Fractal Ownership, Part 1: Introducing Value-Based Ownership

What do you consider valuable? A euro coin? A kilowatt hour of electricity? The features provided by an open-source software?

In this idea of Fractal Ownership, we’ll propose an ownership token system to track the way people exchange value, and reward people who bring value into their network.

We’ll start with a person getting electricity in their village for the first time from a solar installation, and see how they can earn ownership of the solar installation and the income it generates by purchasing electricity over time.

Then, we’ll see how a similar ownership model can work in our organizations today. Following the example of a small software company, we’ll describe how people can be rewarded with ownership of the organization when they contribute something others deem valuable. We’ll also see why this curbs founder ego, rewarding those who continually add value to an organization over time.

Finally, we’ll connect the two. Fractal Ownership will show us:

• How a person getting electricity for the first time can earn income every time that software company gains a new customer.
• How multiple completely separate companies can connect their ownership schemes to gain income and reduce risk.
• How an investor can invest in the token network, removing the need for concepts such as interest payments and instead getting rewarded when their investments provide real value, such as a kilowatt hour of electricity to a person receiving electricity for the first time.

All of the concepts that make up this idea already exist, including token engineering, DAOs (Decentralized Autonomous Organizations), bonding curves, cryptocurrencies, blockchain, modern portfolio theory, cooperatives, and decentralized voting.

We propose putting these puzzle pieces together in a way that does not disrupt, but instead complements how we exchange things of value today. We’ll get rid of irrational speculation, and connect worth only to items or services of true value. Over time, adoption of this system will trend the way that we interact with one another and with value into a sustainable way of living. It will encourage valuable interactions within the ecosystem, and discourage frivolous spending.

Let’s Start with the Sun.

It’s hot, and gives off lots of energy. There are people who could use that energy to do things like cook their meals, charge their cell phones, or keep their hospital running.

These people value these things that require energy, and are willing to exchange something else of value for access to that energy, such as money. Therefore, it is worth someone’s time to connect these people to the energy from the sun.

Luckily, we have solar panels to do so. We’ll take the real example of a Solartainer® built by AfricaGreenTec for this example. Solartainer® are being installed in villages in various countries, bringing many people access to clean electricity for the first time.

But, Solartainer® don’t magically appear. Somebody needs to build them, and then operate and maintain them over time. This requires skilled labor and management.

Also, Solartainer® cost money to build and operate. And they are expensive. The cost of one is often more than the community using the energy is able to pay. Therefore, the operations company needs to ask investors for money (usually a loan), who usually ask for something in return (usually interest payments).

Before diving in, let’s define a term used often: system. A system in this example is an entity that produces value in exchange for external value, like the Solartainer® exchanging electricity access for money depicted below. All of the other people are currently outside of the system because they are bringing external value.

Who is interacting with the system, and what are their goals? What do they want to maximize? Let’s look at the goals of each agent in the network. They are:

• The Sun: keep doing its thang
• People in the Village: affordable access to electricity = pay as little as required for access to the electricity they need
• Solartainer®: provide electricity to the people who need it
• Operations Company: make as much value (money) from their operations as possible
• Investors: make as much value (money) from their investment as possible

Energy to the People

Now, the system has been funded, has customers willing to pay, and has somebody to operate and maintain it. Let’s let the energy start flowing.

The Solartainer® has a certain capacity of how much energy it can generate each day, dependent on the sun, weather, and the equipment’s physical limits. The people in the village also have an appetite for how much energy they want to use, at a certain price they are willing to pay. Let’s represent their appetite as a bounty* offering a monetary reward for offering a kilowatt hour of electricity.

*Note that this system of bounties will be the ‘unit of value creation’ going forward.

Luckily, the Solartainer® system can fill this bounty with the energy it’s able to produce from the sun, and that the price offered is reasonable. Let’s say that 100 of these one kilowatt hour bounties are filled by the Solartainer® at the money price on the bounty. Note that the users are still just paying for electricity out of a pre-paid mobile account like they’re used to. The bounties are created by the system as they are useful as accounting in our exchanges.

How does value flow through the system? First, the people using electricity pay for the electricity they want to use from a prepaid account. The users can then exchange a certain amount of money in their account for electricity at the market rate. Let’s look at this flow of value when a user with 1000 units of money exchanges 100 units for 100 units of energy.

