Token Economics 101

We are moving from an Industrial Age economy where centralized hierarchical organizations produced tangible products and push them out to passive end users to a new form of economy — the token economy.

Tokens are simply another way to talk about units of value. A token can represent anything that has value, such as clean air, transport services, or the number of likes on a social network post. Economies are ultimately value management systems, and tokens are simply quantified units that enable people to define and exchange value of any kind. Sounds a little bit like money, doesn’t it?

So what is different about a token in the cryptocurrency world as compared to standard (fiat) money? The difference is that traditional fiat currencies are based upon the industrial national economic system and are homogeneous in nature: one dollar is the same as the next dollar, and those dollars can be used to by anything available within a nation’s economic system. The value of that dollar is determined by all of the myriad forces at play in the national economy, including federal financial policy, overall unemployment rates, who got elected last week, and more.

Tokens, on the other hand, can be differentiated: we can define where, when, and for what any given token may be used. Anywhere there is the production and exchange of value of any kind, we can define a token and use it to create a market system, essentially creating a micro-economy and a specific token for that specific economy. We can create many different micro-economies, independent from one another and representing the entire spectrum of things that people value. Instead of currency based on where you live, you can use currency based on what you love (or generally find valuable).

Take for example Ananas, an Ethereum based network that allows communities to map the resources that contribute to their belief systems in order to combat hatred and help build constructive dialogue. By creating their token system, Anacoins, Ananas works to identify behaviors, dialogue, and ideas that align the interests of different groups. The tokens are used to reward members of the community and trusted contributors to the platform, and to incentivise participation.

In addition, tokens also offer a powerful new way to align the incentives of the individuals with the whole network and thus grow the ecosystem. If the tokens that any one individual holds are to increase, the value of the whole network must increase; the value that any member within the ecosystem holds is dependent upon the value of the whole network. This is true of fiat money as well, of course; just as Americans generally benefit when the dollar is strong against foreign currencies, token holders benefit when their particular micro-economy is thriving. The difference is that token values are controlled by the users themselves based on immutable, programmable protocols, rather than being dependent upon policy and politics.

By removing centralized management, blockchain token economies facilitate a new kind of open networked economy where anyone can participate, even with very small contributions of value, within frictionless automated exchanges. It opens up new value sources that previously fell outside of the traditional model as it now allows us to “tokenize” and create economies around social and natural capital, which previously went largely unaccounted. Most of all, token economies create powerful incentive structures and network effects that will spread to all areas as the underlying technology matures and our understanding of this new economic paradigm develops.

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