entry bookkeeping revolutionized the field of financial accounting during the Renaissance period some six hundred years ago. By the 1400’s, a Franciscan friar finally codified the double-entry system and it swiftly became the standard with the merchants of the Italian states. Whereas simple ledgers had long been the standard for record keeping for merchants, the church and state treasuries, the growth of long-distance trade and creation of the first joint stock companies resulted in firms whose records were too voluminous and complicated to provide any assurance of accuracy to their users.
Modern financial accounting is based on a double entry system. Described simply, double entry bookkeeping allows firms to maintain records that reflect what the firm owns and owes and also what the firm has earned and spent over any given period of time. The idea is you want to minimize the errors in your bookkeeping so what you do is that for each transaction you do two entries in your books.
The issue with double entry accounting is that there is not really any connection between the different sets of books each firm holds. The records are themselves separate, so if Bob wants to cheat a little bit he can say that maybe this transaction was only eight tokens and he doesn’t have to pay as much in taxes.
Likewise, as the organizational structure and sophistication of companies developed they were expected to share their records with outside stakeholders, such as investors, lenders and the state. This created the problem of how outsiders could trust the company’s books and thus required auditors.
Although you did your double entry accounting in your book there was absolutely no guarantee that the bank, or whomever else you were dealing with, saw the transaction the same way and recorded the same numbers. In fact, as part of an audit, one would have to write to the bank and ask did this organization really have this money at this date and do you agree on this number.
So all this massive amount of administration could be removed if we have an economy-wide accounting system.
TRIPLE-ENTRY ACCOUNTING
Triple-entry accounting can be thought of as a way of agreeing on objective economic reality.
Triple entry accounting is an enhancement to the traditional double-entry system in which all accounting entries involving outside parties are cryptographically sealed by a third entry. Thus placed side by side, the bookkeeping entries of both parties to a given transaction are congruent.
The third entry in the system, entered into the blockchain, is both a receipt and a transaction. It’s proof that something happened between two parties, which goes beyond the receipts that each party holds in double entry system.
Since the entries are distributed and cryptographically sealed, falsifying them or destroying them to conceal activity is practically impossible.
A seller books a debit to account for cash received, while a buyer books a credit for cash spent in the same transaction, but in separate sets of accounting records. This is where the blockchain comes in: instead of these entries being recorded separately in independent sets of ledgers, they occur in the form of a transaction between wallet addresses in the same distributed, public ledger, creating an interlocking system of permanent and objective accounting records.
The idea about triple-entry accounting is that instead of each firm having their own books the transaction goes through a contract and this contract includes everything about the transaction. This may record what the product was, the prices, who is the seller and who is the buyer. It’s digitally signed and it can have a hash that links to further public documentation.
So the books are now linked together by this third entry, the triple-entry, that can potentially be viewed for external auditing purposes.
Triple-entry is quite a confusing term because we are not creating a third entry, we are just linking two separate double entries. That link is created via a smart contract that works to ensure that the two double entries in separate legal entities are always the same; this is auto enforced by the smart contract and as with all smart contracts it is tamper proof.
TRIPLE-ENTRY ACCOUNTING ADVANTAGES
The advantages of a triple entry system are numerous in terms of reconciliation, transparency, trust, and auditing. Triple-entry accounting allows us to reconcile the balance, the transaction, and the reporting process, so that organizations can trust their own books.
Typically, each party is responsible for maintaining their own financial records. However, this can lead to fraud or other errors. The use of triple-entry accounting reduces this risk by keeping a non-biased record.
Many blockchains are publicly visible or easily exposed to external viewing, making them transparent.
With blockchain networks, the entry is the transaction, because the assets are on the blockchain. The ledger is not an account of what happened, it is what happened.
And as the ledger is tamper proof this makes it trustworthy.
For auditing, blockchain accounting is ideal as it creates a list of transactions, thus it creates an immutable history of all the exchanges within the system which could be mined using data analytics. There is a perfect audit trail.
“We came up with double-entry bookkeeping as a species over 500 years ago and it led to the accumulation of capital on a very large scale with the Industrial Revolution and with a lot of the institutions that we have today. When we’re able to further refine that with triple entry bookkeeping it really opens up whole new vistas and possibilities for corporate governance, the transfer of money, accounting. We have this globally distributed decentralized ledger that everybody has the exact same copy of and all the debits and credits that move the bitcoins or the Satoshis around in this ledger, everybody agrees on consensus that those transactions actually happen and boom you got that verification so you have the debit the credit and the confirmation by the Bitcoin network” – Trace Mayer
Arwen Smit discusses the importance of private and personal data and the loss of identity via impermanent institutions. She outlines how our identity needs to be individually controlled, as a basis of democracy.
