Token Economics

Designing The Digital Economy

Contents

Overview
1. Token Economies Overview

Tokenization
2. Distributed Ledger Technology
3. Triple Entry Accounting
4. Tokenization
5. Utility Tokens
6. Intrinsic & Extrinsic Tokens
7. Discount Token
8. Security Token
9. Blockchain Physical Assets

Decentralized Organization
10. Decentralized Token Organizations
11. Incentive Systems Design
12. Mechanism Design
13. User Generated Ecosystems

Token Networks
14. Token Markets
15. Service Networks
16. Automated Networks
17. Trust & Transparency
18. Services Architecture

Development
19. Token Economic Development
20. Initial Coin Offering
21. Token Prediction Markets
Token Economics: Introduction
This book is an introduction to the new area of token economics, otherwise called crypto
economics, which is the study and design of economic systems based on blockchain
technology. In this video we will present an overview to the relevance and significance of this
subject as motivation for the rest of the book, where will be dealing more with the workings
of these new forms of economic organization.

Economic forces are everywhere they shape and structure our everyday lives in how we
organize people, resources, and technology to create and exchange value within society.
During the modern era those forces came to be channeled and structured within a particular
set of centralized bureaucratic institutions based around the nation-state and the enterprise,
but today the proliferation of information networks is once again unleashing those economic
forces. Ledgers as the records of all value within economy are so pervasive — and the
potential applications of blockchain technology so all-encompassing —  that some of the
most fundamental rules governing our society are now once again open for redefinition.

As advanced economies move out of industrial production and into a new form of global
services and information economy so to the economic model of the industrial age is
becoming eroded. The once well establish structures to modern economies are becoming
redefined as resources start to flow through our newly formed information networks. This
emerging global information and services economy will be coordinated through the internet
running on an updated set of protocols that provides the secure distributed infrastructure for
this emerging global token economy.

This transition builds upon major trends that began in the late 20th century which are today
converging in powerful new ways. Privatization and globalization, financialization and the
rise of online platforms are all converging as blockchain networks merge economics and
information technology to take us into a new economic paradigm. Privatization opened up
more spheres of activity to markets, globalization expanded those market around the world,
financialization connected up our real economy into an integrated information-based
financial system, the platform economy created new forms of user-generated networks. The
blockchain brings these previously latent disparate trends together in synergistic powerful
new ways and a new economic system is being built on top of these previously disconnected
building blocks; one that is truly global, that reflects the underlying logic of services; an
economic model that is for the first time in harmony with its underlying technology of
information.

These emerging token networks now offer the potential for unleashing a massive wave of
creativity and innovation as the vast flows of financial capital and supply chain information
start flowing along these newly built channels. Trillions of dollars of securities are migrating
on to blockchain networks, equities, bonds, venture capital not to mention the world's
currencies. With trillions of dollar set to migrate to this global cloud computing infrastructure
of the blockchain in the coming decades the stakes are high; as financial and economic
sovereignty appear to be slipping out of the fingers of nation states the tensions are
mounting. Are we moving into a lawless chaos or are we moving to a new level in the
ever-evolving history of the economic organization? That will be decided by our capacity to
understand this new economic paradigm coupled with our capacity to actually design and
develop these token networks.

Transition
Blockchain is certainly a hugely disruptive force but disruption without redesign is a
dangerous activity, particularly when applied to the most fundamental structures organizing
our societies. There is a very significant need to rebuild economic structures, to realize the
new possibilities now presented; really rethinking how we organize economic production and
exchange is one of the major challenges and opportunities that we are now presented with.

Token economics is an opportunity to revisit the foundations of economic organization and

from that to reconstruct a new form of economy, that is very different from the industrial
model that we know so well. It is an exercise that is of critical importance to the development
of a sustainable model to economic development in the age of information, globalization and
billions of people wishing to join a formal global economic system that is already showing
major signs of stress.

This is no longer about politics, policies or protesting, the technology is reaching a maturity,
we now really stand at a point where we can literally design economic systems from the
ground up and the success or failure of those systems does not rest with the actors in the
network but squarely with the design of the system. Possibly for the first time it is the case
that if we don't like the economic system that prevails we do now have the option to design a
better system, directly through information networks.

What is so powerful about this revolution is that it is not really driven by idealism or politics
but rather economic incentives. The global economy will switch to being based upon
distributed blockchain networks with each actor seeing it as in their economic interest to
make that move. What is more, this revolution does not require large-scale political
coordination, indeed it bypasses it, instead employing a highly modular and granular
transition. Specific parts of existing economic institutions can be upgraded in an
asynchronous fashion, indeed in many cases, they may be backwards compatible,
interoperable with legacy processes and structures.

We can only begin to scratch the surface when it comes to tracing through the implications
and ramifications of such a profoundly disruptive transformation; enterprises will be
automated, whole industries will be upended by powerful new blockchain ecosystems, and
national governments will face mounting pressures from a global information services
architecture. This new economic paradigm holds out the potential to build new forms of
economic organization, networks that go beyond pure economic utility and GDP to
incorporate all relevant parameters and value sources; to deliver what people value. An
economy that can be more open and thus inclusive, harnessing the efforts of the many
instead of the few. To secure property rights, reduce trading costs and integrate people into
the global economy in an effective way.
Content
This is a book on both the study, analysis, and design of token economies. The first section
deals with tokenization, asking what exactly is a token and how do they work. We firstly lay
down some of the basics of distributed ledger technology and triple entry accounting before
going on to talk about the process of tokenization; the conversion of any asset into a digital
token. Here we will look a the two primary categories of tokens, the utility token and security
token and their workings.

The second section looks at decentralized organizations and the design of incentive
structures. We look at how token networks can be used to remove the centralized
management structure to organizations and work to better align the incentive structures of
producers and end users. We touch upon game theory and talk about mechanism design;
the design of incentive structures to align the interests of the individuals with the whole
organization within user-generated networks.

The third section deals with the formation of large-scale blockchain networks that span
across organizations and industries to create powerful new ecosystems. Our focus here is
on blockchain as a new infrastructure for a global services economy, we talk about the
workings of service networks and how they can be automated through smart contracts.
Finally, in this section, we look at service-oriented architecture as an important design
pattern to these emerging service networks.

The last section of the book is dedicated to the growth and development of token
economies. Recently we have seen the rise of initial token offerings as a new model for
bootstrapping these economies, we look at the dynamics of how token networks can fund
their own development and then use prediction markets and advanced analytics to guide
their future development.

Audience
This book is not an introduction to blockchain, it only deals with what economics will look like
once built on that technology, thus you will need to be familiar with the basics of blockchain
as a technology before taking this book, if you are not already then we recommend taking
our blockchain introductory book first, which provides an accessible and broad overview to
the domain. Likewise, game theory is an important component of crypto economics which
we will only have time to touch upon in this book, we recommend that you are either familiar
with the basics of game theory or take our introduction to game theory book.
Token Economic Overview
Blockchain technology is set to have a transformative effect on the very foundations of how
our economies function, the study of this new form of distributed economy may be called
token economics or also termed crypto-economics. In this video, we will give a high-level
overview to what we mean by these terms.

The primary factor to appreciate in understanding the significance of token economics is that
the most basic way in which economic data is recorded is changing; with the advent of
blockchain technology, the information layer upon which economies are built is changing and
therefore everything upwards of that layer will change, which is essentially everything we
know about how our economies work.

Economics is before anything based on information, it is base on records of ownership that

define who owns what and what is exchanged - what we call ledgers - everything that exists
within an advanced economy exists because it is in a ledger. That ledger is currently
maintain by that thing we trust the most which is the government and legal system. That
legal system determines who gets to make entries into those databases and it grants that
power to various institutions that prove their trustworthiness to the legal system, banks,
insurance companies, hospitals, enterprises, institutional investors etc. These centralized
authorities manage this complex set of records or databases and thus control how value is
represented and flows within the economy - which is, of course, the foundations of their
power and influence within society. This centralized approach can have many advantages in
terms of simplicity, speed, and efficiency, but it also means that we have to trust those
institutions and we have to continuously work to constrain their powers.

Throughout the latter half of the 20th century, we converted that information into a digital
format, but the structure of the system remained unchanged. Today everything that we
turned into digital data we can now move onto blockchain records, which can be understood
as a form of distributed database. With this system, people can now connect to the database
directly and we can automate the maintenance and updating of that data. The trust required
to maintain societies records of value is thus displaced from formal centralized institutions
and now placed in the mathematics of cryptography, computer code and the design of
networks. This means that at least theoretically we do not need these centralized institutions
to manage the data now in the way that we did in the past.
The profound implication of this is that society and economy no longer need to be
architectured around centralized institutions. The consequences of redirecting all of these
flows of information, value, and power within society away from centralized channels and
into distributed networks are almost unimaginable; their ramifications are so profound that
none could predict the outcomes.

The surprising thing though is that this is not the dream of some radical anarchist group, but
simply the consequences of a revolution in information technology. Such an extraordinary
transformation happens very rarely in human civilization as it signals the true coming of age
of the information age. The blockchain is unlike other new technologies because it taps into
a deep structural transformation brought about with the move into the information age - that
is to say, the rise of distributed networks as a new organizational paradigm for society,
economy, and technology infrastructure. The blockchain is not magic - as it might appear -
but simply builds upon existing information and communication technologies that are
enabling this deep restructuring process.

Value
The implications of this change are many fold, but the first we can note is that we are now no
longer dependent upon centralized organizations to define value. Because the maintenance
of these databases where value is recorded has shifted to information networks and it is
increasingly becoming possible for anyone or any group of people to set up one of those
networks, it means that individuals and groups can define what they value, instead of that
being defined for them - and who gets to define value within society is of critical importance.

Previously only large centralized institutions got to define units of value, the largest of those
institutions, the nation-state, got to define widely accepted currencies. But those tokens were
always relative to a centralized entity and they only really defined what that centralized entity
valued. A Starbucks gift card is a form of token, the RMB is a form of token, a share in
Microsoft is a form of token, but all of those units of value are defined, created and managed
by centralized entities according to their interest and needs. What is changing now is that
anyone, any group, can now define any form of value through the creation of a digital token.
That token doesn't have to have value for some external centralized entity, it can simply
represent the inherent value within a network of peers.

Tokens are generic units of value that can be used to quantify any form of valued resource,
but more importantly, they can be used to define specific and distinct forms of value. This is
why in a blockchain economy we have so many tokens, energy tokens, food tokens,
transport tokens, social tokens and the list is ever expanding. In such a way the token
economy offers the potential to incorporate more and different kinds of value, thus giving
value representation to what was previously excluded from economic activity.

The potential of this is that we may for the first time start to move towards an economic
system based upon full cost accounting. In recent years with the environmental sustainability
crisis unfolding the idea of a full cost accounting economy has been presented as a solution,
but to date the complexity of realizing that has been overwhelming and the tools for
implementing it have remained limited. Rapid advances in big data, complex analytics, and
blockchain technology are starting to provide the technical infrastructure for of economy that
may, in fact, incorporate all relevant event information and value sources, thus bring many
areas of social and economic organization into token markets of change.

Tokenizing is the process of converting some asset into a token unit that is recorded on a
blockchain. Anything of economic value can be tokenized and thus broad into the blockchain
economy. Today we are starting on a long journey of migrating our entire global economy to
blockchain networks; real estate, commodities, supply chains, energy markets, accounting,
mortgages, loans, insurance, special purpose vehicles and all kinds of derivatives are all
going to migrate one block at a time into this new information-based economy. As the
venture capitalist Bradley Rotter Rivetz notes "everything that can be tokenized will be
tokenized the Empire State Building will someday be tokenized, I'll buy 1% of the Empire
State Building, I'll get every day credited to my wallet 1% of the rents minus expenses, I can
borrow against my Empire State Building holding and if I want to sell the Empire State
Building I hit a button and I instantly have the money."

With this new technology not only existing forms of valued assets will get tokenized but with
advances in information technology we are quantifying and assigning value units to more
and more aspects of our world and our social interactions; token economics will be used to
support these new forms of economies, whether we are talking about the emerging natural
capital economy or social capital. It will be a number of years before we really have the
underlining blockchain technology to do that on a large scale but it is coming and the
implications are enormous.

Organizations
Blockchain technology builds upon previous changes in how people work together to
produce value in advanced economies. With the rise of the platform economy information
technology has already within just a decade or so changed the model for the production and
consumption of value within advanced economies, but these newly forming token networks
greatly extend those previous trends, with some major alterations.
Online platforms and blockchain are changing how we collaborate and work together across
organizations and across society at large. Token economics is set to change the very
structure of the Industrial Age enterprise as it now offers the potential to align the interests of
stakeholders in new ways. What is happening today builds upon the recent development of
the so-called collaborative economy; online platforms that function as two-sided markets
matching producers and consumers. The collaborative economy is defined as initiatives
based on horizontal networks and participation of a community; blurring the lines between
producer and consumer, they connect individuals into large peer-networks of exchange.