The money has flowed from the people into the Solartainer® system, which produced the value. Who should get the value (money) that the Solartainer® system now owns?

Token Representation

Let’s make things a bit easier to track. We’ll take the money we have from fulfilling the bounties and put it into a big pot. Each unit of money can be tracked by a token, that is always valid to be exchanged for the amount of money it is worth in the pot of money. We’ll call these tokens ownership tokens, and you’ll see why as value starts flowing.

1 unit of money is exchanged for 1 token that is created by the system. The unit of money is then put in the money pot (depicted in the image below). At any time, 1 token can be exchanged for 1 unit of money from the money pot, and the token is destroyed by the system. This relationship never changes, and there is always an equal number of tokens in the system and units of money in the money pot.

Just like the relationship between the people using electricity and the Solartainer® system, there are connections between the people within the Solartainer® system that represent flows of value. Let’s see how value flows.

Flows of Value

First, the costs of the Solartainer® need to be covered, including things like operations company salaries and occasional maintenance. Let’s cover those with some of the ownership tokens (exchangeable for money) in the system. To formalize the transaction in the token network, the Solartainer® will create a bounty requesting each of these services.

Once the bounty is completed, the ownership tokens will flow to the operations company who complete these bounties. We’ll track which systems offered and completed the bounties, which will help with accounting who owns what later.

Woah! The operations company was just added to the Solartainer® system. Why? Because it completed the maintenance bounty in the Solartainer® system, it is deemed a necessary component for the system to operate and continue adding value. The number of tokens received for this bounty represents the value the operations company added to the Solartainer® system.

Now, the remaining tokens can be distributed. Because the investor funded the Solartainer® and expects a reward for their investment, they receive the remainder of the ownership tokens. To formalize this transaction, the Solartainer® creates a bounty within its network based on the remaining number of tokens going to the investor. Therefore, we can also welcome the investor to the Solartainer® system! Without their investment, the value being created by the system would not be possible.

Now, who has what percentage of the total amount of value (tokens) in the system? The investors have 80 ownership tokens, and the operations company has 20 ownership tokens.

All of the tokens in the system are directly tied to bounties for energy sales. Therefore, the percentage of ownership tokens anyone owns represents ownership of the value created by sale of energy to the people. That’s why they are called ownership tokens!

Summary so Far

To summarize everything so far:

Building a Solartainer®

• We are solving the problem of bringing energy from the sun to people by building a Solartainer® system.
• A system is an entity that produces value in exchange for external value, like the Solartainer® system exchanging electricity access for money from people.

Energy Economics

• A person who wants energy creates a bounty, advertising how much they’re willing to pay for one kilowatt hour of electricity.
• The Solartainer® system completes the bounty by providing a kilowatt of electricity in exchange for the bounty’s reward.

Ownership Token Representation

• The bounty’s reward is represented by ownership tokens, which are directly exchangeable for a set amount of money in the pot of money. Anybody who owns at least one ownership token is considered to be in the Solartainer® System.

Ownership Distribution

• The bounty is then logged with the name of the systems creating and fulfilling the bounties, to track how value flows through the system.
• The Solartainer® system then creates bounties to pay the operations company (who complete and log the bounties and receive rewards) for their work.
• The remaining ownership tokens are given to the investors, who initially paid for the system and expect a reward.

Now, we’ll check in on the goals of each agent in the system and see if their incentives to participate in the token network are aligned.

Aligning Incentive Schemes

Let’s check in on the goals of each of the agents in the system based on this incentive scheme and see if everything is aligned.

• The Sun: keep doing its thang ✔️
• People in the Village: affordable access to electricity = pay as little as required for access to the electricity they need ❔
• Solartainer®: provide electricity to the people who need it ✔️
• Operations Company: make as much value (money) from their operations possible ❔
• Investors: make as much value (money) on their investment possible ❔

2/5! Not too bad. Let’s look at the question marks.

• The investors are receiving value (money) from the exchange of energy. But are they making as much value (money) on their investment as possible?
• The operations company is receiving enough to cover their costs, but are not further incentivized to make the system as profitable as possible.
• The people in the village now have access to clean electricity, but the rate that they pay for electricity has no reason to decrease over time.

And dive into how to address each of them.

