Tokenomics

Leaving the Paper-Based Economy Behind

It is amazing how much we’ve achieved economically thanks to our traditional equity-based system. Thanks to all the accountants and law firms that keep it all squared away and to all the administrative work and stock clearing houses that tell us who owns what and how much.

We’ve come far — but we’ve reached the plateau.

Digitization and automation is how we take equity to the next level. And in this article, we will explain why. But first what is digitization?

In the crypto world when people say digitization it usually refers to tokenization which is just a fancy way of issuing a token to represent something, something like equity share in a company. Tokens don’t live in a private database instead they are recorded on a decentralized blockchain for everyone to see and use.

This means tokens have the real potential to do equity better because they are much easier to share and void of all the admin mentioned in the intro.

It’s not hard to see tokenomics superseding traditional equity if only for the fact that tokens are truly compatible with the internet.

The most popular use case so far for tokens has been the easy creation and distribution of equity of a company to raise money. Hence the ICO craze of 2017. Today, however, there are major experimentations happening with different ways to approach tokens which we shall get into.

But first, we must understand the current traditional equity system and why it's limited.

Digital Silos

In short, equity is created with the help of large law firms and heavy litigations to enforce contracts.

Firms write contracts stipulating who owns what and eventually the company data will be all ‘digitized’ into a system like a CUSIP and/or register in an ISIN which are essentially data silos for company records.

These databases are highly restricted and only a select few entities such as the DTCC will have access to the database for the purpose of clearing all the trades of stock on the NYSE.

For perspective, the DTCC clocks volumes of over $2 quadrillion USD in a year. Quadrillion, that’s a number you don’t see every day.

The bottom line is that the current equity system is super centralized, inaccessible and relies on select for middlemen, thus creating friction and illiquidity for everyone.

Some of the limitations of our current analog equity system:

High Cost
Getting a company publically listed on the NYSE costs approximately $500,000. It does not include all the hidden costs along the way in the form of contract formation that can take months to set up depending on the type of business.

Costly Administration
Admin and accounting has to be outsourced and verified and checked by multiple parties to reconcile the ‘who owns what and how much’, ranking up high accounting maintenance cost and time.

Poor Transferability
Largely due to not being compatable with the internet companies lack an easy way to distribute company shares without involving multiple middlemen. This also means global transferability is often costly or impossible.

Costly Conflict Resolution
Resolving any conflicts that may arise means long days in court incuring again more resources.

These friction points are contributing to the rift going on today between real company valuation versus the actual valuable services a company may provide.

Separation of Equity and Utility

This disconnect going on between the equity of a company and the value of that company’s products and services is one of the major issues with the current system because it’s designed to prioritize profits over creating real things of value.

If a corporation's aims were only for profits, shouldn’t that profit naturally come from building better services and products that are useful to our lives? and shouldn’t that be reflected in the companies share price?

The stock market is supposed to do exactly that, but in reality, the market has become more speculative than some would like to admit.

For example, corporations today are buying back their own stock on an unprecedented scale. Roughly 93% of profits made by US corporations in the last decade came from the rising share price of the stocks that they keep buying back.

Corporations earn more through buying back their own stocks to a collective tune of $4 trillion USD.

Apple is the biggest culprit of stock buybacks. That isn’t to say Apple isn’t valuable but it makes you think. Source: Birinyi Associates. Created with Datawrapper.

That’s a load of value that is not being shared with the public. Also, that’s value not being put towards new ideas, creating jobs or making companies better.

It isn’t illegal for corporations to buy back stock but we are getting to a stage where it might need to be because it is messing up price signals and creating major disincentives for all parties involved that don’t own the stock, workers for example.

Let’s look at a real example of a mismatch of incentives.

Consider the gig-based companies — Uber, Airbnb, Lyft and their countless copy cats. They not only provide an affordable service to customers but more interestingly, they create jobs in the form of drivers and hosts that rent out unused real estate and cars.

These gig workers keep the companies economic engine alive, but they have zero stock in the companies.

Wouldn’t it make sense if the workers in this economy owned part of the economy they themselves have created? A token perhaps?

A token added to a gig-based economy can work as an accurate barometer of a company’s health because of the token. If no one uses the service the tokens become useless and if they use the service it becomes valuable. Simple.

We have the tools today to better align the incentives of workers in a gig economy but how that’s done comes down to the tokenomics craft.

“WeWork rents a building from me, and breaks it up, and then rents it,” Ellison said. “They say, ‘We’re a technology company, and we want a tech multiple.’ It’s bizarre.”

Consider the following comment by Larry Ellison, founder of Oracle.

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