She outlines why we need a new way to reclaim our identities and offers blockchain-based identity as a solution that can help us pave the way for a more equitable form of democracy.
The central idea is that we, as individuals, should control our personal data. What we can do with blockchain is control a repository of personal data silos so that we determine who gets what data.
For example, if a hotel only need to know if we are older than 18, they can verify that instantly via blockchain, without also accessing other personal information that is unrelated to their requirements.
If you live in an environment where the government or data institutions collapse, with blockchain you can still have your personal data and identity intact.
Arwen Smit founded several blockchain companies, including DOVU and MintBit. She believes that decentralised technologies will be the foundation of new economic and political models. She writes and speaks about blockchain internationally, is an advisor to Tomorrow’s Journey, and mentor to female entrepreneurs at Rotterdam School of Management, London Business School and Berkeley University.
This talk was given at a TEDx event using the TED conference format but independently organized by a local community. Learn more at https://www.ted.com/tedx
When we are talking about economies we are typically referring to the information layer that resides on top of what may be called the real economy: the physical production and exchange of goods.
Accounting is the basics of how we create that information layer and bring all these physical objects and services into the information system of the economy, that we then exchange and analyze.
The earliest most rudimentary economies of pre-civilization may have existed purely in physical form. But an economy of any complexity requires that the real system is translated into a virtual information form. Not just physical assets and liquid currencies but also identity and contractual agreements.
At the end of the day it all has to be converted into an information format.
In order to form organizations and exchange goods and services we need to define ownership and keep track of exchanges and this is done by a series of ledgers. A system of ledgers forms the database of records of who owns what and what has been exchanged within the system.
Ledgers are everywhere. Ledgers do more than just record accounting transactions. A ledger consists simply of data structured by rules. Anytime we need a consensus about facts, we use a ledger.
Ledgers record the facts underpinning the modern economy. All of our economic institutions are, at the end of the day, networks of ledgers; some simpler, some more complex.
A firm is often described as a ‘nexus of contracts.’ A firm is, in fact, a ledger of contracts, people, technology and capital that are arranged in a particular fashion to deliver some function. Firms maintain ledgers in a variety of forms: of property; of employment and responsibility; of ownership and deployment; of suppliers and customers; of intellectual property and corporate privilege; of physical and human capital.
It is safe to say that our economies are ledgers all the way down and at the bottom we find a government backed legal system. Where a ledger requires coercion in order to be enforced, the government is required. Governments maintain ledgers of authority, privilege, responsibility, and access.
Governments are the trusted entity that keeps databases of citizenship, taxation obligations, social security entitlements, and property ownership.
USAGE OF LEDGERS
Ledgers can confirm ownership through property rights. For example, property title registers map who owns what and whether their land is subject to any conditions or restrictions.
Ledgers confirm identity. Businesses have identities recorded on government ledgers to track their existence and their status under tax law.
Ledgers confirm status. Citizenship is a ledger, recording who has what legal rights and what obligations people are subject to.
Employment is a ledger, giving those employed a contractual claim on payment in return for work.
Likewise, the electoral roll is a ledger.
Ledgers confirm authority. Ledgers identify who can access what bank account, who can validly sit in parliament, who can enter restricted areas, etc.
At their most fundamental level, ledgers map economic and social relationships. They can be understood as an agreement about the facts and when they change.
This consensus about what is in the ledger and its accuracy is one of the fundamental bases of a market economy.
DEVELOPMENT OF LEDGERS
Ledger technology has for thousands of years remained largely unchanged. Ledgers originate with the beginning of written communication. Ledgers and writing developed at the same time in the Ancient Middle East to record production, trade, and finance.
The ancient clay tablets with cuneiform script listed units of work, taxes, rations, etc.
The first international trade networks were arranged through a structured network of alliances that functioned a lot like a distributed ledger.
The modern era brought the first major changes to ledgers in the fourteenth century with the invention of double-entry bookkeeping. By recording both credits and debits, double entry bookkeeping conserved data across multiple ledgers, and allowed for the efficient reconciliation of information between ledgers.