Investors

Notice that the investor is receiving a percentage of the ownership tokens (again, directly exchangeable for money from the pot) created by energy generated. Why is this different? In a typical loan, the investors would get a set amount of money each month, regardless of how much energy is sold. However, this separates the investor from the real value their investment is bringing: energy to the people. Instead, in our system, their investment is repaid in a share of the energy generated, used, and paid for.

Why is this good for the investors? If the Solartainer® performs well and creates a lot of value (energy), the investors will be paid back more quickly and the value of their investment will be greater. However, if the Solartainer® does not perform well, their investment will not perform as well. The performance of their investment is therefore tied directly to the real value their investment is bringing: energy to the people. Also, typical interest-based investments don’t return any value after the investment period. Energy-backed investments continue to offer returns until the system no longer is producing value.

Remember that each token is directly exchangeable for money from the money pot. If the investor or operations company wants to exchange their tokens for money, they can do so at any time. So, the investors are meeting their goal of making as much value (money) as possible, as well as helping other goals in the system of producing as much electricity as possible at a market price. Therefore, their incentives are aligned ✔️.

Operation company and People in the Village

Now, why would investors give a share of the ownership tokens they receive to the people in the village and the operation company of the Solartainer® other than to cover base costs?

If the operation company received a share of the investors’ tokens, they would be incentivized to maximize the productivity of the Solartainer®, as a more productive Solartainer® would give them more value (money) over time and meet their goal. This is also good for the investor, as a higher productivity of the Solartainer® means their investment will perform better.

If the people in the village received a share of the investors’ tokens, a few things would happen:

• Just like the operation company and the investors, they would be incentivized by a more productive Solartainer®. Therefore, they would have a stake in the Solartainer® and potentially support activities such as making sure it is being properly cared for and maintained.
• Their cost of electricity would go down, as they would get back a fraction of the cost they had paid for the electricity back into their account, meeting their goal.

So, if the investors give a share of their ownership tokens received due to energy sales to the people in the village and the operation company, we can now put a big fat ✔️ next to each of their objective functions.

Distribution of Completed Bounties

Let’s therefore add a mechanic in our incentive scheme that give those in the system a share of the tokens brought in by creating energy:

Every time the Solartainer® system completes a bounty and value flows into the system, the reward will be distributed fractionally based on the share of ownership tokens that are contained in the Solartainer® system.

What does this mean in our current Solartainer® system with another 100 token energy exchange based on a bounty completed by the Solartainer®? The 100 tokens exchanged for energy are distributed fractionally to each person who has ownership tokens in the Solartainer® system.

First, the people pay for 100 units of energy with money. That money is converted into ownership tokens by the Solartainer® system.

Then, the tokens can be distributed to those owning ownership tokens in the Solartainer® system based on their % share:

As shown, the operation company are incentivized to help maintain a more productive Solartainer® system, as they receive ownership tokens as a reward for more value (money / tokens) flowing into the system.

So, we’ve solved the problem of incentive alignment for the operation company ✔️. What about the people in the village using electricity?

Rewarding Valuable Contributions

How can we reward valuable contributions to the system, such as purchasing energy from the system, or actively participating in the network such as funding or completing bounties?

Two incremental improvements can be made via two added mechanisms:

1. Bounty Funder Rewards: Reward the person who issues a successfully completed bounty as the resulting flow of value wouldn’t have been possible without them!
2. Transaction Fee: Add a transaction fee, where every time a token is exchanged for something of value, a small fee (let’s say 1% for now) is cut out and distributed to everybody in the network holding a token.

Adding Bounty Funder Rewards

Each time a bounty is completed, a small percentage of the bounty reward is distributed to the people funding the bounty. With a small (let’s say 1% for now) bounty funder reward, people are incentivized to propose and fund valuable activity in the system. Let’s see what happens with another 100 token energy purchase bounty created by the people in the village.

We’ll wait to distribute that 99 tokens until the transaction fee mechanism is added. Hodl tight.

Because of the energy purchase bounty that the people consuming electricity created, those same people now hold ownership tokens and are therefore welcomed into the Solartainer® system! They can now do one of two things:

1. Cash out: Exchange the tokens they’ve earned for money from the pot, slightly offsetting their cost of electricity immediately
2. Hold: Keep the tokens they’ve received, which represent ownership in the Solartainer® system. Because they now own a share of the Solartainer® system, they will receive a larger and larger portion of all bounties in the system (due to our rule of how bounties are distributed to every person who has ownership tokens). Over time, they may choose to exchange these ownership tokens for money from the pot, further offsetting their cost of electricity.

