A Case for Crypto [3]
The Token Economy: a Review
Definition
At its core, a Token Economy represents an ecosystem where every form of value is tokenized, ensuring smooth exchanges, verifiability, and the potential for further development. This conceptual framework emerges from the advent of blockchain technology.
Before we go further though, let’s define what “blockchain” means.
In our opinion, a blockchain is simply a decentralized ledger or database. This definition encapsulates much of blockchain’s essence. While terms like borderless, permission-less, trust-less, immutable, and uncensorable often accompany discussions around blockchains, they describe specific implementations or characteristics, not fundamental requirements.
Take Central Bank Digital Currencies (CBDCs) as an example. Governments could use blockchain, trusting its transparency to highlight corruption or counterfeit currency production. However, CBDC lacks some of the defining characteristics of cryptocurrencies such as trustlessness and immutability. Yet, we can safely say that CBDC uses a blockchain-based technology.
But our primary focus here isn’t CBDCs; it’s the broader landscape of the Token Economy.
The Rise of the Token Economy:
Why is the Token Economy attractive to many in the crypto realm? Critics argue that such a hyper-capitalistic system could intensify wealth disparities. Yet, isn’t our current financial environment reflective of the same imbalances? In rebuttal to this idea, the Token Economy’s unique proposition lies in its ability to code law into physicality. Imagine embedding social causes into immutable Smart Contracts, or a fairer voting system in a company, this is the kind of features absent in traditional systems. We concur there are challenges, however.
Let’s take another example. Imagine owning tokenized art or property and being able to effortlessly trade it based on market’s current valuation. The Token Economy could offer this unparalleled level of financial fluidity if there are enough market-makers, which the space has shown to be the case. Meanwhile, in the traditional market, you need to find a buyer for your art or property, which isn’t simple without going through a large amount of paperwork and commission-based agents.
The potential benefits extend beyond mere transactions. An entirely tokenized market would promote transparency. No longer would investors rely on third-party auditors; the evidence of business operations would be crystal clear. This transparency could prevent financial debacles, like the 2008 crisis, and establish a more trustworthy financial environment.
Moreover, laws governed by code offer clarity and consistency, making manipulation or misinterpretation challenging. From social programs to tax collections, the possibilities are boundless.
The Failures:
The concept of the Token Economy is hardly novel. Countless Web3 startups have started and floundered. During crypto’s zenith, legitimate ventures sometimes seemed overshadowed by scams. Rug-pull was nearly a daily occurrence, along with constant reports of scammers.
Shifting the Token Economy beyond the digital realm was also met with stern regulatory scrutiny. Regulators came down hard, with many opting to ban innovation before its growth. Though some decisions might appear harsh, our community could have done better in educating new adopters about the pitfalls of unregulated ecosystems.
It is not entirely the community’s fault, though. Part of the deal of not trusting anybody means…not trusting anybody. This includes protocols, DAOs, and any online personalities. The only way forward is to verify. And there lies the problem. How can we assume that most people who participate in the Token Economy is able and willing to continually verify everything? Eventually, they will need to trust someone to efficiently interact with the crypto space, may that be security auditors, builders, and protocols. This presents a challenge: How much should one trust versus verify?
Furthermore, digital laws can be encoded, but real-world enforcement usually requires governmental backing. Structurally, we also need to understand that in most countries, physical force is still the ultimate form of power. You can code law into something, but you still need some kind of governmental institution to enforce those laws if it’s in the physical realm. And this creates a conflict of interest where government would want full control of its currency to add to their arsenal to combat criminal and military activities. Seizing control to the people may not be in their best interest.
The Revival:
So, how do we rekindle the Token Economy’s potential? As builders and investors, we might not hold all the answers, but we can offer insights. The immediate future seems split in possibilities, but long-term prospects for the Token Economy in various nations appear more optimistic. To advance, our community must infuse greater trust and clarity, possibly by simplifying smart contract interpretations or establishing dedicated DAOs or tools for code vetting.
Concurrently, governments should embrace the dual-fold benefits of blockchain’s transparency and privacy. A collaborative effort with regulatory bodies, focused on tokenizing tangible assets and embedding laws, can pave the way for more democratized financial benefits.
Traditional financial sectors, too, are gradually acknowledging the Token Economy’s benefits, separating it from the criminal-filled crypto-space (and our stance remains that blockchain technology actually helps prevent financial crimes).
In the final post of this series, we conclude our thoughts with all the arguments we have on hand, and hopefully, present you with a clear picture of the future of cryptocurrency.