However, these large platform organizations that have arisen with the development of the
internet are still centralized around the platform providers, creating many issues of security,
data privacy, control, misalignment of incentives and concentration of wealth. Blockchains let
us design protocols that provide the same capacities for people to collaborate within large
peer networks but this time without needing the centralized entity. Through the use of
tokens, the network is converted into a token market, with the market mechanism used to
coordinate it in a decentralized fashion. By removing the centralized component this works to
align the incentives of members better and turns businesses into something more like
communities or ecosystems. By removing the centralized component that is controlling the
overall network and operating it for a profit, the individuals in the network become much
more aligned with the whole. This alignment between the individuals and the whole network
is realized through the token, because as the value of the whole organization increases this
increase in the value of the platform does not get sucked up by management and
shareholders but in fact gets distributed across the network itself by accruing to all of those
that hold the token.
This is how and why in a token economy the traditional business of the Industrial Age - that
was primarily designed to create a profit for its owners - is greatly reduce and replaced by
these token networks which are more like public utilities as profit does not get taken out by
the shareholders but instead is continuously reinvested and redistributed to the users of the
network through the utility token.
Thus unlike the centralizing forces of the Industrial Age where value was always getting
pulled inwards and suck upwards, with these distributed networks - if designed properly -
they can work to inherently push the value that accrues downwards to the infrastructure
layer and outwards to the members of the network who hold the token.

With token economies, we now have the capacity to directly program incentive structures
through tokens and this shifts the success of economies from the realm of policy and
management into the realm of design and technology. Today well designed token networks
hold out the possibility to build new forms of incentive structures that really improve the
alignment between the agents in the network and the whole system; potentially working to
avoid a rich get richer effects and reduce the gap between owners and users of the
economy. We no longer have to place our hopes on the promises of politicians or protest
against neoliberal economic policies but the future of our economies is now largely about
designing token economies, programing blockchains and building communities.

Services Infrastructure
The blockchain is a new modality for organizing society and economy as such it is often
referred to as an institutional technology.
Professor Jason Potts talks about this as such "this isn't a story about how the economy
grows because of this new technology, it's a story about how we can now create new
economies in ways that we could never create new economies. It used to be that you have
to have a government and a nation-state and a money system and laws and legislation and
all of these things, and you know there's 193 economies in the world or however many
nations there are. We're about to enter a world where the number of economies in the world
will change hourly, it may well be measured in the billions not the small hundreds and these
things will be largely built on technologies like the blockchain. I think once you see that it's a
governance technology, an institutional technological revolution, that's the interesting thing
that I think has largely been missed."

What is different about this institutional technology is that it is distributed by design, that
means that unlike centralized systems that work to improve closed organizations, it instead
improves opens systems of organization. This is a paradigm shift in that it runs very much
contrary to the centralizing forces prevalent in the industrial age; it is something that we are
not used to and that is why it is difficult for us to understand.

Blockchain networks are inherently designed for coordinating open systems, their innate
distributed design is in fact inherently resistant to closure. Though private blockchains may
deliver short-term efficiency gains for existing centralized organizations, the fact is that
private blockchains remove most of the valuable benefits of using a distributed system and
as soon as someone figures out how to develop a public blockchain for the same purpose it
will harness more resources to grow faster and eventually replace it.

As Toni Lane Casserly, Co-Founder of Cointelegraph states it "if you're going to create a
blockchain project, if you're not creating a public utility you are fundamentally not creating a
blockchain and you're fundamentally not creating a new form, a new economic asset in a
new series of token classes, because the entire point of blockchain technology is that we are
creating new forms of economy as an open-source public utility."

Blockchains are distributed systems with extreme network effects. They are designed to
push outwards, the more people and organizations they bring into common systems of
coordination the stronger they are. They are designed to network the intra-organizational
space, greatly facilitating coordination within large ecosystems, across whole industries and
economies. This is how they really create value and this is how they are going to disrupt
existing systems. Existing organizations won't be disrupted by one of their competitors, they
will be disrupted by protocols that network across whole industries to build ecosystems that
are greater than the sum of any of their parts - just as Amazon, Uber, and YouTube did in
the past, but this time these networks will be distributed and increasingly automated.

Indeed the long-term vision of these token networks is as the infrastructure for a new form of
global services economy. We think we know what globalization is about, we think we know
what the services economy is, but the blockchain as an infrastructure is set to realize the
convergence of these in new, unexpected and powerful ways.

In the past decades, we have wrapped layers of communication networks around our planet.
We first started communicating and exchanging media along this new infrastructure as social
media went global, forming networks composed of hundreds of millions of people. We then
started to build service applications on top of this shared IT infrastructure; services like car
sharing, accommodation, and e-commerce, but that services layer is still quite fractured and
very much dependent upon traditional centralized structures. Blockchain provides this global
communication network with the protocols to exchange units of value securely and with
limited friction.
As the protocols mature and the blockchain becomes this globally distributed cloud computer
that it promises to be, it will become extremely easy to build secure automated services on
top of it that amass micropayments in a frictionless fashion. Those services will be
borderless as they are running on a global distributed computer. Likewise, they will not be
limited to just the traditional offerings of the private sector but will also now include public
services. For the first time in centuries, nation states will find that they are having to compete
with global token markets when it comes to the provisioning of public services. It will be very
difficult for individual organizations to compete with these global public utility networks that
support whole ecosystems of users, particularly those that manage to align incentives in
more productive ways and are able to harness the productive capacities of the many instead
of the few along more dimensions. Similar to the rise of Google and Facebook, these token
networks will be very formidable actors in the global economy within less than just a decade.
Network Growth
The past year has seen the rise of a new model for the funding of technology companies
called initial coin offerings. In 2017 the amount of money raised by startups via ICOs
surpassed early-stage venture capital funding for internet companies. This is the first
example of these new token networks already replacing one area of the traditional financial
system in a substantial way and we can note the speed with which that happened. Within the
space of just a few months, ICOs went from almost nowhere to today where new blockchain
projects are able to attract hundreds of millions of dollars by offering tokens directly, for
anyone with an internet connection to purchase.

The rise of ICOs as a new model for growing economic networks is no accident or random
event, it taps into a new capacity of information technology - first seen with crowdfunding -
for people to fund their own projects directly out of the future value the project is expected to
deliver. The centralized third-party investor is removed which takes away the need to
organize the project around investor profits - or to remove value from the network for
shareholders - instead, the network funds itself out of selling access to the future service that
it will deliver.

Indeed this illustrates one of the important aspects to note, which is that these networks are
very autonomous. A network can fund its own initial development through an ICO, but not
only that, it can then fund its own future growth through simply increasing the number of
tokens and given those to members who present initiatives, projects or other forms of work
that will be of benefit to the future success of the ecosystem. The network inflates its own
token, gives those new tokens to projects that will increase its future service delivery and
thus will work to deflate the token in the future when more people demand that added future
service.
In this way, no external profit-seeking third party, such as a bank or other financial institution,
is needed. By removing that third party you have the potential to also remove a massive
amount of overhead costs and regulation, likewise, you stop the value being taken out of the
network and you align incentives between members better.

ICOs and prediction markets will be a central part of long-term economic development on
token networks, but these will also be combined with advanced analytics as a primary
mechanism for coordinating the network in the short term. The convergence of advanced
analytics and blockchain networks will be a major part of the workings of these token
networks. Like with the existing digital platforms of the current internet, these blockchain
networks are going to datafy everything, they are going to create massive amounts of data
and will be highly amenable to complex analytics. With the use of this big data, business and
economics will move from the realm of speculation and intuition to becoming more of an
actual science where data can be gained, theories tested, and new systems engineered in
an iterative process with a much more complete and effective feedback loop.

Unlike our traditional economy which existed historically outside of information systems,
these economic networks exist by default within information systems, they thus are well
defined in terms of software and they automatically create data. This means as soon as
these networks are up and running we are going to start applying analytics to them, using
that data to adjust the incentive structures, gain feedback and iterate on that in a fast pace
learning process. Likewise, being open source projects anyone can see how the system is
designed and coded and they will have the data to see how any changes perform. The
functionality of these systems will shift to the software layer and if that is open source
anyone may contribute and earn tokens if their contribution is successful as measured by the
feedback loop. Today businesses have been largely secretive by default, run by a few with
decisions ultimately made by the highest paid person in the room. Economies have been
directed by whoever managed to get elected and abstract economic theories that have never
been really tested on real data with direct feedback to see how they work in practice.

Scott Nelson CEO of Sweetbridge describes some of this well when he says "what we do
need in addition is to understand that we are dealing with the actual invention of something
extraordinarily new and very powerful and that is the ability to build economic games that
actually are businesses and which are controlled by a community who's vested in the game,
and the countries that master this are going to be the railroad baron company countries of
this century. I mean we are dealing with a sea change here that cannot be underestimated
because the power of economic engines to be tuned and now measured, we can actually
see the economic activity of the customer what they're doing and get very direct feedback
loops about how the customer is using the system and when the transparency is extremely
high in the environment, this changes everything."

Conclusion
We have almost zero experience with the design of large-scale decentralized economic
networks. Added to this is the fact that we can't just shut down existing systems while we
migrate them to the new model; as an analogy, we can say that this is like rebuilding an
airplane while it is flying with all of the passengers inside. The only thing we can say for sure
is that this is going to be a rocky journey.

Nothing is promised and written in stone in this new emerging economic paradigm. There
are always ways for resources and power to be re-concentrated in new ways, for potential to
go unrealized or misdirected. The only thing that can ensure the desired outcomes are really
understanding the dynamics of these systems and using that to design and develop
economic networks that truly enable people. Systems that work by default to push
capabilities and resources out to the edges of these networks and engage everyone,
providing them with the tools to participate in a level playing field.

As Shermin Voshmgir of the Crypto Economics Institute notes "[Blockchain] is a very

powerful technology and it will spawn further technologies, we can use it as a machine to
promote universal freedom, to create a better decentralized society, with less bureaucracy
which will be better suited to a globalized world, [but] if we don't do it right the very same
technology can become a machine for universal control, to prevent that we have to take all
aspects into account."

It is in the combination of advanced analytics, blockchain networks, and IoT that the
Information Age comes of age, as information based networks gain their autonomy and
break free from the supporting industrial age model. It is important to note these networks
aren't going to be contained and confined within the box of our existing model; we will
increasingly find that all of these newly formed technology-based networks converge and
work synergistically to provide a coherent and integrated set of new solutions that take us
into a new paradigm.
With the blockchain, it is critical that we think outside the box of the established parameters
that have defined our industrial economies for centuries now. This is a new stage in the
information revolution, these networks won't be like the networks of yesterday or today, the
Facebooks and the Amazons that are limited in capacity and very dependent upon existing
structures. These new forms of decentralized organization will be greatly strengthened and
gain much greater autonomy, within a decade or so these networks won't be confined to
operating within the model of the past and it is important to keep that in mind; both the
potential and risks that it offers.

This is not just another technology that you adopt this is a fundamental re-architecture of
how things work. Those who don't grasp that and try too fit it into the box will get left behind
surprisingly fast, as innovation is currently being unleashed at a staggering pace, fueled by
large amounts of capital, already billions of dollars are starting to flow into these new
emerging networks. As a recent paper on the subject notes. "This process is going to be
extremely disruptive. The global economy faces (what we expect will be) a lengthy period of
uncertainty about how the facts that underpin it will be restructured, dismantled, and
reorganised."
Distributed Ledger Technologies
When we are talking about economies we are typically referring to this information layer that
resides on top of what may be called the real economy; the physical production and
exchange of goods. Accounting is the basics of how we create that information layer and
bring all these physical objects and services into this information system of the economy that
we then exchange and analyze.

The earliest most rudimentary economies of pre-civilization may have existed purely in
physical form but an economy of any complexity requires that the real system is translated
into a virtual information form. Not just physical assets and liquid currencies but also identity
and contractual agreements, at the end of the day it all has to be converted into an
information format.

In order to form organizations and exchange goods and services we need to define
ownership and keep track of exchanges and this is done by a series of ledgers. A system of
ledgers forms the database of records of who owns what and what has been exchanged
within the system.

Ledgers are everywhere. Ledgers do more than just record accounting transactions. A
ledger consists simply of data structured by rules. Anytime we need a consensus about
facts, we use a ledger. Ledgers record the facts underpinning the modern economy. All of
our economic institutions are at the end of the day networks of ledgers, some simpler, some
more complex.

A firm is often described as a ‘nexus of contracts’. The firm is, in fact, a ledger of contracts
and capital that are arranged in a particular fashion to deliver some function. Firms maintain
ledgers in a variety of forms, of property, of employment and responsibility, of the ownership
and deployment, of suppliers and customers, of intellectual property and corporate privilege,
of physical and human capital.

It is safe to say that our economies are ledgers all the way down and at the bottom, we find a
government back legal system. Where a ledger requires coercion in order to be enforced,
the government is required. Governments maintain ledgers of authority, privilege,
responsibility, and access. Governments are the trusted entity that keeps databases of
citizenship, taxation obligations, social security entitlements, and property ownership.