Each of these options maintains the total amount of money in the network. If a person cashes out their token, the token is destroyed and they receive a unit of money instead.

So, we’ve now aligned the incentives of the people in the village ✔️, and therefore all parties in the network!

Adding a Transaction Fee

There is another mechanic we can add that has interesting effects on value flow in the network.

Now, let’s also add a small transaction fee (let’s also say 1%) for every bounty. After the bounty is completed, the transaction fee is then distributed evenly to all tokens in the entire network. Here’s an example of this new distribution scheme when a bounty is completed for maintenance of the Solartainer®.

First, 98 of the 99 tokens available to distribute are distributed based on the % of total ownership tokens each person has. The 1% transaction fee (1 out of the 100 initial tokens) is held back for now.

Then, the transaction fee is distributed the same way, based on % of ownership of the total token count.

What just happened? The operation company company received ownership tokens for their service. But, with the transaction fee, every token holder in the network also received a small fraction of tokens, a share of the value added to the network. This isn’t very interesting in the single network we’ve seen so far, but what if we go fractal? Things get craaaaazy!

The operation company company is actually made up of a few people:

• A coordinator / manager
• A mechanic
• An electrician

Typically, the coordinator finds the jobs for the company, and pays the mechanic or electrician to complete these jobs.

The operation company company could then be represented by a system, just like the Solartainer® system is. This is where things start getting fractal.

Summary so Far

Once again, we’ll summarize everything so far, adding in the new mechanisms:

Building a Solartainer®

• We are solving the problem of bringing energy from the sun to people by building a Solartainer® system.
• A system is an entity that produces value in exchange for external value, like the Solartainer® system exchanging electricity access for money from people.

Energy Economics

• A person who wants energy creates a bounty, advertising how much they’re willing to pay for one kilowatt hour of electricity.
• The Solartainer® system completes the bounty by providing a kilowatt of electricity in exchange for the bounty’s reward.

Ownership Token Representation

• The bounty’s reward is represented by ownership tokens, which are directly exchangeable for a set amount of money in the pot of money. Anybody who owns at least one ownership token is considered to be in the token network.

Ownership Distribution

• The bounty’s reward is then distributed evenly to everybody who holds ownership tokens in the system, based on their percentage of tokens owned.
• The bounty is then logged with the name of the systems creating and completing the bounties, to track how value flows through the system.
• The Solartainer® system creates bounties to pay the operation company and maintenance crew (who complete and log the bounties and receive rewards) and cover system costs. This causes the distribution of ownership tokens to flow towards people adding value and away from the investors over time.
• The ownership tokens given to the investors are based on their current share of tokens. The investors paid for the system and expect a reward.

Incentive Alignment Mechanics

• Bounty Funder Rewards: Reward the person who issues a successfully completed bounty as the resulting flow of value wouldn’t have been possible without them!
• Transaction Fee: Add a transaction fee, where every time a token is exchanged for something of value, a small fee is cut out and distributed to everybody in the network holding a token.

Next Article: Introducing Fractal Ownership

The next sections will describe Fractal Ownership, and the benefits we can find by applying this ownership token structure to other types of value offerings, including tracking the value added by the contributors to a R&D company in Germany. Then, we’ll show how a single token can connect the ownership of these two seemingly separate entities, and why that is valuable to everybody in the token network.

We’ll use this ownership token structure to challenge the status quo of how companies are run today, and propose steps to real action including a simulation proposal for the Solartainer® system and its ownership tokens.

This is the synthesis of all the great discourse we had faced with the challenge to align incentives between users and owners of a system ever since the “discovery of tokenization” as a new form of financial and business model for networks. The puzzle pieces came together during the #TokenEngineering track at the #Diffusion2019 hackathon hosted by Outlier Ventures and leading up to it when we prepared the #Connect2Evolve challenge together with Sebnem Rusitschka. Special thanks to Michael Zargham, Angela Kreitenweis, Stephen Young, Ravi Patel, the Siemens team, and many, many others for everything leading up to and coming out of the First Ever Token Engineering Hackathon! We will definitely turn this up to 11, especially with our new collaboration with TU Munich Chair of Information-oriented Control (HT/ Herb of 1e9 — The place to take back the future of technology) and BlockScience.