From monetary theory to token economies
Journey to the “perfect” token model (Part 2.1)
This is the first of two articles in which we will trail the path of thoughts from using traditional standard economics for modeling a token economy to a more modern and appropriate approach. Our first brain waves apparently didn’t match the needs of a solid modelization, so we kept on looking for alternatives.
ICO’s and the need for robust evaluation
So-called Initial Coin Offerings (ICO) collected around 17 billion dollars in 2018 alone, five times more than it was the case in 2017. This development clearly shows the potential of ICOs, especially for start-ups. With this form of procurement, it is much easier and quicker to raise funds. By using ICOs as investment companies create enormous financial resources at their disposal at relatively early stages of development. The only condition is a sufficiently large community which believes in the vision of the project and provides the “funds”. This way of raising money and capital brings both opportunities and risks. On the one hand, it enables companies to develop innovative ideas and business models independently of sponsors and major investors. On the other hand, there is always the risk that projects will never make it to market or be uncompetitive. authentic.network is also considering such an ICO and the implementation of a token economy.
Up to now, however, there has been a lack of a system or tool to present, simulate and analyze token systems that blockchain companies can use to identify and eliminate potential limitations or risks of the model.
Importance of Stability
However, the robustness of the token economy is of decisive importance. As a rule, this serves as the basis for the actual business model, which also applies to authentic.network. The ecosystem should serve as a basis for later interactions of network participants and payment transactions. It has to guarantee incentives for the user but also stability and functionality. In the case of authentic.network, it is particularly important that a certain degree of price stability prevails. Consumers and companies have a “trading relationship” with each other, volatile prices in such a system would create uncertainty and have a negative impact on trading volume, activity and participation in the network.
The MONIAC
In order to adequately counter the problems mentioned before, it is of crucial importance to be able to simulate token economies and the movement or flow of the tokens themselves. The father of the idea is the so-called MONIAC, after his model the modeling of a token economy is to take place. The machine itself may seem primitive at first glance, but the underlying idea is still relevant today.
The Monetary National Income Analog Computer, MONIAC for short, or Phillips Hydraulic Computer was developed by Alban William Housego Phillips in England in the late 1940s and was one of the first computers to simulate economic phenomena. This machine enabled calculations to be made (for the first time) on the functioning of macroeconomic contexts, in particular, the relationships between income, employment, interest rates and other economic variables. This was done with the help of analog calculation methods and the flow of water as a calculation medium. The calculations were based on Keynesian principles, with the equation Y=C+I+G+(EX-IM) as the basis for calculating national income.
How it works:
The computer contained several tanks filled with colored water. These should reflect the economic subjects or sectors, households, companies, government and foreign trade, and make their behavior visible.
Adjustments were made to parameters such as interest rates or changed conditions in foreign trade. The effects of these adjustments on the economic entities and sectors, and thus ultimately on the cash flow within the system, could be visualized by means of the circulating liquid.
The MONIAC’s digital twin
Following the basic idea of the MONIAC, a model/simulation is to be developed based on its model, which is capable of depicting a digital economy and the movements of the tokens. The “MONIAC 2.0” is to become the modern version of its model. For example, supply, demand and circulation of tokens in the ecosystem are to be mapped. Depending on the properties of the token used, risks, limits and bottlenecks should be identified.
Classical Monetary Theory
A platform for modeling the token ecosystem could provide the classical monetary theory, more precisely the Keynesian orientation of this. This conclusion suggests itself, since a token economy in the broader sense can be regarded as a form of “monetary system” and should, therefore, be subject to similar laws as the FIAT system.
Furthermore, monetary theory offers a sufficiently researched and generally accepted basis. Existing models “only” have to be adapted for the modeling of tokens, scientific work on alternative digital currency systems already exists and provides useful approaches for modifying classical economic models.
The Monetary Circuit
The (institutionalized) money cycle seems to be a promising starting point for the model to be created, as it can be found in almost every textbook. The monetary system is seen here as an institutional agreement in which a selected circulation and calculation medium, which is legally recognized for the payment of debts, is recognized for the payment of goods and services. This type of trade pattern can also be regarded as a cycle. The system becomes a closed loop if it is possible to purchase all goods and services of the market with the selected medium. The cycle is considered closed when goods/services are “exchanged” for funds and the process starts anew. A complete cash cycle means that all transactions are carried out in money and are motivated by market incentives. Furthermore, both the conclusion and the end of the cycle must be compatible with the forces of the market.
According to this model, a token economy is to be modeled. The basic framework presented must be adapted to the characteristics and peculiarities of a modern digital ecosystem and transferred into simulation software. In order to be able to carry out this fundamental modeling/adjustment of the money cycle, it is indispensable to gain a deeper understanding of the “world of tokens”.
Feel free to comment on our idea and approaches on this and on upcoming articles.
We from authentic.network have been looking for a token model which suits our use case — providing unique identities for goods and documents — for quite a while now but we did not find any. So we want to develop it by ourselves.
You are invited to follow us on our journey to develop a model to simulate token ecosystems. To figure out what the different motivations of the stakeholders are, how they can be incentivized to create a healthy token flow inside a system and point out where the bottlenecks and limits of the system are.
PS: you will find our journey also on steemit.com.