Usage of Ledgers
Ledgers can confirm ownership throw property rights. For example, property title registers
map who owns what and whether their land is subject to any conditions or restrictions.
Ledgers confirm identity. Businesses have identities recorded on government ledgers to
track their existence and their status under tax law. Ledgers confirm status. Citizenship is a
ledger, recording who has what legal rights and what obligations people are subject to.
Employment is a ledger, giving those employed a contractual claim on payment in return for
work. Likewise, the electoral roll is a ledger.

Ledgers confirm authority. Ledgers identify who can access what bank account, who can
validly sit in parliament, who can enter restricted areas etc. At their most fundamental level,
ledgers map economic and social relationships they can be understood as an agreement
about the facts and when they change . This consensus about what is in the ledger and its
accuracy is one of the fundamental bases of a market economy.

Development of Ledgers
Ledger technology has for thousands of years remained largely unchanged. Ledgers
originate with the beginning of written communication. Ledgers and writing developed at the
same time in the Ancient Middle East to record production, trade, and finance.

The ancient clay tablets with cuneiform script listed units of work, taxes, rations, etc. The first
international trade networks’ were arranged through a structured network of alliances that
functioned a lot like a distributed ledger.

The modern era brought the first major changes to ledgers in the fourteenth century with the
invention of double-entry bookkeeping. By recording both credits and debits, double entry
bookkeeping conserved data across multiple ledgers, and allowed for the efficient
reconciliation of information between ledgers.

The 1800s saw the next evolution in ledger technology with the rise of large bureaucracies
and the corporation. These centralized ledgers enabled major increases in organizational
size, scope, and efficiency, but relied completely on trust in the centralized institution.

In the latter half of the twentieth-century ledgers moved from analog to digital. For example,
the national databases of passport ledgers were digitized and centralized. These databases
are computable and searchable making them greatly more efficient, however, a database
still relies on trust; a digitized ledger is only as reliable as the organization that maintains it.

Economic Structure
We can see how the economic structure of modern capitalism has evolved around the
structures of these centralized ledgers. The 2009 Nobel laureate in economics, Oliver
Williamson, showed that people produce and exchange in markets, firms, or governments
depending on the relative transaction costs of the different institutions. Building upon the
work of Ronald Coase Williamson’s transaction cost approach provides a key to
understanding what institutions manage ledgers and why.
It might seem strange that a ledger — a rather mundane and practical document associated
mainly with accounting — would be described as a revolutionary technology. But the
significance of the blockchain is fully based on the significance of ledgers as the foundations
to our economy.
Because at the end of the day ledgers are nothing more than a kind of database or
information technology, how we record value is of course critically dependent upon the
information technology that we have available to us.

Traditionally we have required centralized institutions of private enterprise or government in

order to provide the authority needed for people to trust a given ledger and the record of
exchange. However through advances in information technology, specifically the
combination of distributed computing and cryptography, blockchain technology now provides
the infrastructure for a network of computers to collaborate towards maintaining a shared,
tamper-proof and trusted ledger.

Thus the blockchain provides an alternative to traditional centralized ledger systems of firms
and governments. As such it is legitimate to say that the blockchain is an institutional
technology. It is a new way to maintain a ledger — that is, coordinate economic
activity — distinct from firms and governments.

A ledger of contracts and capital can now be decentralized and distributed in a way they
could not before. Ledgers of identity, permission, privilege, and entitlement can be
maintained and enforced without the need for private organizations or government backing.
The ledger is instead maintained by a distributed network of nodes. This changes the very
foundations of economic activity with massive repercussions for how economies are
structured and function; it literally rewires the channels through which we coordinate in the
production and exchange of goods and services in society.

Ledgers are so pervasive — and the possible applications of the blockchain so

all-encompassing — that some of the most fundamental principles governing our society
are now up for grabs. The blockchain is a distributed ledger that does not rely on a trusted
central authority to maintain and validate the ledger. This means that we can create
economic networks for the recording and exchange of value that are not dependent upon
centralized systems.

Such a system for coordination via distributed ledgers would have many advantages. It
would drastically reduce the cost of recording and thus make it possible for us to expand
formal legal systems and economic activity. For example to the 2.4 billion people that
currently have no formal ID or 70% of the global population that has no documented land
rights. But also to record extremely small exchanges of value that are currently not feasible,
and to account for new and different forms of value that are currently unaccounted for. In the
next module, we will talk more about this new capacity for the recording of value via
tokenization.
Triple-Entry Accounting
 
One  of  the  great  innovations  made  possible  with  the  advent  of  blockchain  technology  is  the 
development  of  triple-entry  accounting.  Triple-entry  accounting  is  a  term  for  a  new  method  of 
accounting,  that  was  proposed  in  the  1980’s.  It  was  more  recently  popularized  when  Ian  Grigg 
associated  it  with  blockchain  technology.  Triple  entry  accounting  is  an  enhancement  to  the 
traditional  double  entry  system  in  which  all  accounting  entries  involving  outside  parties  are 
cryptographically  sealed  and  linked  through  a  smart  contract  to  a  third  entry.  But  to  understand 
the  value  of  this  we  need  to  appreciate  a  little  bit  the  history  of  accounting  systems  and  where 
we are coming from. 
 

Single-Entry Accounting
There  is  evidence  that  even  during the Mesopotamian era, some four or five thousand years ago, 
a  fairly  complex  accounting  of  property,  purchases,  and  expenditures  existed  on  tablets. 
Extensive  accounting  methods  also  existed  in  Greece  since  the  fifth  century  B.C.  By  the  middle 
ages  a  fairly  advanced  system  of  accounting  had  developed,  but  before  the  advent  of 
double-entry  accounting,  accountants  relied  on  a  chart  of  balance  sheet  accounts  to  record 
financial  transactions.  This  single-entry  accounting  system  is  a  method  of  bookkeeping  relying 
on  a  one-sided  accounting  entry  to  maintain  financial  information.  This  creates  a  system that is 
very difficult to examine for accountability.  
 
Consider  the  extreme  problems  such  a  system  would  pose  today.  Companies  would  publish 
balance  sheets  without  Income  Statements.  There  would  be  no  way  for  investors  to  scrutinize 
the  changes  in  equity.  With a single-entry system, all you have to do is remove a line in the ledger 
and  that money no longer exists. There was no way to verify, no way to audit, no way to reconcile, 
for  people  to  agree. Likewise, it would be nearly impossible to build a single entry system, that by 
itself  supports  the  reporting  needs  of public corporations, companies that sell shares of stock to 
the  public.  The  development  of  double-entry  accounting  opened  the  realm  of  accounting  into  a 
whole new world. 
 

Double-Entry Accounting
Double  entry  bookkeeping revolutionized the field of financial accounting during the Renaissance 
period  some  six  hundred  years  ago.  By  the  1400’s,  a  Franciscan  friar  finally  codified  the 
double-entry system and it swiftly became the standard with the merchants of the Italian states.  
 
Whereas simple ledgers had long been the standard for record keeping for merchants, the church 
and  state  treasuries,  the  growth  of  long-distance  trade  and  creation  of  the  first  joint  stock 
companies  resulted  in firms whose records were too voluminous and complicated to provide any 
assurance of accuracy to their users.  
 
Modern  financial  accounting  is  based  on  a  double  entry  system.  Described  simply,  double  entry 
bookkeeping  allows  firms  to  maintain records that reflect what the firm owns and owes and also 
what  the  firm  has  earned  and  spent  over  any  given  period  of  time.  The  idea  is  you  want  to 
minimize  the  errors  in  your  books  so  what  you  do is that for each transaction you do two entries 
in  your  books.  The  issue  with  double  entry  accounting  is  that  there  is  not  really  any  connection 
between  the  different  sets  of  books  each  firm  holds.  The  records  are themselves separate, so if 
Bob  wants  to  cheat  a  little  bit  he  can  say  that  maybe  this  transaction was only eight tokens and 
he doesn't have to pay as much in taxes. 
 
Likewise,  as  the  organizational  structure  and  sophistication  of  companies  developed  they  were 
expected  to  share  their  records  with  outside  stakeholders,  such  as  investors,  lenders  and  the 
state.  This  created  the  problem  of  how  outsiders  could  trust  the  company’s  books  and  thus 
required  auditors.  Although  you  did  your  double  entry  accounting  in  your  book  there  was 
absolutely  no  guarantee  that  the  bank,  or  whomever  else  you  were  dealing  with,  saw  the 
transaction  the same way and recorded the same numbers. In fact, as part of an audit, one would 
have  to  write  to  the  bank  and ask did this organization really have this money at this date and do 
you  agree  on  this  number.  So  all  this  massive  amount  of  administration  could be removed if we 
have an economy-wide accounting system. 
 

Triple-Entry Accounting
Triple-entry  accounting  can  be  thought  of  as  a  way  of  agreeing  on  objective  economic  reality. 
Triple  entry  accounting  is  an  enhancement  to  the  traditional  double-entry  system  in  which  all 
accounting  entries  involving  outside  parties  are  cryptographically  sealed  by  a  third  entry.  Thus 
placed side by side, the bookkeeping entries of both parties to a given transaction are congruent.  
The  third  entry  in  the  system,  entered  into  the blockchain, is both a receipt and a transaction. It’s 
proof  that  something  happened  between  two  parties,  which  goes  beyond  the  receipts  that  each 
party  holds  in  double  entry.  Since  the  entries  are  distributed  and  cryptographically  sealed, 
falsifying them or destroying them to conceal activity is practically impossible. 
 
A  seller  books a debit to account for cash received, while a buyer books a credit for cash spent in 
the  same  transaction,  but  in  separate  sets  of  accounting  records.  This  is  where  the  blockchain 
comes  in:  instead  of  these entries being recorded separately in independent sets of ledgers, they 
occur  in  the  form  of  a  transfer  between  wallet  addresses  in  the  same  distributed,  public  ledger, 
creating an interlocking system of permanent and objective accounting records.  
 
The  idea  about  triple-entry  accounting  is  that  instead  of  each  firm  having  their  own  books  the 
transaction  goes  through  a  contract  and  this  contract  includes everything about the transaction; 
this  may  record,  what  the  product  was,  the  prices, who is the seller, who is the buyer, it's digitally 
signed  and  it  can  have  a  hash  that  links  to  further  public  documentation.  So  the  books  are  now 
linked  together  by  this  third  entry,  the  triple-entry,  that  can  potentially  be  viewed  for  external 
auditing purposes. 
 
Triple-entry is quite a confusing term because we are not creating a third entry, we are just linking 
two  separate  double  entries.  That  link  is  created  via  a  smart  contract  that  works  to  ensure  that 
the  two  double  entries in separate legal entities are always the same; this is auto enforced by the 
smart contract and as with all smart contracts it is tamper proof. 
 
Advantages
The  advantages  of  a  triple  entry  system  are  numerous  in  terms  of  reconciliation,  transparency, 
trust,  and  auditing.  Triple-entry  accounting  allows  us  to  reconcile  the  balance,  the  transaction, 
and  the  reporting  process,  so  that  organizations  can  trust  their  own  books. Typically, each party 
is  responsible  for  maintaining  their  own  financial  records.  However,  this  can  lead  to  fraud  or 
other errors. The use of triple-entry accounting reduces this risk by keeping a non-biased record. 
Many  blockchains  are  publicly  viable  or  easily  exposed  to  external  viewing  making  them 
transparent.  With  blockchain  networks,  the  entry  is  the  transaction,  because  the  assets  are  on 
the  blockchain,  the  ledger  is  not  an  account  of  what  happened,  it  is  what  happened,  and  as  the 
ledger  is  tamper proof this makes it trustworthy. For auditing, blockchain accounting is ideal as it 
creates  a  list  of transactions, thus it creates an immutable history of all the exchanges within the 
system which could be mined using analytics. There is a perfect audit trail. 
 
"We  came  up  with  double-entry  bookkeeping  as  a  species  over  500  years  ago  and  it  led  to  the 
accumulation  of  capital  on  a  very  large  scale  with  the  Industrial  Revolution  and  with  a  lot of the 
institutions  that  we  have  today.  When  we're  able  to  further  refine  that  with  triple  entry 
bookkeeping  it  really  opens  up  whole  new  vistas  and  possibilities  for  corporate  governance, the 
transfer  of  money,  accounting.  We  have  this  globally  distributed  decentralized  ledger  that 
everybody has the exact same copy of and all the debits and credits that move the bitcoins or the 
Satoshis  around  in  this  ledger,  everybody  agrees  on  consensus  that  those  transactions  actually 
happen  and  boom  you  got  that  verification  so  you  have the debit the credit and the confirmation 
by the Bitcoin network" - Trace Mayer 
 
 
Tokenization
As we have discussed economies are first and foremost about value, what humans value
and how we strive to achieve the things we value. To have an economic system the first step
is to take account of this value that is in the system. The foundations of economics is being
able to securely represent the underlying resources and exchanges within the real economy
in some information system and then being able to exchange, analyze, distribute or
otherwise alter it in various ways.

