Million-dollar question — Tokens

I don’t want to miss the chance of contributing to the token legitimacy debate that’s currently going on. From the position I stand in, as head of legal in a decentralized project, and former M&A lawyer, I’ll try my best to explain why I consider there’s a need for deeper understanding about token existence before we begin demonizing them:

After reading tons of medium posts, magazine articles and after hours of discussion with friends and colleagues, I find three main points for a defense statement:

Tokens respond to behavioral economics, and materialize community-belonging sentiments.

Behavioral economics is a discipline I knew nothing about 6 months ago. Then, “Misbehaving, The making of behavioral economics” by Richard H. Taler came to my hands, and I took sense of the magnitude the Blockchain-based decentralized business could take.

Yuval Noah Harari wrote “Sapiens” as a shake-up, an instrument for us to question certain basics of Human history. Among other, he describes the ways in which civilizations have managed to be stable, claiming that “an imagined order cannot be sustained by violence alone. It requires some true believers as well.”

For the imagined order is not a subjective order existing in my own imagination — it is rather an inter subjective order, existing in the shared imagination of thousands and millions of people. The inter subjective is something that exists within the communication network linking the subjective consciousness of many individuals.

Inter subjective phenomena are neither malevolent frauds not insignificants charades. They exist in a different way from physical phenomena such as radioactivity, but their impact on the world may still be enormous.

I believe this concept of “inter subjective imagined order” described perfectly what the decentralized movement implies, of essential understanding if one wants to make the correct approach to the economic models that are arising from it.

But not only the human element contributed to the popularization of this movement. Financial and economic exclusion also did. As the Tapscotts’s wirte in their last best seller, “capitalism, as a system for organizing the economy, is not the problem”. “the problem is that most people never get a shot at seeing the benefits of the system, because the Rube Goldberg machine of modern finance prevents many from accessing it”.

In such a panorama, Blockchain presents itself as a qualified solution, as it enables the lowering of barriers to financial inclusion and enhances new models of entrepreneurship. They call it democratization.

Tokens are not (only) a funding mechanism.

Tokens have their killer app in ICOs, but they are not, and should not, be just a funding mechanism. I’m still doubtful about why ICOs have grown such a large number of detractors, but something I’m sure of is about the utility of tokens.

In the first place, tokens enable governance systems. Of course, you first need to have predefined that you’ll have one, but if you do so, then it means that you want to have your own community system. Now, the reasons for not having governance systems redirected to ether by smart contracts (which would justify the will of those who claim the disappearance of tokens) is that if we are aiming to have our own system, why would we be using someone else’s money? While anyone can have USD, not anyone have Uber shares, right? Then, redirecting the Smart Contracts of my infrastructure to ether would be like having any company redirected to USD, that would imply that I would be able to just walk in an Uber’s board meeting because I own USD.

So, tokens are intra-community governance systems enablers.

But they’re something else. Tokens serve another purpose either than making people behind ICOs rich (which, by the way, I found is a misconception of what ICOs where really born to do). They represent economic incentives for early supporters and adopters, and represent a funnel for economic incentives of internet products.

Let me explain myself here: Some argue that using tokens to drive network effects is the wrong way of using them, and that they should rather be used to drive the common building blocks (protocols) that make dApps possible. But the fact is that tokens are perfect instruments to jump start this network effects and overcome the “chicken or the egg” dilemma. So, the bigger the need of networking effects in your business model, the more useful it is to get hold of the token model and give people partial ownership of the network. But then again, as not every company may need to implement Blockchain technology, not every project may have an obvious network effect need, so it is up to each founder to responsibly define, communicate and determine how do tokens help their structures.

Added to it, tokens have become a way for any developer or creator, to monetize development and maintenance of protocols, without having enormous corporations in place having to actually adopt them, or to make business on top of them to make them successful. The perfect example is the email protocol, which had to be firstly adopted by huge companies to provide it with usability. How different would things have been for the email protocol creator if token model had already existed back in the 90s? Maybe, his intellectual property would’ve been fairly compensated, wouldn’t it?

Tokens are a key instrument for open source projects to succeed as business models.

Until a few years ago, the traditional, and maybe only business models where those in which a central company owned money by extracting benefits from the networks they had created.

With decentralization and token models, we are witnessing a new way of structuring businesses, in which a decentralized project develops a software protocol and the money is owned by the community of people whom have actually help build it.

Even though nothing makes us thinks both business models are exclusive one from the other, the fact is that the irruption of decentralized structures is causing certain anxiety in a few token detractors. I personally attribute it to 2 main reasons:

On the one hand, capitalist corporate industry has long been a limited access-to sector. Few share holders, very restrictive shareholder’s agreements, and redistribution of benefits generated by others amongst a privileged few. Money made more money, they say. This reality is a perfect and legitimate one that from my point of view, will be kept alive, because it just suits certain objectives, and constitute their own incentives. But is constitutes a disruption-friction element that should not be ignored.

On the other hand, it’s a pushing-innovation element: collaborative “wiki” models of business making are now reaching traditional paradigmas, and thus, traditional corporate and financial industries, boosted by the existence of certain technologies like the Blockchain, which empower individuals globally, in a secure and fast way and enable decentralized business models to become real through, among others, tokens.

Given the above, and the fact that I am a token-believer, it should be said that the future of tokens depends very much on how we, the people putting together projects in this space, diligently use and spread them.