Realigning Interests: The Token Economy

Media has painted tokens as simply a new form of crowdfunding riddled with fraud, but this masks “utility tokens” potentially far more profound impact on value production relationships.

At a high level, there are only two constituents in the modern capitalist society: laborers who work for wages and capitalists who own the means of production. While labor is directly creating value, the excesses of value creation have disproportionately concentrated amongst capitalists, shareholders and managers (i.e. average CEO of a large company makes over 200 times the median employee’s salary).1 Thus many employees do not enjoy a significant share of the fruits of their labor.

However, what if labor was at least in part compensated with tokens and those tokens represented the value of the network of services provided? For example, let’s say that an exchange used it’s own token as the only way to accept payments for transaction fees on the exchange and the supply of coins is fixed, thus contributions by employees leading to more demand for the platform (and thus its token) would directly result in appreciation of the token and thereby the laborer’s net value. In other words, laborers capture more of the value created from their contribution.

Thus while many commentators discuss separating the “underlying blockchain technology” from cryptocurrencies, this is in many cases not effective or desirable. Without an intermediary, there must be incentives for participants in the decentralized network to maintain the network, cryptocurrencies provide precisely those incentives. If you decouple the two, the result is less incentives to create a robust platform and a reduction in potential alignment between value producers and value recipients.

The “dot com” era was a boon to venture capital in the 1990’s, providing numerous opportunities for new firms to emerge and go public. However, a host of new problems were created with power concentrating in a few hands and soaring costs of accessing capital markets. Over 50% of venture capital (VC) money in the United States is in Silicon Valley, an area less than 1% of the United States’ land mass, and after a series of expensive funding rounds (seed, pre-A, A, etc.) tech companies usually pay in excess of USD 1 million for taking their companies public.2 While there will most certainly be ups and downs in funding trends and funding amounts, token-based funding has already emerged as a popular alternative financing channel and a potential solution to the issues arising from the current VC-centric model. Token-based funding will likely distribute power, align interests, and create opportunities for a new type of model to emerge.

In an age where income inequality and the technical divide seem pre-ordained, blockchain and the token economy may be the antidote to creating a more well-aligned society where value producers are directly rewarded for their contributions.

Sources:

1. Donnelley, Grace. (n.d.). Top CEOs Make More in Two Days Than An Average Employee Does in One Year. Retrieved March 19, 2018, from http://fortune.com/2017/07/20/ceo-pay-ratio-2016/

2. Curragh, M. (n.d.). Considering an IPO? — Strategy& — Strategy& — the global … Retrieved March 19, 2018, from https://www.strategyand.pwc.com/media/file/Strategyand_Considering-an-IPO.pdf

3. (2018, January 18). Blockchain Startups Absorbed 5X More Capital Via ICOs Than Equity Financings In 2017. Retrieved March 19, 2018, from https://www.cbinsights.com/research/blockchain-vc-ico-funding/