The critical aspect of this process is that the information accounting layer remains true to the
underlying assets and exchanges within the real economy. Of course, many people will wish
to alter these records to their advantage and thus we need some trusted source for
maintaining and verifying them. Previously we have relied upon centralized institutions to
take account of and vouch for the authenticity of these records of value.

However, the secure and trusted nature of blockchain networks makes it possible for us to
directly associate the value of a real-world asset with a programmable asset and we call this
tokenization. “Tokenization is the process of converting rights to real-world assets into a
digital token on a blockchain.”

Previously we could not create trusted records of value without the support of centralized
institutions. Creating token systems at large scale has previously been the purview of states
and empires. The implication of having an automated distributed system like the blockchain
is that everything could be securitized by everyone, as we greatly expand our capacity to
define, measure and exchange value of all kind. We can now set up blockchain networks
that can store records of value and be trusted by members involved without anyone actually
controlling or really owning the network.

Implications
The implications of this are many fold. Firstly we are no longer dependent upon lengthy and
often expensive bureaucratic procedures for the registry of valued assets. People can
literally securitize their own assets and have them validated by the network.

Secondly, we are no longer confined to assets that are large enough to be worth some
centralized institution recording and tracking them. With digital technology, the cost of doing
this is so low that we can securitize almost anything and with personal and mobile computing
people can do this themselves.

Thirdly with parallel advances in big data and pervasive sensing, mobile computing and
social networking we are now able to track more types of value that previously went
unaccounted for and assign tokens to them.
Lastly, the implications of blockchain tokenization should be considered, as token economies
shift the locus of power both outwards to the individual and to the networks that manage
these economies. Previously we invested a massive amount of power and control within
centralized organizations as they were the ones that got to define value within society and
economy, but with token economics, the management of value records and exchanges shift
to information networks with huge implications.

Formal Organization
Centralized systems of organization for the recording and validation of assets have
advantages, but they also have many limitations. Because they are centralized they create
bottlenecks; there are a few people in the center trying to serve a large population. If the
administration is well developed this can work to a certain degree; land registry in places like
Germany and Singapore may work well but for most of the world it does not. In places like
India or Africa centralized institutions are overwhelmed and under-resourced to provide for
the mass of people and as a consequence, the majority of our global economy is
undocumented and informal; not having access to legal rights, financial services etc.

Likewise, centralized systems require many layers of hierarchy and regulation to ensure that
people are acting according to the mandate of the organization. As the system gets larger
more and more layers of bureaucracy build up. Take for example the administration of
organic farming in a country like Ireland, there may be an organization for assessing and
certifying the farmers, which will be assessed in turn by some national body which may, in
turn, be assessed by the European Union. These different layers of bureaucracy create high
overhead costs and over time create inertia.

Cost of Transaction
The formal proceedings of large bureaucratic systems is often overbearingly complicated
and expensive for people to avail of them. For example, If you look at the administration that
lies behind trying to issue 100 million shares and all the different institutions, you have to pay
to keep shares and register them, to distribute them, keep track of them and regulate the
whole system. It takes an enormous amount of work effort and cost, thus most companies
don't get to access global capital markets via the offering of shares.

With the tokenization of assets, they move on to digital exchanges where they can exchange
a very low cost and in very small increments. Something like a building can be tokenized and
instead of having to buy the whole building with huge legal and regulatory overhead costs
you could now purchase one square centimeter of the building in seconds with very little
overhead cost.

Multivalue
Thirdly, information technology is expanding our capacity to quantify value and tokenization
enables us to capture different forms of value; social capital, natural capital and financial
capital. The thing to appreciate is that this is not just about the blockchain, this paradigm
shift in economics is possible because of very fundamental changes in information
technology that go far beyond the blockchain itself. A key aspect here is datafication, the fact
that we are quantifying and turning more and more aspects of our world into data.

In a world of scarce information, we were limited in what types of value we could quantify
and how much we could keep track of. But in a world of pervasive information and
communications, we find that we are spontaneously quantifying and tracking all sorts of new
forms of value that previously when unaccounted for, social networking is one good example
of this. Token systems enable us to ascribe value to everything that we value and create
markets around that.

One of the great advantages of token economies is that we can create token networks for
the things that people value. In our existing economy, we are fully dependent upon
centralized institutions to define value. Centralized institutions will only do things that are in
their interests if something is not in the mandate or interests of a centralized organization we
find that it will not get done.

We may find that it is not in the interests of any centralized organization to remove the trash
from the side of the road but by creating a token system, we could incentivize people to clear
the rubbish. In a traditional free market system, we may not be able to place a value on the
functionality of an ecosystem, and the government authorities may have every incentive to
simply sell out the nations natural resources, but by creating an eco token we could try to
capture and manage that value via the token network.

Take for example Plastic Bank. The Plastic Bank creates social and environmental impact in
areas with high levels of poverty and plastic pollution by turning plastic waste into a
currency. By enabling the exchange of plastic for Blockchain secured digital tokens, they
reveal the value in plastic. This empowers recycling ecosystems around the world and stops
the flow of plastic into oceans by creating a market that connects those who can use plastic
waste for recycling and those who have time to collect it.

Decentralization
The capacity for communities of people to directly define what they value and create
economies around that without depending upon a centralized institution to do that for them is
truly revolutionary. It is truly a restructuring of the very fabric of our civilization with massive
implications and repercussions that will take decades to play out. It removes current
bottlenecks that have limited the availability of formal economic and financial structures to a
small minority of the global population and makes it possible to extend the most advanced
and sophisticated legal frameworks and market systems to anywhere on the planet.
It enables us to extend the exchange of value and market mechanisms to very small high
volume exchanges, such as between machines and computers. It allows communities to
define what it is they value instead of that being decided by a centralized authority. And as
we will discuss it allows us to incorporate a broader spectrum of values into market
exchanges.
"So everyone has different value systems and every community or every organization,
embodies those values system, but today we only have one way of actually transferring this
value around and that's to fiat currency. The idea is actually to have multiplicity, so right
now we have a monopoly of value set, which is the market value set, and if we can create
new values with a new value system which are basically represented by those tokens on the
blockchain but in fact what it is is the ability for communities to express what they value by
transferring tokens" - ​Primavera De Filippi, CNRS & Harvard
Utility Token
A token is a generic quantified unit of value that is registered on a blockchain network.
Today tokens are understood to come in two kinds, utility tokens, and securities tokens.
Security tokens represent fixed assets of some kind, it may be a piece of property such as a
house or a share in a company. A utility token is a more liquid medium of exchange that
gives one access to the value created by a blockchain network. Utility tokens really
represent access to a service delivered by a blockchain based ecosystem.

To understand token economies it is best to think in terms of services and not products.
Utility tokens represent the service delivered by a network. The utility tokens are quantified
units of services that can be accessed within a given network.

Tokens are generic units of value, this means that they can represent any kind of value.
Wherever there is a network delivering a service a token can be created to define that value.
We can create a token for any different type of network and service. For example, if we have
a community watch scheme where people look out for each other's houses to make sure
there are no trespassers or burglars, this is a community that is delivering a valued service of
securing peoples houses. We can then define an economy around that community, by
creating a token that quantifies the service delivered and a blockchain system that keeps
track of who is delivering the service and who is using it. This utility token is then used as a
medium for the exchange of that service. Those who consume the service have to give
tokens to those the provide it. In this example, we can see how token economics works to
formalize what was previously informal and merges economics and social communities in
new ways.

The service can be of many kinds. Health care services, for which we might have a health
coin, it could be cleaning services, a clean coin, a transport service. For example, the DAV
Token is a form of utility token. The DAV network is a blockchain platform currently under
development that connects transport and logistics service providers with those who need
those services - in particular, it focuses on connecting autonomous vehicles. Members of the
ecosystem can earn DAV Tokens by providing transportation services, by say letting your
self-driving car give rides to passengers when you’re not using it or having your drone help
with deliveries. While users of the service pay tokens to be transported anywhere or to send
and receive packages through the network. A utility token, such as that of the DAV Token,
should then reflect the quality and quantity of the service that the network can deliver. The
better the quality the more people will want it, and the greater the quantity of service
delivered, the more tokens will be needed.

Digital Currencies
Some people classify digital currencies as a third type of token, but they can just as easily be
understood as a utility token. For example, we might think of Bitcoin, ultimately Bitcoin's
value comes from its capacity to be exchanged for some service or exchange for some other
currency that can be used within a national economy such as the Euro.
Currencies like the Dollar or RMB have value because we believe they have value, but
ultimately they rest upon the fact that they are supported by the massive real economies of
the US or China - really they are utility tokens that give you access to the services delivered
by those economies. If the Japanese real economy disappeared tomorrow the currency
would crash because people would stop being able to buy things with it. Currencies are just
mediums of exchange and agreements about what we value but they are supported by real
economies and governments that make sure those currencies can be used to access the
goods and services within their economy. Bitcoin may not be directly linked to any one
national economy but at the end of the day, it is linked to the global economy in one's
capacity to exchange it for other fiat currencies that are linked to national economies. Thus
we can see how currencies are a form of utility token that provides access to the services
created by a given economy. Whereas fiat currencies provide access to a national economy,
tokens provide access to a blockchain based network economy.

ICO
Because tokens have a price, they can be issued and sold at the inception of a new network
to fund its development, similar to the way startups have used crowdfunding platforms like
Kickstarter to fund product development. The money is typically received in digital currency
form and goes to the founding organization that is developing the network and issuing the
tokens.

In the same way that a company increasing sales is an alternative to raising money, token
launches can be an alternative to traditional equity-based financing  and as we will discuss
in a future module can be an effective way to fund previously unfundable shared
infrastructure, like open source projects.

Utility tokens, also called app coins or user tokens, represent future access to an
organization's product or service. The defining characteristic of utility tokens is that they are
not designed as investments; if properly structured, this feature exempts utility tokens from
legal regulation covering traditional forms of securities.

By creating utility tokens, a startup can sell “digital coupons” for the service it is developing,
much as retailers accept pre-orders for a good that may only be available weeks later.
Filecoin, for instance, raised over two hundred million by selling tokens that will provide
users with access to its decentralized cloud storage platform. Thus we can see that the
traditional divides that defined the industrial age financial system become blurred and
redefined within the new model of token economics.

The question is though why do we need hundreds or thousands of different types of tokens,
why can't we just pay for everything in Dollars like we used to or even in bitcoins, wouldn't
that be simpler? Answering that question goes to the heart of the distinction between token
economics and traditional industrial age economic systems and we will talk about this in the
coming module.
Intrinsic & Extrinsic Tokens
With major technological, social and economic processes of change underway we are fast
moving away from the well-established model of the Industrial Age and into a new form of
digital networked economy where the traditional well defined parameters of economics are
being once again revisited as we search for a new model better suited to this new reality.
One aspect to this is a reconceptualization of the very foundations of economics, that is to
say, the idea of value. With token economies, we are really re-exploring what value is and
how we quantify and exchange it. Part of this equation is the differentiation between intrinsic
and extrinsic value.

The economic system that evolved over the course of the modern era has come to be based
on utility as a measure of extrinsic value. Token economics is a more generic form of
economic model that lets us define not just utility but also intrinsic value. To make sense of
this we need to first look at what we mean by utility and intrinsic value.

Things can have value both in and for themselves and as means to other ends. For
example, a tree has some kind of value in and for its role within an ecosystem but it also has
value in use as firewood for heating. The first form of value we can call intrinsic value and
the second extrinsic value or utility, it is important to make this distinction because the two
have very different properties. For example, most of us recognize that having many friends
and connections has a certain value, but we also recognize that this is different from
financial capital; buying friends is not the same thing as having friends. Why is this so?
Because money is a measurement of utility while friendship and social bonds are seen to
have some form of intrinsic value. Though our traditional monetary system does not capture
this form of social capital in some way token systems can. For example, likes on social
media can be a form of tokens, with those tokens representing your social capital. This
subtle difference between intrinsic and extrinsic value and how we may harness and capture
them through tokens is very complex and something we are just beginning to explore.

Intrinsic & Extrinsic Value

Our traditional financial system and the basis of neoliberal free market economics is the
construct of value as utility. Utility is the value that something gives to some person. Utility
implies that it has a general and immediate usefulness that people would be prepared to pay
for. Utility is a measure of extrinsic value. Utility is instrumental, like a tool or an instrument,
we just use it for what it can achieve, we don't care about the system itself. Utility is always
relative to what someone is prepared to pay for it, due to this we can measure the value of
something by looking at its supply and demand curve to derive a single price, that is defined
as the measure of its value.

In contrast to utility is intrinsic value. Intrinsic value is the value that something contributes to
the maintenance and functionality of a whole system. With intrinsic value, we have a unit that
values the functionality of the whole network. For example, the social capital contained in the
bonds of a society that enables it to function as a community is a form of intrinsic value. A
mangrove swamp that preserves a local ecosystem and prevents coastal erosion is a form of
intrinsic value. When we chop the mangrove down that may deliver something we can
exchange on a market and utility, but it has lost its intrinsic value in maintaining the
functional integrity of that ecosystem.

