What is the Token Economy?
Traditionally, yes there’s already a tradition, a Token Economy is all about how many tokens a company will issue on its ICO, how will the tokens be distributed and how the tokens are expected to appreciate in value and become more scarce with time by using different tricks. Obviously these economies are very well suited for investors which are interested in a highly speculative value of the token. The main problem with such economies is that they do not consider the actual people, the users and producers (service providers/goods providers) which are expected to on-board this great new decentralized platform that was built for them!
Having a token which is used for transactions on the platform implies you have a currency which implies you have an economy. But is the token a currency? Does anyone buy a currency thinking about great future returns? Why not?
When people invest they go where they can get a stream of revenue such as stocks of companies or they invest in assets which they think will be scarce and in demand (oil, sugar etc).
Why not currencies? The gold and bitcoin bugs will jump and say that fiat currencies are being highly inflated, but when you think about it, currency is nothing but a tool which measures the current output of the economy and future faith in the ability of that economy to produce more.
If currency was deflated and not growing together with the economy an artificial gap would be created between the real economy production and future value versus the price of the currency. For example if the economy did not change but the amount of currency was reduced there will be a price deflation which makes no sense. Since most economies do not grow rapidly like new companies can grow, currencies are not a very attractive investment even if they were not inflated but grow in tandem with the economy (in that case a currency is supposed to have 0% growing value relative to the underlying economy).
So if a token is expected to deflate and yield high returns obviously it can not be a currency. If we examine the interest of the users and service providers they absolutely have no wish to hold speculative volatile tokens. Users simply want to buy with the currency they have, whether it’s fiat or Bitcoin and when they wake up tomorrow they want to see their wallet value is still the same and not 10% down. Service providers don’t care how they get paid as long as it’s fungible and without risk (a company can be exposed only to so much risk). Others have talked about the velocity issues of a token when service providers don’t want to keep it see James Kilroe and Kyle Samani.
Will the tokens eventually become currency like some hope? by the “invisible hand” of the “free market”, after a token crash, or slowly with time? Perhaps but it will be a very treacherous road to cross and if the platform survive it will have lost its investors and speculators which drive the belief in the of future value of the platform so it’s a win-lose situation.
If a token’s purpose is to become a currency what’s the justification for it in the first place? why not use Bitcoin, Ethereum or just fiat?
There’s probably no way around it, tokens are the digital shares of the future, and so it makes no sense to use them also as a currency.
So is tradition good or bad? Tradition can be a good thing if we understand why we follow it.
ICOs and cryptos are an amazing tool for democratizing investment credit, we want them to stay this way. If we want tokenized platforms to succeed we need to seriously start thinking about them as both a company having shares and a micro economy with a currency. Both needed to be managed in a smart decentralized way that is sustainable and attractive to all parties involved: founders, users, service providers and investors.
At DaBlock we are building the future of token economies.
If you are interested in better token economies please join us on our telegram channel or contact us
