Token Economics 2: Distributed Ledgers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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