Utility is a measure of some derivative value, while intrinsic value is inherent to the network
or system that delivers the value. For example we are able to quantify, buy and sell wood but
not the functionality of an ecosystem. We are able to buy care for elderly people but we are
not able to buy with money a functioning community that might provide this service
organically. Intrinsic value is like a fixed asset, it is non-liquid. You can cash in the value of
an ecosystem or of a community or culture, as we have done in many ways, but you lose a
massive amount of the value when you do that. For example, research has shown that a
mangrove swamp is worth orders of magnitude more when it is left intact than when it is
cashed in.

As a metaphor, we can think of utility as the lowest denominator, being divisible into many
things and easily exchanged, whereas intrinsic value is the highest denominator being
non-divisible and non-exchangeable; because it is intrinsic it is inherent to the system and
can't be easily ported to other contexts.

Tokens Systems
Traditional currencies and the free market system only let us quantify and exchange utility,
they do not account for the value that may be inherent to a system that is not of immediate
utility to any actor. But token systems enable us to expand economic activity beyond the
realm of utility.

Token economies can be understood as a natural evolution to our economic system that
responds to the broader set of values that people come to hold in post-industrial economies.
The industrial age was all about the provisioning of basic tangible products which the market
system and utility captured effectively. A post-industrial economy - which all advanced
economies are today - goes beyond this basic provisioning of goods as people's basic needs
are met they move up the hierarchy of needs and start to care about and value a broader
spectrum of services.

The traditional model of utility tells us about the exchange and consumption of goods, it does
not tell us about the quality of the social, cultural or natural environment within which agents
exist. Thus actors can end up living in a severely degraded social, cultural and natural
environment – which significantly reduces their quality of life – while still, the economy is
churning through vast amounts of resources so as to make up for this, and our metric of
utility - in this case, GDP - would still tell us that the system is in an optimal state.

The economy is supported by a vast heritage of natural capital – such as clean water,
sunlight, oxygen etc – which stays providing the conditions for the inflow of natural
resources. Whereas in the previous industrial age these may have seen infinite, today it is
becoming more apparent that they are finite and we are increasingly looking for means to
quantify and integrate them into market decisions.

Likewise, an economy is embedded within and dependent upon a massive nexus of social
and cultural institutions that are required for it to function effectively. This value that is in
social bonds that enables trust and frictionless exchange is called social capital and the
economy benefits all day, every day, from huge complex networks of social capital that go
unaccounted for, but again we are starting to take note of the value of social and cultural
capital as important to the success of enterprises and economies.

Increasingly what people in advanced economies want from their economies is not just GDP
but quality of life, which is a much more complex thing involving many different forms of
value. This is why a post-industrial economy is a services economy and the best model for a
services economy is a token model. Because token networks can potentially capture and
incorporate all the different forms of social, cultural natural and financial capital needed to
provide quality of life.

Programmable Tokens
By excluding intrinsic value we have created the notorious divide within the industrial
economy between the market and the public sector. Markets were previously limited to utility
exchanges and dependent upon public institutions to regulate the supporting social and
natural capital. However, this is what changes with token economies as we can now begin to
quantify, account for and exchange social and natural capital.

Going forward we will be increasingly able to express social values through tokens via their
programmability. Because tokens are digital they may be programmed with certain rules and
when you have moved assets on to the blockchain those programmable rules can be used
to define what kinds of activities the token network supports or does not support.

For example, if our society decided tomorrow that we no longer thought the eating of meat
was a good thing and wanted to move away from it, we could do that by simply no longer
purchasing meat products and the entire industry would disappear quickly. In a digital token
economy, we can put our money where our mouth is, as a proof of what we value. We could
create a veggie token, that could be programmed so that it could not be used to purchase
meat products. Or as another example, we may have a weapons-free token, which is
programmed so that it can not be used to purchase weapons. If our societies only had
tokens of this kind then weapons could not be purchased and they would disappear.

We could then see how much our society value peace by looking at how closely that token
traded relative to another token that was the same but could be used to purchase weapons.
If there was a big difference and the token traded at a very low price then our society
obviously doesn't want the token and is not willing to lock itself into a weapons-free world.
We can see how this integrates social values with economic value in new ways and helps us
escape from a world where people and politicians say one thing and do another. In many
ways, it reflects the underlying blockchain proof of work or proof of stake system.
The way that we prove that we value something is by locking ourselves into it. The way that
we express our social values through an economic token is by locking ourselves into
networks that express those values. This multi-value token system enables us to recognize
and mobilize existing networks in new ways. Tokens help us to expand the economic system
to incorporate more value systems and thus harness people's motivation along more
dimensions, rather than simply for utility based profit.

Tokens, because they are more generic enable us to quantify almost any form of value, both
extrinsic and intrinsic. When you hold a currency to an asset you are making an investment
in that network, you are saying that it has value to you. If no one wanted to hold Dollars then
the Dollar would have no value. By creating all these little economies with their own distinct
currencies we are able to say exactly what it is we value and invest our resources in that
ecosystem. By bolding the Liverpool pound or the Bristol pound we are saying that we value
that ecosystem and will invest our resources in it. When we cash our Liverpool pound in for a
British pound we are saying that we don't really value it; we are not prepared to restrict
ourselves to making purchases only in that network and support the community value that it
creates.

This is why it is important to not think of tokens as being like traditional currencies because
they represent the possibility for a new kind of information services economy that is
fundamentally different from the one we know and is a necessary evolution in our economic
structures; just a significant as the evolution from a pre-modern feudal system to a modern
industrial economy.

Likewise, it illustrates the issues we are having surrounding regulation. A token economy is a
different form of economy to the industrial economy; it will not fit inside the box of the
industrial model. Because token economies expand the nature of markets to include a
broader spectrum of values they can be self-regulating, which stands in contrast to our
existing industrial age logic of the utility based market which always requires external
regulation and support because of their incompleteness and narrow set of values that they
incorporate. The token economy offers the possibility of creating self-sustaining economies
by incorporating all relevant value systems within multi-value tokens and multi-value
markets.

While in the industrial economy all forms of value could be reduced to a single metric of
utility, a services economy is inherently a multi-value economy. While extrinsic value may be
reduced to a single metric, intrinsic value is many inherent forms of value each requiring
their own distinct token that is irreducible.
To really understand the significance of token economies is to appreciate that society and
economies evolve and change over time and part of what is happening in the world today is
an evolution in what people value and that is a very profound thing that in turn really requires
a new economic model to capture and develop.

Michel Bauwens of the P2P Foundation describes this well when he says "​ the three revolutions
in human productivity, so the first invention is coercive labor that gave us civilisation, slavery,
serfdom, that's how we created castles and temples, in other words the motivation there is
external negative motivation, I conquered you, I could kill you, but out of the goodness of my
heart I let you live and you can work for me for the rest of your life this is the social
contract of slavery. I think capitalism introduces something new which is, well it's not just
about that but also about self-interest, in other words positive extrinsic motivation, I'm doing
something because I'm going to get something for it, which really give a boost to human
science and technology etc. I think we're going through a third revolution now which is about
actually moving from extrinsic to intrinsic, so we are building systems open contributory
systems like Wikipedia and others where people are actually there for variety of motivations
but they are mostly intrinsic motivation, I want to create a global internet encyclopedia I want
to create this I want to learn from it, there are various motivations."

Token economies is a new way for us to try and represent intrinsic motives, it enables us to
create economies that better reflect both peoples' intrinsic and extrinsic motives, but that
relationship between intrinsic and extrinsic motives is extremely complex and subtle,
figuring out exactly how that works is a long learning process ahead.
Discount Tokens
Discount tokens are one of the new innovations made possible at a large scale within a
blockchain based token economy. In short,
discount tokens are digital assets that give their holders a specific claim to receive discounts
on purchases of products or services from an organization — such  as an enterprise, a
cooperative, or a blockchain network. Unlike gift cards, discount tokens are not invalidated
when used but remain active and in possession of the holders. The specific size of the
discount that the token delivers for its owner is designed to grow in proportion with the
overall utilization of the network. The discount token itself allows the holder to access the
discount.

This can be seen as a royalty model but instead of claims to a fixed stream of revenue, it’s
rights to receive a proportion of total services offered. Given the growth in economic activity
on the network, the owner may utilize more discount on the service they receive directly or
sell/share the surplus.

While simple in its essence, it has profound implications. In a discount token economy,
creators and users of the network are clearly aligned, while passive investors and
speculators find themselves at an economic disadvantage. This is because discount tokens
are more economically valuable to users than passive investors and thus work to discourage
unconstructive price dynamics seen in other classes of crypto assets. The discount is
fundamentally linked to the adoption and growth of the network. The discount grows
proportional to the growth in network service delivered. The overall returns to the active
token owners surpass the returns to passive token holders, the investors.

The discount token enables next generation, technology-enabled mutual companies, and
cooperatives while working to reduce speculation. While tokens themselves allow for
transactions, capital formation, investment, and speculation, the discount token model is an
interesting way to incentivize the growth of a crypto-powered network. The discount token is
loyalty to the growth of the network, and not just for pure speculation because it is always
better to hold a discount token if you are a user of the network rather than simply a
speculator. This creates alignment between the customer and the provider that doesn't occur
with shareholders, with loans or bonds or other classical financial instruments used.

The discount token model is applicable to a broad range of business models. Businesses
that most benefit from it are those that desire and expect significant long-term business from
its customers through ongoing subscriptions, recurrent fees, or frequent repeat purchases.
For such dedicated customers the discount that the token offers means real money to them,
but for others that have no great interest or use of the network, the token will have limited
value.
The SweatBridge blockchain project is one of the strongest proponents of the model of a
discount token. In their paper, they write about the reasons for using a discount token over a
simple utility token. "As creators who desire to be both responsible and compliant, we find
ourselves in search of a class of token economics that would (1) underlie a broad range of
decentralized organizations and networks; (2) align incentives between investors (both early
and late), creators, and consumers; (3) be demonstrably distinct from securities and Ponzi
structures in the incentives they generate; and (4) align with existing regulatory precedent.
The discount token framework is designed to meet these requirements; while simple at its
core, it has profound implications."

Discount tokens are a good illustration of the kind of economic and financial innovation that
is being unleashed with token economics. It is not just about making things faster and more
efficient but discount tokens illustrate how we can really think about basic economic
structures and incentives and then build currencies that work in totally different ways to the
ones we have today, in so doing try to solve major economic issues - such as excessive
financial speculation and better rewarding those that are actually interested in the
development of the given economic network's functionality.
Security Tokens
The first application of blockchain technology may have been in currencies but people are
becoming increasingly aware that a secure distributed ledger system of this kind could in fact
potentially support all economic activity one day. Today startups around the world are
feverishly building new frameworks for migrating ever more spheres of financial and
economic activity to distributed ledger technology.

Many believe that the next stage in this process is the conversion of capital markets to token
networks as it is becoming increasingly apparent that the management of securities of any
kind, from stocks and bonds to real estate, could be brought into the age of information
through tokenization. There is currently great interest by financial intermediaries and
technologists in figuring out how to move real-world assets onto blockchains to gain the
advantages of distributed ledgers while keeping the characteristics of the asset.

The conversion of capital markets to token networks would create many efficiencies. It could
take the somewhat elite world of high finance and make it accessible to any and all; creating
new opportunities for investors and new sources of equity for organizations.

Our capital markets of various kinds today hold trillions of dollars of assets that are being
used far from their potential; locked up by high transaction costs, low transparency, layers of
middlemen and bureaucracy.
The tokenization of this system could radically improve the efficiency of transaction
processing by removing the layers of bureaucracy created by centralization. It could unlock
vast amounts of currently locked up fix capital. It could create a quantum leap in
transparency, opening up capital market data to advanced analytics in unimaginable new
ways. Likewise distributed ledgers are tamperproof making them less susceptible to fraud.

Capital Markets
Our world is full of different forms of assets: oil, basic foodstuff, stocks, carbon credits, real
estate, gold, etc. Many of these assets are difficult to subdivide or physically move around,
so buyers and sellers instead trade pieces of paper that represent ownership of part or all of
those assets. However this existing system composed of paper and lengthy legal
agreements is cumbersome, assets are difficult to transfer and can be hard to track.

