Recommended Reading: Tokenomics
Title: Token Economy: How the Web3 reinvents the Internet
Who: Shermin Voshmgir, Director of the Research Institute for Crypto Economics at the Vienna University of Economics and the founder of BlockchainHub. Advisor of Jolocom, a blockchain-based identity protocol, and Wunder, a decentralized Art Museum.
Published: 2019
Why: This is a must-read for those wishing to learn about Web3 and get a good sense of the token economics of DAOs. Comprehensive technical coverage on how to design and engineer a token. The content covers the fundamentals of the blockchain, applications in Web3, understanding token economics, decentralized finance, and use cases of tokens; further details are below. The content was easy to digest through clear explanations and well-supported examples. Furthermore, the chapter summaries captured the salient points nicely and use illustrations that clarified several concepts.
What:
This book attempts to summarize existing knowledge about blockchain networks and other distributed ledgers as the backbone of Web3 and contextualize the socio-economic implications of the Web3 applications addressing: smart contracts, tokens, DAOs, concepts of money, governance, and decentralized finance (DeFi).
Part 1 on Web Basics covers the evolution of peer-to-peer (P2P) networks and protocols in supporting a stateful decentralized Web3 network, explaining how control is maintained in a trustless environment while addressing the “double spend” problem, consensus mechanisms, and the nature of distributed ledger systems. The role of cryptography precedes a thorough discussion on identity in Web3 and how it compares to analog and web2 variations.
Part 2 about Web3 Applications is concerned with understanding smart contracts (technical, legal, and economic aspects) and how they relate to oracles (hardware, software, inbound, outbound and consensus-based). Followed by the discussion of monetary and fiscal policies of DAOs, couching crypto-economic systems within larger frameworks of socio-economic and complex systems. The chart on institutional economics of DAOs succinctly explains how various elements of a DAO compare to that of a company and a nation-state. Governance explanations follow this (on- and off-chain) and a comprehensive look at nine dimensions of defining a token.
Part 3 on Token Economics & Decentralized Finance starts with a discussion on the future of money. It starts with stable tokens and CBDCs, followed by a healthy discussion on privacy tokens and a look at how tokens are exchanged, applications of lending and borrowing tokens, and the nature of the challenges therein. This section concludes with a discussion on token sales and various offerings.
Part 4, where four Token Use Cases are presented — security, real estate, art, and collective fractional ownership. Given that this book was published in 2019, the discussion remains relevant. The insights offered on how to engineer a token with considerations for the public good, externalities, psychology, behavioral analysis, behavioral finance, and game theory. Leading to a discussion on Basic Attention Tokens (BATs) and Token Curated Registries (TCRs). The section closes with a discussion of the technical, legal, and economic dimensions of engineering tokens, with some thoughts on the ethical and political aspects.
The annex offers supporting material on the origins of Bitcoin and Web3, solutions to scalability, and Libra — Facebook’s attempt at launching a cryptocurrency.
A sampling of Quotes:
While the Web2 was a front-end revolution, the Web3 is a backend revolution.
The current Internet was built around connecting machines, not people. The Internet does not provide a native identity layer for people, institutions, or objects other than the operating nodes in a network of computers.
The governance rules of TheDAO did not account for decision-making processes in the case of unforeseen events … showed that “decentralization” is also a question of human behavior, and thus also subject to behavioral economics, and never only a mathematical or technical question.
DAOs offer the possibility to establish more fluid decentralized organizations over the Internet and around a specific economic, political, or social purpose.
In their institutional structure, Web3 networks resemble nation states much more than they resemble companies. The blockchain protocol is comparable to the constitution and the governing laws of a nation state.
Purpose-driven tokens provide an alternative to conventional economic systems, which predominantly incentivize individual value creation: private actors to extract rent from nature or from the workforce, and transform this into products, often externalizing costs to society, while internalizing (and maximizing) private profits.
Behavioral finance studies why market actors are economically “irrational” and resulting market inefficiencies such irrational behaviour and how others can profit from such (predictable) irrationality. Findings from behavioral finance are important aspects to consider when modelling purpose-driven tokens and DeFi market mechanism.
Other videos
TEDxCERN — Dec 20, 2018. Web3, Blockchain, cryptocurrency: a threat or an opportunity? It explains what Web3 is, along with several thought-provoking questions about incentives, governance, and the development of inner workings.
TEDxUniHeidelberg — Jun 30, 2018, How Blockchain Technology can protect us online Shermin talks about privacy in the machine age and why we need to redefine human rights for the data-driven world we live in today. Sherman strongly encourages a debate on privacy and encryption and emphasizes that Blockchain technology is a powerful tool to reinvent the internet, indeed.
NEXT17 | Sep 27, 2017, Blockchain & The Future of the Internet Blockchain challenges centralized, top-down decision-making through auto-enforceable code, decentralized control, and radical transparency. This talk offers insight into the development of Web3, with use cases and potential implications of this new technology.
