In Cryptoeconomics We Can Trust!

Tom Farley
Aug 22, 2017 · 3 min read

Blockchains, as distributed ledgers secured by cryptography, provide a reliable platform for decentralized networks. Tokens add an economic dimension, as they incentivize development through more meritocratic distribution of the value capture of ‘network effects’ (increasingly the foundation of value in modern businesses). As a means of finance, token sales can more efficiently coordinate global communities and resources to tackle some of the world’s most ambitious projects. In the words of Mark Zuckerberg: “The great arc of human history bends towards people coming together… to achieve things we couldn’t on our own.”

Funding early stage, network-based businesses with token sales is still in its infancy and comes with its own risks — everything is a trade-off (one of my few personal axioms of life)— but the greater accessibility (US as a proxy: only ~5% of adults are considered sophisticated, or “accredited”, enough to be even allowed to participate in early stage opportunities, far less practically have access as VCs dominate the space), liquidity (traditionally the greatest barrier to entry that costs great projects access to capital), lack of red tape, and economic promise of what is effectively new infrastructure (analogous to the significance of the creation of the joint-stock company) for social dynamics/network based business models has unleashed a ‘Cambrian explosion’ of entrepreneurship. The initial application of Blockchain technology, Bitcoin, now has a market cap of USD$66B (PayPal USD$70B), and Bitcoin ATMs have already been rolled out in Australia. Already we have seen token sales (“ICO fundraising”) overtake Angel & Seed stage internet funding, with USD$550M raised in June alone.

The structures of networks, from tribes to nation states and corporations to subreddit communities, are the foundations of society’s institutions and development, see Niall Ferguson’s “The False Prophecy of Hyperconnection”. Various types of networks have their own defining characteristics and implications, for example “hierarchies… enable complete strangers to know how to treat one another without wasting the time and energy needed to become personally acquainted” (Yuval Harrari’s “Sapiens: A Brief History of Human Kind”). Ethereum founder and blockchain pioneer, Vitalik Buterin, defines the network structure of blockchains along three axes of centralization: “Blockchains are politically decentralized (no one controls them) and architecturally decentralized (no infrastructural central point of failure) but they are logically centralized (there is one commonly agreed state and the system behaves like a single computer)”, the apparent implications are greater transparency, integrity, and security of these networks.

In recent history, the networks of free markets have enabled incredible development and progress within society. On balance this has proved the most efficient system of resource allocation (one of society’s most important functions), but the costs of unbridled capitalism have today manifested in growing populist movements, particularly economic nationalism and anti-immigration (disengagement from the world’s most valuable network. Sad!) — the ‘invisible hand’ does a great job of creating value, but has problems with distribution, and may end up biting itself. So much so that Bridgewater Associate’s Founder, Ray Dalio, has determined that today “populism’s role in shaping economic conditions will probably be more powerful than classic monetary and fiscal policies”. Politicizing the distribution of value creation and entrusting bureaucrats has its own serious limitations. At least part of the solution involves greater decentralization of these underlying networks, and more meritocratic participation in the value creation — distribution of value creation is to society what capital allocation is to business. Such systems of more efficient value distribution can now be codified immutably with tokens and validated by blockchains. The ability to code native characteristics of a token represents a new economic paradigm (Web 3.0: an internet of value/things) that provides for new structures of relationships and networks that can optimize outcomes for particular use cases. I wanted to write this to synthesize my thoughts on understanding the explosion of the crypto markets, and the more I understand about this technology, the more I’m convinced that blockchain enabled cryptoeconomics is the next inflection point in human history.

In Cryptoeconomics We Can Trust!

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https://www.linkedin.com/in/tjfarley/

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