Tokenization of securities is the process of converting rights to an asset into a digital token
on a blockchain. Any asset that is currently traded on a capital market as a security, such as
commodities, shares, bonds, or various forms of derivatives could be tokenized by linking
them to a blockchain register. Indeed any asset at all could be securitized by linking it to a
digital token. This might include any form of property, such as a house, it might include loans
or mortgages, all of these could be converted into security tokens and traded on markets.
The most obvious use of this system is the raising of initial funding for a new project. Already
huge amounts of funds have been diverted from traditional forms of venture capital in to
directly funding projects through ICOs. Many industry observers believe that mainstream
companies will one-day issue shares through ICOs, either in place of or in addition to
traditional public offerings. ICOs are a good example of where we are heading as we shift
more of capital markets onto the blockchain. They illustrate the capacity to open up these
markets to the many, as venture capital has gone from the domain of a few investors to
being accessible to anyone on the planet with internet connection and a few dollars.
They illustrate the direct peer-to-peer nature of token economies. But what we have seen so
far is really just the tip of the iceberg as what has happened to venture capitalism could
literally happen to all of capitalism - as all capital could be tokenized. A number of platforms
are currently in operation or being built to do exactly this.

Token Platforms
LAToken is one such platform. LAToken is an asset tokenization platform that allows users
to convert tangible assets such as real estate or precious artworks into tokens, thereby
making them sellable in fractions. You can tokenize your asset on their platform and sell it in
fractions to investors, investors may then sell the tokens on a secondary market and you can
buy back the asset later on or sell it on the settlement date.

Imagine an artwork by a famous artist with 100 copies. The art prints could be tokenized by
having ownership held by a company that has a standing offer to the public to redeem
tokens for either a single art print or a fraction of one copy. In this way, buyers could obtain
an easy-to-transfer token and a secondary market could transact in fractions of the art prints.
This could potentially be a source of financing for the artist and a way for the broader public
to participate in the art market that is currently inaccessible to most.

Likewise, commodities could be converted into security tokens and traded. Imagine a group
of companies that want to trade aluminum with one another. Normally they’d exchange
paperwork and keep their own lists of trades. If they could move to a blockchain-based
system for trading their aluminum, they could potentially reduce paperwork and have more
robust record-keeping.

Self-Securitization
One of the fascinating aspects of distributed ledger networks is that they can enable people
to securitize their own assets. Tokenization is an extension of the more traditional process of
securitization, which is the conversion of an illiquid asset into a record that can be traded to
increase liquidity.

Whereas previously the creation of securities was the domain of large highly regulated
centralized organizations, blockchain networks can automate this process and make it
accessible to all. People and organizations of any kind could securitize any asset that they
own, they simply lock it on the blockchain and receive liquidity in return, when the liquid
capital is returned the illiquid asset is unfrozen.
Sweetbridge is one token platform that is essentially enabling people to be their own banks
when it comes to loans. This is done through creating a blockchain network where people
can register and lock up their own assets as collateral against which they can borrow money
at low-interest rates or even no interests rates at all. Users are essentially lending
themselves money without a credit check because they are lending it against their own
assets they have locked up.

What is happening is that when you lock an asset into the network, the network grows in
value and gives you the tokens equal to that growth in its value which you can then
exchange for other tokens of fiat currency. Because you are creating the currency and not
renting it from somebody else you don't need to pay much interest on it or even no interest at
all.

Where this gets exciting is not in developed economies it is in places where you have a
highly ineffective and inefficient formal economic system and a high level of informality, such
as the developing nations of Africa and Asia. In these environments, interest rates tend to be
very high and loans tend to be very difficult and yet these are the roots of the supply chains
of the world. This is where the food is grown, where the minerals come from. In these frontier
markets it can be really tough to get financing of any kind and if you do it's very expensive; it
may be 10 to 20 percent. With a security token platform like that of Sweetbridge, no credit
rating would be needed, you just lock up some asset and get liquidity in return at a
low-interest rate. This can be revolutionary, making a massive difference, not just for global
trade but in the lives of the most vulnerable.

Real Estate
Real Estate is another asset class that is set to move to token networks in the coming years.
The stock of real estate assets is enormous, it is the biggest asset class in the world, valued
at well over 200 trillion dollars. At just 1.4 trillion in transactions every year most of this
market sits stagnant and does not really trade. Real estate is a very illiquid market and one
of the least transparent, buying and selling property especially on the global market across
borders is full of frictions, middlemen, and lengthy procedures.

You can hold a piece of a corporate or a government debt in a bond, but it is very difficult to
hold a piece of property and there is a lot of friction to trading property. While at the same
time for many assets in real estate people will pay up to 20% more for one that is liquid
versus one that is not; so tokenizing these assets could release huge amounts of untapped
or underused resources.

Atlant is one platform that is working to tokenize real estate. It does this by linking the
property to a special purpose vehicle(SPV) which is then converted into tokens. The property
is purchased and transferred to the SPV, the SPV is split into many shares that can then be
traded on the platform with almost no friction. Now a person sitting in Taiwan can at the click
of a button invest in the creation of a new factory in Poland or a section of an office space in
Mexico City.
Likewise, through this tokenization of property, the physical asset can be split up into
extremely small units of equity that make the whole market greatly more liquid. Say for
example you have a shopping center, the platform can tokenize it by dividing it into a million
centimeters of floor space. People can then exchange those small units or rent the property
they own out.

Physical Linkage
In all of this conversation around the tokenization of real-world assets remains one big
elephant in the room, which is the question of how exactly do you put assets on the
blockchain. The linkage between the information software layer of the blockchain network
and the physical real-world asset is of course of critical significance and in many cases
remains an unanswered question as to how exactly that linkage is secured, so in the next
module we will pick up on this very topic.
Blockchain Physical Assets
The blockchain originates out of the purely digital realm of Bitcoin. Thus blockchain networks
themselves can only ever manage what is on the network. This is fine if the asset is simply a
digital token, but going forwards we find ourselves increasingly wanting to use these
networks to manage real-world assets, thus these value networks will have to interface with
the real economy and this interface between the physical and information realms creates
major issues. Economies are at the end of the day still very much physical systems of
technology, land, natural resources, buildings etc. if we are serious about migrating our
economic systems to the blockchain major consideration has to be given to that interface to
ensure that the tokens are securely and accurately connected to their underlying physical
assets.

In a digital system like Bitcoin, there is always consistency. Transactions obey the rules of
the software and there are no exceptions. In the real world, there are often exceptions. Cars
are stolen, houses destroyed, videos turn out not to be properly licensed, commodities fail to
be delivered - humans sometimes don't obey the rules. Therefore the key challenge for any
system that involves tokenizing real-world assets is to ensure that the digital token stays
linked to the real-world asset.

Very few people in the blockchain world have an appreciation for the complexities of the
physical systems that run our economies and their regulation; such as containers passing
through customs at a port. There is a huge gap between this very light dematerialized culture
of the blockchain and the very heavy culture of traditional physical assets and the national
legal structures that they are embedded within.

Today this interface is secured by laws and ultimately the physical force of a government
that backs those laws. If you have a legal document that says a piece of land is yours and
someone comes and resides on it you can go to the government and they will physically
remove that person from your property if need be.

Imagine a token that represents a fractional interest in a set of gold bars in a vault. If a gold
bar is taken from the vault, how will that be reflected in the digital token? Who will make sure
that the token value stays linked to the gold bars that should be in the safe? Who will bear
the risk and how? If the buyer of a token can't be sure that the token is properly linked to the
real-world asset, then the value of the token will fall or even become zero if no one has faith
in the correspondence between the two.
Arbitration
At present blockchain systems are still dependent upon traditional legal frameworks for this
linkage between the digital representation of an asset and the asset itself. Currently,
arbitration is seen as one of the most effective ways of mapping between what is happening
on the blockchain and what is happening with the physical asset and the legal systems it
might be embedded within. Arbitration is a long since used method for creating legal
agreements in international commerce where both parties agree to bind themselves into a
legal contract of their making. An arbitration award is legally binding on both sides and
enforceable in the court of choice.

One way of linking legal systems to what is happening on a token network is through what is
called a Ricardian Contract. A Ricardian contract places the essential elements of a legal
agreement in a format that can be expressed and executed in software. The aim is to make
the document both machine-readable and readable as an ordinary text document such that
lawyers and consenting parties may read the essentials of the contract conveniently.

From a legal perspective, the use of markup language embedded within a largely legal prose
document leads to reduced transaction costs, faster dispute resolution, enhanced
transparency and improved enforceability. From a computing perspective, the Ricardian
contract is a software design pattern to digitize documents and have them executed within
financial transactions, such as payments, without losing any of the richness of the
contracting tradition.

It is robust through use of identification by cryptographic hash function, transparent through

use of readable text for legal prose and efficient through markup language to extract
essential information.

Mattereum is one such project that tries to use Ricardian contracts to create an effective
linkage between records on the blockchain and the established off-chain legally binding
dispute resolution of arbitration thus giving what happens on the blockchain full legal weight
under natural language contract.

Mattereum is the first, what it calls "Internet of Agreements" infrastructure project for
legally-enforceable smart contracts, enabling the sale and lease of physical property and
other transfers of rights in assets. Mattereum is billed as a court that understands the nature
of cryptocurrencies, making physical property and intellectual property transactable on a
blockchain.

In a case where you might buy a physical asset using a fraction of a Bitcoin and the seller
does not follow through, it is difficult to explain this to a judge in a small claims court. This is
where Mattereum comes in, enabling technically competent arbitrators to make rulings in
these cases instead of a judge. As the founder of the project, Vinay Gupta describes it
"Mattereum.com is my bid to get the necessary legal frameworks in place to make direct
control of physical property using the blockchain recognized in 150+ countries. I want to
break the door open to the material world so you can change the status of a smart contract,
and have a real-world court recognize that legal ownership of a fiat asset has changed
hands. Fiddly, but it’s necessary infrastructure for all of our next steps together."

Technology
The alternative to depending upon traditional centralized legal institutions is depending on
technology. Code may be the law on the blockchain but outside of those networks, Big Data
and IoT will be law. Big Data is going to give us new insight into what happens when and
where with high levels of statistical assurance, while at the same time IoT will put code into
all of the technology around us that we are now so dependent upon and that is a new form of
law enforcement. If you have the code that can stop a car or open a door lock then you
control that system and can enforce whatever contract is on the blockchain.

As an illustration, we might think about a blockchain IoT securitization of gold. We create an

automated warehouse, people are allocated secure sealed lots within the warehouse. We
deposit a stock of gold in one area and when someone purchases a block of gold the system
automatically moves it to the owner's container and the owners gold token account is
calculated by summing up the gold in their container. This is a simplified representation of a
blockchain cyber-physical system where blockchain records and tokens are linked directly to
the underlying asset through automated technology. By an extension of this model whole
buildings, cars and other assets could be directly connected to blockchain tokens thus
bridging the gap between the virtual token and the physical asset.
Decentralized Token Organization
Token economies can be understood as a new way of coordinating human activity in a
decentralized fashion, this being done through peer-exchanges within market networks.
As Primavera De Filippi of Harvard puts it "Today the blockchain is marking the beginning of
a new digital revolution whose focus is not just human communication but rather human
interaction and cooperation, what the internet has done to achieve global interpersonal
communication the blockchain could do today to achieve global and systematic
collaboration."

It is common to compare the invention of Bitcoin and the blockchain with the internet. In this
respect, it is often said that the blockchain is Internet 2.0 The internet has been a powerful
tool that has revolutionized the way we interact, but if anything this comparison undersells
the significance of the blockchain. As the authors of a recent article on "The Blockchain
Economy" suggested, a better metaphor for the blockchain is the invention of mechanical
time. Before the modern mechanized measuring of time, human activity was temporally
organized by natural cycles: the crow of the rooster in the morning, the gradual descent into
darkness at night. The problem with this though was variability, there was simply too much
variance in the measurement of time for it to function as a widespread system for
synchronizing economic activities.

Mechanical time opened up entirely new categories of economic organisation that had until
then been almost unimagined. During the industrial revolution, the effect of the reduction in
the variability of time measurement was felt in almost all areas. Mechanical time allowed
trade and exchange to be synchronised across great distances. It allowed for production and
transport to be coordinated. It allowed for the day to be structured, for work to be
compensated according to the amount of time worked — and for workers to know that they
were being compensated fairly. Working life became routinized around this new objective
standard of time measurement. The blockchain and token economics may well be such a
systemic transformation in human coordination.

Decentralized Coordination
the blockchain is a new coordination technology that relies on a decentralized network of
computers in order to coordinate individual actions in a decentralized manner. We can think
of token economies as a way for people to mimic the social dynamics found in certain highly
social creatures like bees, ants, and termites as a way to promote and ideally achieve
effective collective organization. By recording individual actions on a distributed database
the blockchain makes it possible for people to coordinate themselves indirectly and
collaborate on a global scale, without any centralized authority or hierarchical structure. This
is something quite new in human civilization until very recently the basic premise has been
that order and organization are achieved by centralized authority.
Centralized Institutions
Throughout history, we have achieved widespread coordination and economic organization
via centralized systems that imposed common standards. The evolution of civilization can be
understood as the rise and fall of ever larger more complex systems of human organization.
Economies are built around networks of trust and common protocols, traditionally these have
come from either a government institution or from some form of Church which are structured
in a pyramid form. In those power structures, you're able to do business, you're able to trust
people who are not your immediate family because the centralized authority provides the
common standards, the protocols, the regulatory and legal structures for you to trust each
other and exchange; fiat currencies being one good example of that. Although centralized
systems have their advantages they also have their disadvantages and are inherently limited
when it comes to the formation of very complex organizations.

