With the ongoing revolution in technology, our economic systems of organization are being transformed and disrupted by the rise of information networks. It started with the advent of the personal computer, the World Wide Web. With the rise of online platforms, the disruptive power of information networks to reshape economic organizations became ever more apparent. Today this process of economic transformation continues with a new set of technologies as we are currently in the process of remaking the technology stack of the Internet, building what is called web 3.0, a primary component of the blockchain.
The defining feature of this next stage of economic development is that it decentralizes our economy and shifts operations to global information-based networks like never. This distributed internet technology stack that is currently being built enables a network of computers to maintain a collective database of value, ownership, and exchanges via internet protocols. This bookkeeping is neither closed nor the control of one party, and rather it is public and available in one digital ledger, which is distributed across the network.
The most mature example of this is what we call the blockchain. In the blockchain, all transactions are logged, including information on the date, time, participants, and amount of every single transaction. Based on sophisticated mathematical principles, the transactions are verified by the so-called “miners,” who run the computing infrastructure required to maintain the ledgers. The technology of web 3.0 enables a new form of a decentralized economy. It removes the dependency on a centralized authority for managing the network instead of replacing it with a distributed consensus model managed by many. This shared, securely encrypted database enables trustless, peer-to-peer interactions via new internet protocols. People can begin to set up their own networks for coordination and direct exchanges of value, peer-to-peer, and it enables the rules of these transactions to be automated in new ways.
At the heart of this system is the distributed ledger, which records the exchanges of value. These distributed ledgers can account for and validate the exchange of any form of value—it may be a currency, it may be property, it may be a kilowatt-hour of energy, the usage of a parking spot, or the number of followers a person has on social media. These distributed ledgers provide the infrastructure for building token economies. A token is simply a quantified unit of value. Tokens are both:
Tokens are generic in that they can be used to define any form of value and fungible, meaning they are exchangeable between different specific forms of value. Traditional monetary currencies are not fully fungible, as there are many circumstances when one cannot exchange a monetary currency for other forms of value. For example, likes on social media may have a certain value but typically cannot be directly exchanged for monetary currencies. A token differs from our traditional monetary currency in that it is more generic. Our existing currencies define a monetary value, which we call utility, based on the economic logic of the industrial economy. While tokens are more generic, tokens can define a broader set of values, social capital, natural capital, or cultural capital. For example, natural capital is the integrity of an ecosystem that enables it to function and provide ecosystems services to people. In our traditional economic model, we only quantify and account for the ecosystem’s services, such as food, water, materials, etc. However, we do not account for the integrity of the ecosystem that enables it to function.
The generic nature of the token means it can be used to account for values such as this natural capital. The capacity to differentiate between different forms of value is made possible by the programmability of token units. Because tokens are digital, they are also programmable, enabling one to specify certain rules for that token and have those rules executed when exchanged, thus enabling certain constraints or possibilities in its usage. One can specify that a certain token is only spendable under certain terms or specify how it can be converted. For example, one could program the token not to be exchanged for diamonds mined in a world known for its use of slave labor. In this way, the token is not just a unit of utility but also expresses social values. Likewise, one could create a health care allowance in dollars or Euros that could be programmed on the blockchain only to be used to pay for healthcare at certified parties. Automating these measures leads to a considerable decrease in bureaucracy. This programmable token system works to shift our economies from a single value model to a multi-value model. They create many different types of value and economies but still retain the possibility for exchange between them.
The distributed web connects the economic market system with information technology to convert traditional organizations into distributed markets based on tokens. Tokens define whatever is a value within that organization, and the market system is used as a distributed coordination mechanism for managing and growing that resource. By creating an expanded definition of value and converting closed organizations into open markets, this means that we can vastly expand the scope and capacities of the economy. The provisioning of services within the economy no longer becomes dependent upon a limited number of centralized organizations acting for profit. Still, instead, anyone can now provide the service via these open protocols. This means we can harness the many resources in a distributed fashion instead of dependent upon a few. Likewise, the token economy can harness the motives of individuals not just for financial rewards but for a multiplicity of values.