The 1800s saw the next evolution in ledger technology with the rise of large bureaucracies and the corporation. These centralized ledgers enabled major increases in organizational size, scope, and efficiency, but relied completely on trust in the centralized institution.
In the latter half of the twentieth-century ledgers moved from analog to digital. For example, the national databases of passport ledgers were digitized and centralized. These databases are computable and searchable making them greatly more efficient,. However, a database still relies on trust: a digitized ledger is only as reliable as the organization that maintains it.
ECONOMIC STRUCTURE
We can see how the economic structure of modern capitalism has evolved around the structures of these centralized ledgers. The 2009 Nobel laureate in economics, Oliver Williamson, showed that people produce and exchange in markets, firms, or governments depending on the relative transaction costs of the different institutions. Building upon the work of Ronald Coase Williamson’s transaction cost approach provides a key to understanding what institutions manage ledgers and why.
It might seem strange that a ledger — a rather mundane and practical document associated mainly with accounting — would be described as a revolutionary technology. But the significance of the blockchain is fully based on the significance of ledgers as the foundations to our economy.
Because, at the end of the day, ledgers are nothing more than a kind of database or information system, how we record value is of course critically dependent upon the information technology that we have available to us.
Traditionally we have required centralized institutions of private enterprise or government in order to provide the authority needed for people to trust a given ledger and the record of exchange.
However through advances in information technology, specifically the combination of distributed computing and cryptography, blockchain technology now provides the infrastructure for a network of computers to collaborate towards maintaining a shared, tamper-proof and trusted ledger.
Thus the blockchain provides an alternative to traditional centralized ledger systems of firms and governments. As such it is legitimate to say that the blockchain is an institutional technology. It is a new way to maintain a ledger — that is, coordinate economic activity — distinct from firms and governments.
A ledger of contracts and capital can now be decentralized and distributed in a way they could not before. Ledgers of identity, permission, privilege, and entitlement can be maintained and enforced without the need for private organizations or government backing.
The ledger is instead maintained by a distributed network of nodes. This changes the very foundations of economic activity with massive repercussions for how economies are structured and function. It literally rewires the channels through which we coordinate in the production and exchange of goods and services in society.
Ledgers are so pervasive — and the possible applications of the blockchain so all-encompassing — that some of the most fundamental principles governing our society are now up for grabs.
The blockchain is a distributed ledger that does not rely on a trusted central authority to maintain and validate the ledger. This means that we can create economic networks for the recording and exchange of value that are not dependent upon centralized systems.
Such a system for coordination via distributed ledgers would have many advantages. It would drastically reduce the cost of recording and thus make it possible for us to expand formal legal systems and economic activity. For example to the 2.4 billion people that currently have no formal ID or 70% of the global population that has no documented land rights. But also to record extremely small exchanges of value that are currently not feasible, and to account for new and different forms of value that are currently unaccounted for.
2017 witnessed the rise of a new model for the funding of technology companies called initial coin offerings (ICO). The amount of money raised in 2017 by startups via ICOs surpassed early-stage venture capital funding for internet companies.
This is the first example of these new token networks already replacing one area of the traditional financial system in a substantial way and we can note the speed with which that happened.
Within the space of just a few months, ICOs went from almost nowhere to today where new blockchain projects are able to attract hundreds of millions of dollars by offering tokens directly, for anyone with an internet connection to purchase.
The rise of ICOs as a new model for growing economic networks is no accident or random event, it taps into a new capacity of information technology – first seen with crowdfunding – for people to fund their own projects directly out of the future value the project is expected to deliver. The centralized third-party investor is removed which takes away the need to organize the project around investor profits – or to remove value from the network for shareholders. Instead, the network funds itself out of selling access to the future service that it will deliver. Thus retaining the value within the network.
Indeed this illustrates one of the important aspects to note: these networks are very autonomous. A network can fund its own initial development through an ICO, but not only that, it can then fund its own future growth through simply increasing the number of tokens and given those to members who present initiatives, projects or other forms of work that will be of benefit to the future success of the ecosystem.
The network inflates its own token, gives those new tokens to projects that will increase its future service delivery and thus will work to deflate the token in the future when more people demand that added future service.
In this way, no external profit-seeking third party, such as a bank or other financial institution, is needed. By removing that third party you have the potential to also remove a massive amount of overhead costs and regulation, likewise, you stop the value being taken out of the network and you align incentives between members better.