Alignment of Interests
One of the primary issues with current centralized organizations is that they are not general
purpose as each organization acting as an authority also has its own vested interests. This
creates a misalignment of incentives between the centralized authority and users of the
system. If we are lucky and we get virtuous members in the center of the organization the
interests of the centralized authority may be aligned with those of the network, but equally,
they may not.

As we will discuss in the coming module there is really a misalignment of interests at the
heart of centralized organizations. We have this problem today where most of our most
important economic and financial functions are provided by centralized for-profit
organizations. The incentive of the organization is to create profit for its owners, the result of
this can be that profit gets sucked into the center and upwards, reducing the quality of the
network delivering the function and accentuation inequality.

Bottle Necks
Likewise, centralized coordination creates bottlenecks, resources are brought into the
center, processed and then pushed back out to the edges. The system always works much
better close to the center and then coordination drops off the further out you go.

This is why, for example, Zimbabwe is a much better use case for cryptocurrencies than say
Singapore, because Singapore is close to the center of the global financial systems while
Zimbabwe is out on the edges. Centralized systems have problems delivering structure and
functionality all the way out to the edge of the network, the result is that we end up with a
trickle-down economy with the edges always being dependent upon the center, but the
center not being properly incentivized to deliver services all the way to the edges. Those at
the center get a good service but those at the edges don't; the billions of people who are left
out of the global financial system because they are not economically worth serving is
illustration of this.
Fractured System
Centralized systems end up forming either monopolies or a fractured overall system.
Centralized systems have a specific locus as their center and then push out until they meet
another organization. The end result, is either a monopoly where one comes to dominate
overall others or a fractured system, with lots of different patterns forming. The nation-state
is a good example of this. Within a given jurisdiction we have a monopoly of public services
but on the global level, we remain with a fractured system.

Peer-production
The alternative to these centralized systems is decentralized peer-to-peer networks. Without
centralized authority being used to achieve coordination, this coordination is achieved via
direct exchanges of information and value peer-to-peer, such as in a pure market where the
price is decided by the interaction between members.

Token economics turns these centralized institutions of the industrial age into distributed
token markets. The critical change that is coming about is that we are now able to design
token systems that work to incentivize people's behavior towards coordinated outcomes
without that coordination being imposed by some centralized authority.

What is different now is that we have the technological means that we can design
economies instead of just organizations. Economies that create the right incentive systems
and feedback loops to coordinate the activities of the organization in a decentralized fashion.

Token economies build upon the development of peer-production, an alternative model to

economic activity that has arisen with the development of the internet. Peer-production is a
process taking advantage of new collaborative possibilities afforded by the internet and has
become a significant mode for the division of labor within post-industrial economies. Free
and open source software and open source hardware are two examples of peer-production.

With the development of web 2.0 technology, it became possible to coordinate a large
number of people using software systems as the coordination mechanism instead of any
centralized authority. This was exemplified by projects like Wikipedia. But these networks
were lacking the critical element of economic incentive, token economics provides a new
way to fund and incentivize these newly formed distributed networks.

Juan Benet, founder of Protocol Labs, describes well what is happening today "One of the
interesting properties here is the ability to create markets where there wasn't a market
before... what [blockchain] application platforms can do is suddenly cut out this huge
middleman with a protocol and that is a massive cost-saving for the entire network... you can
turn this into a protocol that will optimize the entire process much faster than any centralized
company can do, because it turns it into a market. The moment you can take a very
complicated process and translate it into a market where a whole bunch of different actors
can vie for opportunities and just beat each other, you have this amazing optimization power,
where it will just fit the function much better than a centralized entity could have."
The blockchain provides the infrastructure of trust, secure record keeping and peer
interaction required to create general purpose networks for the provisioning of economic and
financial services via distributed markets. The challenge of doing this though is one of
designing incentive systems and this is what we will talk about in the coming module.
Token Incentive Systems
Incentives are a central part of economics and blockchain networks give us new ways to
design and build incentive systems. As Mike Goldin, a lead engineer at ConsenSys noted
"Blockchain gives us programmable money. When you can program money, you can
program incentives, and when you can program incentives you can program people."

Programming people may sound a bit funny but in fact, it captures something of what is now
possible. Like never before we have the capacity to rapidly build and implement large-scale
structures for incentivizing human behavior towards certain ends. We are increasingly
moving into a world where we can analyze, design and adjust real-world economic and
social outcomes by deploying new protocols on the internet. This is a new capacity that we
now have, one that offers both huge potential and is at the same time frighteningly powerful.

How to create incentive systems that align the interest of the individual with the overall
beneficial outcomes for the organization or economy is a central issue of interest in business
management and economics in general. A central premise of economics is that people
respond to incentives. One of the key insights of Adam Smith was that overall beneficial
outcomes for society and economy should not depend upon the virtues of the individuals
within the system but instead, optimal outcome should be achieved by designing incentive
structures that link the individual's self-interest with beneficial overall outcomes.

This is captured in his famous passage "It is not from the benevolence of the butcher, the
brewer, or the baker, that we expect our dinner, but from their own interest. We address
ourselves, not to their humanity, but to their self-love, and never talk to them of our
necessities, but of their advantages."

This is a very important insight and history will teach us time and time again that we should
not depend upon the virtues of the agents within the system if we wish for long-term stable
functional outcomes. Over time the most virtuous of leaders can turn into the most brutal of
dictators.

The only way we can assure long-term stable outcomes is by a clear analysis and design of
the incentive structures in the system. The only way we are ever going to get really
functional economic systems is by really understanding the incentive structures in the
network and designing those so that they are aligned with the overall desired outcomes.
Every misalignment of incentives will over time turn into a dysfunctionality within the network.

The structure of the incentives within the system is critical to whether the economic system
will thrive or fail. Capitalism has succeeded to a certain extent where communism failed
precisely because of its incentive structure.
A good illustration of this is The Jamestown Colony, the first English-speaking colony in
North America founded in 1607 in Virginia. The colonists spent the first 10 years of their
existence hungry, they never had enough food, with over 80-percent of the colonists
perishing in what became known as the "Starving Time".

But then after those first ten years, the colony thrived, the colonists had plenty of food and
their numbers increased and it took off. It was the same people using exactly the same
techniques so what changed. Before 1615 they all went out to the field they all worked and
then they took the output from that field and divided it up equally. In such a system people
have no incentive to work harder than the minimum required; there was no linkage between
individual incentives and overall beneficial outcomes. In 1615 they made a very simple
change to the rules, they divided up the farmland so that each person had their own
individual plot of land. You could now do whatever you wanted with the food that you grew,
they grew their own food, they ate it, they sold it to each other, they gave it to their families
and the colonies thrived. It was a change in incentives that ended the starvation and brought
about abundant food supplies.

Human beings have always been bad with incentives getting ourselves into all sorts of
situations we don't intend to because of how we try to direct the ways that groups behave.
We can look a what the incentive structure that a deregulated financial system has caused,
or anonymous political donations of money. The reality of how incentive systems play out in
the world is complex and typically beyond the designer of the system's capacity to foresee,
as a consequence we often just lurch from one model to the next as we react to the
unintended consequences of the previous system.

The central aim of economies is to enable people to work together within a combined
enterprise. To do this we have to align the behavior of the individual with the whole.
Blockchain networks are all about protocols that enable coordination between actors. The
great innovation of blockchain networks is as a new system for incentivizing a network of
autonomous nodes towards maintaining a shared infrastructure.
Token economics builds upon this underlying technological innovation. With tokenization, we
are going to start to incorporate explicit incentive systems into more and more spheres of
life. We are attempting to build these micro-economies around every source of value so as
to align people's individual incentives with delivering an overall functional ecosystem.

Trust Equilibrium
In every socio-economic organization, there is the opportunity for collaboration and
cooperation which leads to optimal outcomes for all and there is the opportunity for
competition and conflict that will lead to suboptimal overall outcomes and unequal pay-offs
for actors. The point of a social or economic institution is to achieve coordination and optimal
overall outcomes.
Every game has two equilibria, there's a good equilibrium where everybody cooperates
resulting in everybody gaining and there's a bad equilibrium when nobody cooperates,
nobody gives in and nobody gets anything. The optimal overall equilibrium is typically very
fragile, it's enough for one person to deviate from the good strategy and the whole system
can deteriorate. The bad equilibrium though is very stable. Trust is about our ability to stay in
the good equilibria, what do we do to live in a society where we all benefit because
everybody has a short-term incentive to betray the public good but the moment people start
betraying the public good things deteriorate quickly?

The traditional way that we have solved this equation is through a centralized authority that
mandated that all act according to the economically or socially beneficial outcome. Token
economics attempts to achieve this alignment through peer-to-peer exchanges of value that
incentivizes the actors to operate according to overall effective outcomes.

To illustrate this dynamic we can think of the torrent file sharing system. In a torrent network,
anyone can share their files with a decentralized group of peers. The idea was that people
would download them and keep sharing the file with the network for others to download. If
you were downloading a file, then you were expected to seed as well. This is what we would
call an honor system, which is a system operating based on honor or honesty without having
strictly enforced rules governing its principles.
The problem is that humans are not always the most honorable of creatures and without any
economic incentives it made no sense for people to keep seeding a file which took up
unnecessary storage space and bandwidth.

What token economics adds is the capacity to incentivize these peer networks. Unlike open
source software, peer-to-peer file sharing or creative commons where the infrastructure is
dependent upon the goodwill of the actors, tokens incentivize the peers to participate. So
instead of a file storage system being dependent upon a centralized for-profit organization or
people's charitable willingness to provide the resource, it gives those members tokens to
incentivize their provisioning of the resource.

The fact that tokens can be used to define and exchange any form of value means that
these distributed organizations can be used to deliver all forms of services; both what has
been previously delivered by private organizations but also services that have previously
been the purview of the public sector.

Public services like cleaning up litter, maintaining parks, public security, care for the elderly,
reduction in noise pollution, civic engagement etc. Indeed anywhere value could be
generated by the coordination of members, we can define a token for that value and use it to
incentivize the agents towards the coordinated behavior, thus enabling the delivery of the
service through peer-to-peer token markets.

The Ethereum developer Karl Floersch summarizes the current situation well when he notes.
"Incentives drive behavior and open access to programmable incentives sets the stage for
radical change. This is a really unique moment in history, this change can be good or this
change can be bad, we can program incentives which promote cooperation and equitability
and general happiness, everyone's goal, or we can create incentives which prop up a few
people and give them way more power than they already have. This is like kind of terrifying,
so we need to design mechanisms, test them in the real world and share our findings and do
that over and over on a large scale."
Mechanism Design
Token economics represents the merging of economics and information technology, it shifts
economics into a more technical realm. In the past, we could really just tweak around the
edges, but now we can really design economies like we never could before. Once we shift
business and economic organization into this more formal and technical realm we can begin
to bring very powerful mathematics and analytical tools to bear on what we are doing. One
aspect of this is using the models from game theory to design these incentive systems.

Game theory is the study of the strategic interaction between adaptive agents and the
dynamics of cooperation and competition that emerge out of this. A much more recent
extension of this is mechanism design. Mechanism design is a field in economics and game
theory that takes an engineering approach to designing economic incentives toward desired
objectives, in strategic settings. Because it starts at the end of the game, then goes
backward, it is also called reverse game theory. It has broad applications in the management
of markets, auctions, voting procedures and is of particular relevance to token economics.

As an economic theory that seeks to determine the situations in which a particular strategy
or mechanism will work efficiently - compared to situations in which the same strategy will
not work as effectively - mechanism design theory allows economists to analyze and
compare the way in which markets or institutions lead to certain outcomes because of their
inherent incentive structures. With mechanism design, we are trying to design the system
towards a certain desired equilibrium state. With this approach we first think about what
outcome we would like to see from the system, we can then build a set of rules that will
hopefully lead to those optimal outcomes.

Legal systems are a kind of mechanism, as they are a method for shaping human behavior,
a particular set of laws is usually trying to shape a particular type of outcome through the
imposition of a set of penalties, fines, rewards or incentives such as tax breaks etc.
Of course, these existing systems are centralized in their design
but with token networks, we are looking for a mechanism design that does not depend upon
a centralized authority specifying and enforcing the rules but instead some kind of
peer-to-peer value exchange mechanism that is self-regulating through direct information
feedback loops.

