Token Economics 6: Growth

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.”