To illustrate how this works, let’s think about the service of cloud data storage. Currently, this is provided by a limited number of enterprises like Amazon and Microsoft. These centralized organizations have huge data centers, but those data centers are only a small fraction of the storage capacity in the world. Most of the storage is in the personal computing devices of end-users, and most of that is not being used. Filecoin is one organization that works to create a distributed token economy for this storage. Filecoin is a decentralized storage network that turns cloud storage into an algorithmic market. The market runs on a blockchain with a native protocol token called Filecoin, which miners earned by providing storage to clients. Conversely, clients spend Filecoins hiring miners to store or distribute data. The sum of all these computers, which are coordinated through an automatic market system on the blockchain, can provide a much larger, more resilient system than the centralized model while reducing redundancy and inefficiencies in the overall system. It also pushes the provision of the service out to the location where it is demanded, as people are connecting peer-to-peer locally instead of going to the centralized server that may be on the other side of the planet.
Tokens such as file coins can be exchanged for other currencies, or members can hold on to their tokens, whose value may appreciate, as the networks grow over time. This illustrates a very interesting aspect of tokens. Anyone who uses the system is also an investor in the system, so tokens merge investment capital and liquid exchange capital in new ways. In the traditional capitalist model, we divide between owners of capital and workers and a divide between more fixed investment capital and liquid exchange currencies. The shares in a company are not the same as what people get paid for working in that enterprise and use for everyday exchanges in the market. This creates the notorious divide within the industrial economy described by Karl Marx, between the capitalists that make money off their investments and the workers that must stay, selling their labor for money without ownership.
Tokens represent both the inherent value of the community, which is its capital investment, and they are also units of exchange within that ecosystem. The founders of the project issue many tokens at inception and sell those. To use the system, they must buy the tokens; in so doing, they become part investors in the project, but they also use those same tokens to make exchanges within the market. Thus, the people creating the value in the ecosystem are also getting paid in tokens meaning. The workers that are creating value through their work also have ownership within the organization. In the traditional utility-based exchange of cash, people have no ownership in the organization; they try to make money, creating divides between the owners and the users.
The token system works better to align the individuals’ incentives with the overall system because the value of the tokens they earn depends on the whole value. When working for a token network, you are working for yourself and the entire organization to become more aligned, unlike the traditional divide between capitalist and worker.
The token system enables networks to overcome the chicken-and-egg problem. If you are the first user of a network like eBay, then the value would be very low; thus, it is difficult to get the network started because it must reach a critical mass before it is of value to the users. This means that it may require a large investment to create a network. The Silicon Valley model worked by having large initial venture capital backing that enables them to overcome this. Still, it means that most networks don’t get off the ground and that once a network reaches scale and has value, it becomes dominant and very difficult to compete with. This results in a lock-in effect and makes it easy for large incumbent organizations to become extractive over time. It also means that those who founded the organization win big time. If the network takes off, it creates a winner-takes-all dynamic, with most people losing because of the threshold.
The token system extends the benefits of being an early adopter of a new network to all the users and thus helps to solve this issue. It does this by issuing tokens for anyone to purchase at the beginning of the project. As the project grows, the tokens come to have greater value for all the holders. This also works to make the users of that organization the network promoters because, as it grows, the tokens that they hold become more valuable. It incentivizes people to join networks early to gain the benefits of increasing their token value as it grows, which reduces the problem of thresholds. With this technology, companies no longer must go to traditional capital markets through an initial public offering of shares in the company in exchange for money. Still, instead, they sell tokens directly on the Internet to raise initial capital for the project, called an initial coin offering or ICO. This means that founders can monetize their networks directly by simply holding their tokens and making the network useful.
To date, we have had an Internet patched onto the side of an economy operated through the many centralized organizations of the Industrial Age, creating a strong contradiction between the underlying technology and the institutional arrangements. The distributed web will transform this by merging information networks and economic organization, as information flow and economic value become one. This will greatly reduce our dependency on centralized organizations expanding markets as systems of organization. The global market economy will become available to many through small, distributed, peer-to-peer interactions running through web protocols, as the decentralized internet takes us a step further into the networked economy.