Tag: tokenization

TOKENIZATION

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

TRIPLE-ENTRY ACCOUNTING

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

DISTRIBUTED LEDGER TECHNOLOGIES

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.”

Blockchain technology builds upon previous changes in how people work together to produce value in advanced economies. With the rise of the platform economy, information technology has already within just a decade or so changed the model for the production and consumption of value within advanced economies. But these newly forming token networks greatly extend those previous trends, with some major alterations.

Online platforms and blockchain are changing how we collaborate and work together across organizations and across society at large. Token economics is set to change the very structure of the Industrial Age enterprise as it now offers the potential to align the interests of stakeholders in new ways.

What is happening today builds upon the recent development of the so-called collaborative economy: online platforms that function as two-sided markets matching producers and consumers. The collaborative economy is defined as initiatives based on horizontal networks and participation of a community. Blurring the lines between producer and consumer, they connect individuals into large peer-networks of exchange.

However, these large platform organizations that have arisen with the development of the internet are still centralized around the platform providers, creating many issues of security, data privacy, control, misalignment of incentives and concentration of wealth and power.

Blockchains let us design protocols that provide the same capacities for people to collaborate within large peer networks but this time without needing the centralized entity.

Through the use of tokens, the network is converted into a token market, with the market mechanism used to coordinate it in a decentralized fashion. By removing the centralized component this works to align the incentives of members better and turns businesses into something more like communities or ecosystems.

By removing the centralized component that is controlling the overall network and operating it for a profit, the individuals in the network become much more aligned with the whole. This alignment between the individuals and the whole network is realized through the token, because as the value of the whole organization increases, this increase in the value of the platform does not get sucked up by management and shareholders but in fact gets distributed across the network itself by accruing to all of those that hold the token.

This is how and why in a token economy the traditional business model of the Industrial Age – that was primarily designed to create a profit for its owners – is greatly reduced and replaced by these token networks which are more like public utilities as profit does not get taken out by the shareholders but instead is continuously reinvested and redistributed to the users of the network through the utility token that they must hold to use the network.

Thus unlike the centralizing forces of the Industrial Age where value was always getting pulled inwards and suck upwards, with these distributed networks – if designed properly – they can work to inherently push the value that accrues downwards to the infrastructure layer and outwards to the members of the network who hold the token.

With token economies, we now have the capacity to directly program incentive structures through tokens and this shifts the success of economies from the realm of policy and management into the realm of design and technology.

Today well designed token networks hold out the possibility to build new forms of incentive structures that really improve the alignment between the agents in the network and the whole system; potentially working to avoid a rich get richer effect and reduce the gap between owners and users of the economy.

We no longer have to place our hopes on the promises of politicians or protest against neoliberal economic policies but the future of our economies is now largely about designing token economies, programing blockchains and building communities that fuel them.

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.

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.

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.