ICOs and prediction markets will be a central part of long-term economic development on token networks, but these will also be combined with advanced analytics as a primary mechanism for coordinating the network in the short term.
The convergence of advanced analytics and blockchain networks will be a major part of the workings of these token networks. Like with the existing digital platforms of the current internet, these blockchain networks are going to datafy everything, they are going to create massive amounts of data and will be highly amenable to complex analytics.
With the use of this big data, business and economics will move from the realm of speculation and intuition to becoming more of an actual science where data can be gained, theories tested, and new systems engineered in an iterative process with a much more complete and effective feedback loop.
Unlike our traditional economy, which existed historically outside of information systems, these economic networks exist by default within information systems. They thus are well defined in terms of software and they automatically create data. This means as soon as these networks are up and running we are going to start applying analytics to them, using that data to adjust the incentive structures, gain feedback and iterate on that in a fast pace learning process.
Likewise, being open source projects, anyone can see how the system is designed and coded and they will have the data to see how any changes perform. The functionality of these systems will shift to the software layer and if that is open source, anyone may contribute and earn tokens if their contribution is successful as measured by the feedback loop.
Today businesses have been largely secretive by default, run by a few with decisions ultimately made by the highest paid person in the room. Economies have been directed by whoever managed to get elected and abstract economic theories that have never been really tested on real data with direct feedback to see how they work in practice.
Scott Nelson CEO of Sweetbridge describes some of this well when he says “what we do need in addition is to understand that we are dealing with the actual invention of something extraordinarily new and very powerful and that is the ability to build economic games that actually are businesses and which are controlled by a community who’s vested in the game, and the countries that master this are going to be the railroad baron company countries of this century. I mean we are dealing with a sea change here that cannot be underestimated because the power of economic engines to be tuned and now measured, we can actually see the economic activity of the customer what they’re doing and get very direct feedback loops about how the customer is using the system and when the transparency is extremely high in the environment, this changes everything.”
We have almost zero experience with the design of large-scale decentralized economic networks. Added to this is the fact that we can’t just shut down existing systems while we migrate them to the new model; as an analogy, we can say that this is like rebuilding an airplane while it is flying with all of the passengers inside. The only thing we can say for sure is that this is going to be a rocky journey.
Nothing is promised and written in stone in this new emerging economic paradigm. There are always ways for resources and power to be re-concentrated in new ways, for potential to go unrealized or misdirected.
The only thing that can ensure the desired outcomes are really understanding the dynamics of these systems and using that to design and develop economic networks that truly enable people.
Systems that work by default to push capabilities and resources out to the edges of these networks and engage everyone, providing them with the tools to participate in a level playing field.
As Shermin Voshmgir of the Crypto Economics Institute notes “[Blockchain] is a very powerful technology and it will spawn further technologies, we can use it as a machine to promote universal freedom, to create a better decentralized society, with less bureaucracy which will be better suited to a globalized world, [but] if we don’t do it right the very same technology can become a machine for universal control, to prevent that we have to take all aspects into account.”
It is in the combination of advanced analytics, blockchain networks, and IoT that the Information Age comes of age, as information based networks gain their autonomy and break free from the supporting industrial age model. It is important to note these networks aren’t going to be contained and confined within the box of our existing model; we will increasingly find that all of these newly formed technology-based networks converge and work synergistically to provide a coherent and integrated set of new solutions that take us into a new paradigm.
With the blockchain, it is critical that we think outside the box of the established parameters that have defined our industrial economies for centuries now.
This is a new stage in the information revolution, these networks won’t be like the networks of yesterday or today, the Facebooks and the Amazons that are limited in capacity and very dependent upon existing structures. These new forms of decentralized organization will be greatly strengthened and gain much greater autonomy, within a decade or so these networks won’t be confined to operating within the model of the past and it is important to keep that in mind both the potential and risks that it offers.
This is not just another technology that you adopt. This is a fundamental re-architecture of how things work.
Those who don’t grasp that and try to fit it into the box will get left behind surprisingly fast, as innovation is currently being unleashed at a staggering pace, fueled by large amounts of capital, already billions of dollars are starting to flow into these new emerging networks.
As a recent paper on the subject notes. “This process is going to be extremely disruptive. The global economy faces (what we expect will be) a lengthy period of uncertainty about how the facts that underpin it will be restructured, dismantled, and reorganized.”