Feedback Systems
As previously mentioned coordination within distributed systems, like token economies, is
not achieved via centralized coordination but instead by the interaction between members
and the incentive structures created by the exchange of tokens. The primary dynamic for us
to consider then is that of the feedback loops that are created out of people interacting
peer-to-peer. We are trying to enable cooperative structures without imposing them and that
is achieved through peer-to-peer interaction.
Creating optimal outcomes for the whole system means effectively linking the payoffs of the
individual to those of the whole system and thus reducing negative externalities. Every
action that an agent takes has an effect and we can ask what are the repercussions of those
actions and who bears the costs and benefits. When an actor gains from an action but the
costs are born by others this is a negative externality. Pollution is the classic example of a
negative externality; so too excessive inequality may be seen as a negative externality of
people's greed. Negative externalities incentivize actors to overperform a given action as
they are not bearing the cost and leads to unsustainable results overtime as that cost is
being born by someone else, the whole system or environment.

Building systems of cooperation in such a context means enabling ongoing interaction, with
identifiable others, with some knowledge of previous behavior, lists of reputations that are
durable and searchable and accessible, feedback mechanisms, transparency etc.

The development of current web platforms is good illustration of where we are going as they
often incorporate many of these design components. Sites like TripAdvisor and Yelp exist as
standalone feedback platforms, while Amazon and eBay legitimize their products by allowing
users to place feedback on their purchases. Feedback systems are used to rate and rank
content on social media like Reddit and Facebook. All of the above have become an
essential part of how we identify quality products and services that meet our needs.

But while the internet gives a voice to all, misinformation has become an accepted reality.
Competitors may falsify reviews to discredit a product, while the review platforms themselves
may modify or delete feedback that doesn’t fit their agenda. The combination of blockchain
tech and advanced analytics could take the possibility of bias and corruption out of current
feedback systems, with an end-to-end process designed to pick out quality feedback and
then safeguard it.

Revain is one blockchain platform that works to secure feedback systems. All incoming
reviews will have to pass an initial screening test, with IBM’s Watson AI platform analyzing
emotional and unconstructive language. Users are rewarded with RVN tokens for submitting
a review, while companies can use the token to purchase quality feedback, direct from its
customer base. And at the end of the whole journey, consumers have unbridled access to
transparent, high-quality feedback to aid their decision-making.

Uber is an example of mechanism design. From this perspective, Uber just adds to the
financial contract of paying someone to take you somewhere a reputation feedback system.
Uber adds reputation for both drivers and for riders and adding reputation into the system
actually significantly influences the way that people behave within that system. The goal is to
shape the behavior of the participants and adding that additional reputation can have a
significant impact. But of course with blockchain systems, this can all be tokenized, and
because tokens can represent any form of value exchange - natural capital, social capital,
cultural capital, industrial capital etc. - we can build in many different forms of feedback loops
and different forms of mechanism design.
User Generated Ecosystems
As we have previously talked about the central aim in the development of an enterprise or
economy is linking the individual's interests with the whole organization in order to achieve
optimal overall outcomes. In very small communities it may not be very difficult to maintain
that connection. In small communities, people can see that their efforts contribute directly to
the overall value created and the overall value created is in turn linked back to the benefits
that they will gain. Likewise, there is limited need for centralized coordination thus no great
concentration of wealth in the system and people may feel that it is fair. The problem with
this model is that it doesn't scale and allow for more complex economic systems with
specialization of work, as a consequence, over time larger more complex organizations
come to subsume these smaller more basic forms.

If you want really good scientists, builders or teachers they are going to have to specialize in
those activities, which will, in turn, require large systems of exchange. We invented formal
centralized institutions, monetary systems, large market exchanges so as to achieve
specialization, mass production, and complex economic organizations. However, as we did
scale, there came to form a disconnect between the individual's contribution and the value to
the whole, which creates the potential for both negative externalities, large concentrations of
wealth, extraction and inequality.

As the scale of the economic systems that we are engaged in has increased the
interconnectivity and interdependence between any two random members has decreased –
because they are farther apart in the network. This has worked to disintegrate traditional
cooperative institutions that are based on local interactions and interdependencies. In the
absence of tools for interconnecting everyone within a large national society, we have had to
create the large bureaucratic centralized institutions of today.

But these centralized institutions have created notorious divides within the modern capitalist
system, between owners and workers, between producers and consumers. With the rise of
information technology and globalization, we are creating organizations that span the entire
planet, creating massive divides between producers, owners, and consumers, with the
interests and incentives becoming increasingly misaligned.

Clothes are produced in Bangladesh by people who get paid half nothing, revenue is sucked
up into a global financial system to pay shareholders, while end users have no loyalty or
care for the organization from which they buy their products. There is a massive
misalignment of incentives that creates a hugely inefficient overall system.

Misalignment of Interests
We can analyze the incentives structures of this organization by looking at the centralized
technology platforms of today. Here we see on one side we have value creators and the
other side we have value consumers, they're all coming together through some type of
central server platform. For example, with Uber you would have the value creators on one
side, being the drivers, sending their information to a central server and on the other side
you'd have the riders that are using the transport service from the platform, in the middle you
have the platform and of course the reason that these companies are doing it is for-profit, so
a portion of the profit or all the profit goes up to shareholders.

The users of the system do not care if the value of Uber goes up or down, all they care about
is getting from point A to point B. That is their involvement with the organization and that's
the limited vested interest that this centralized structure is able to take advantage of.
The drivers likewise don't care about the value of the overall organization, they just want to
get paid and the shareholders and management are only interested in the quality of the
service and the conditions of the workers to the extent that it affects the profits of the
organization.

Likewise, we can look at Facebook and see that it is at odds with its users. Facebook’s
founders and shareholders have made massive amounts of money. Yet its users didn’t,
despite contributing the key personal information and content that is the central value
proposition of Facebook. Profits are drawn inwards and upwards to the top management and
shareholders. With its billions of users and high engagement, Facebook has become
enormously powerful in our world. Yet it’s controlled by a small handful of people. This is
dangerous for society. Especially given the fact that it is not really structured to handle such
responsibilities.

The only reason that these companies or shareholders are putting forth the products is for
the money that they can make and that is the entire business plan, it is to maximize profits
and that drives our whole economy. What you have here is a split between the users and the
beneficiaries rights and that creates a huge degree of misaligned interest. Not only this, but
there is no user vested interest, the users don't really care about the success of the
company in which they're using that product, that really leaves a lot of value on the table,
because the user's engagement can be hugely beneficial.

Token System
Token economics offers the potential to reintegrate this whole system. Break down divides
between users and producers, between workers and owners; working to align their
incentives within a whole ecosystem. By connecting people peer-to-peer and automating the
operations of the network, blockchain technology enables us to take out the centralized
component and reintegrate producers and consumers into a much more functional
ecosystem of exchange.

As illustration, we can think of the production of a movie. Currently, this is achieved through
a centralized organization for-profit that then hires producers, directors, and actors to make
the film which people then pay to see with profit going to the investors. But this could be turn
into a token network. We use a blockchain network to create a token, call it a "movie coin"
actors, directors, and others get paid in that coin that viewers have to buy in order to see the
film. People can purchase the token before production to raise the initial capital to fund the
project, thus cutting out the intermediaries.

As another illustration, we can think about the fact that the average tenure of an employee in
Silicon Valley is less than two years. One of the causes is the lack of alignment between
employees and the owners. This is called the Principal-Agent Problem. Every group of
people has principles, which are the owners, and agents, which are the employees, and it is
easy for them to become misaligned. What may be good for the employee may not be good
for the company.

In startups, principals and agents are the same. That’s why they are all really motivated to
work together and can create a great amount of progress rapidly. But as the organization
grows there becomes a growing gap between owners and employees and growing potential
for the misalignment of their interests.

By creating micro-economies we can work to reintegrate the two. Distributed organizations

have no centralized management structures for controlling and coordinating the
organization. The architecture of the code is the rules of the organization and people may
have an input on how that code is altered. The aim is to have autonomous actors who feel
integrated with the organization to create true user engagement. By functioning as both
equity and currency the token can work to link the value of the ecosystem with the value that
people exchange within that market.

Moving to decentralized ecosystems you really have the same parties involved but you
removed the centralized entity completely, thus closing the economic loop of that company
with a peer-to-peer token exchange. Instead of sending money to a centralized body with
fixed fees on both sides taking off a profit margin these companies can introduce a token.
Because of the linkage between the value of the exchange token and the value of the
network, in the token system, the value generated gravitates not upwards within the
hierarchy but naturally propagates to the token layer that reflects the value of the whole
ecosystem and goes into the pockets of anyone holding the token. Because it is also a utility
token it means that the value goes to those using the network, the producers and end-users.

In the example of Uber, imagine every single user paid in a native currency or a native token
of the actual organization itself and then every driver receives that token and then they sell it
back to people that need to have rides. This closes the economic loop and aligns the
interests of everybody in the organization. You now have unprecedented vested interest,
every single person involved in that corporate ecosystem is now invested in the success of
the organization. Just as everyone holding a Bitcoin will promote the digital currency to their
friends, anyone holding the token of any network will be incentivized to promote the use of
that network, so you are turning the users into evangelists.

Another example would be Brave. Brave is a new token network for the digital advertising
industry. It pays publishers for their content and users for their attention. This service creates
a transparent and efficient Blockchain-based digital advertising market relative to the
traditional model.
An Ethereum based network that radically improves the efficiency of digital advertising by
creating a new token that can be exchanged between publishers, advertisers, and users. By
connecting all parties involved directly via a token market, publishers receive more revenue
because middlemen and fraud are reduced. Users, who opt-in, receive fewer but
better-targeted ads that are less prone to malware. At the same time, advertisers get better
data on their spending and more engaged users.

What we start to get are economic networks that are really like a cross between private
enterprise and public utility. We are getting a hybrid of the community system with its vested
interests, where the work you produce is connected to the value of the ecosystem but also
getting the option to exchange within broader systems involving high levels of specialization
and complex coordination.
Token Market System
Openness is one of the key design features of blockchain networks, they are inherently
designed to enable intra-organizational collaboration. As soon as you start to use a
blockchain to support a closed organization you start to find that there is no real reason to
use a distributed ledger at all and that it is better just to use a centralized authority to
maintain the database.

With closed centralized institutions the drive is to concentrate the most efficient resources in
the center, indeed the most valuable and effective centralized organizations are the ones
that can concentrate the most efficient nodes in the center and exclude those that are less
efficient. Distributed networks, however, have a very different dynamic, quite the opposite,
they create the most amount of value by going outwards towards the edges to harness the
resources of the mass of people within user-generated systems of exchange. These open
user-generated systems are what we would call markets.

One of the most effective ways to understand this shift into a token market economy is
through looking at transaction costs, as it is the reduction in transaction cost and the
increase in automated coordination that is now enabling us to convert centralized
organizations into open networks. By automating transactions, automating compliance and
trust and connecting people peer-to-peer blockchain systems will radically reduce the friction
within economic networks of exchange and make markets a primary mode of organization.

Markets can enable the decentralized coordination of large and complex organizations. One
of the basic features of complex systems that we see in the world around us is that complex
organization can, in fact, be the product of simple rules. Markets engender this principle,
actors in markets can operate based only on very simple local information, if someone will
pay me more for this car than it is worth to me, then I will sell it. If I get paid more at one job
than another and I like the job then I will do it. The rules under which actors operate within
an economy are often very simple, but through all the interactions we can get complex
emergent behavior on the macro level without that organization being prespecified.
Blockchain networks enable the shift in organization from formal structures to much more
fluid structures based on value exchange via markets and those markets are organized
through price signaling that alter people's local incentives.

Price Signaling
Prices are the signals that coordinate economic activity via markets. A price is a signal
wrapped up in an incentive. An increase in the price of oil signals users that oil has become
more valuable in alternative use. But we don't just want to signal to people we also want
them to move in the right direction, to take the signal seriously, to adjust in the right way. The
higher price does exactly this. It gives users of oil an incentive to respond to the signal. They
respond by using less, by substituting a lower cost alternative. Suppliers are also
incentivized by the signal to invest more in exploration, to look for alternative sources, to
build more etc.

The price system economizes on information. It's able to allocate resources in a

decentralized fashion using all of the information available, but without collecting all of that
information, without having to transmit all of the information, because it makes use of the
information in a decentralized fashion. It uses the information which is in people's heads via
the local choices they make in the market.

Markets are linked. They are linked geographically across the world. They are linked across
different goods. They’re also linked, through time. The market acts like a giant computer that
arranges our limited resources over space, time, and across different goods so that we can
allocate resources via a decentralized mechanism.

For example, after a hurricane, it's quite common for the price of generators and chainsaws
to become very expensive. It's signaling that we need more of those resources. The higher
prices in a hurricane-devastated region, that says, "Bring the resources here!" The high price
is a signal saying that the value of generators, the value of chainsaws -- it's really high in this
location, at this time. And that higher price is acting as an incentive. It's telling entrepreneurs,
“You can profit by bringing resources from where they have low value to where they have
high value." The price system is doing exactly its right job. It's signaling and incentivizing
people to respond to these shortages.

Jason Potts an economies at RMIT University describes well how tokens work similar to the
pricing system. "The purpose of the token system is to publicly coordinate private actions
and that's the interesting part of this, it's not a monetary system it's not a price system per se
but it's still a system where you've got coordination going on where individuals are able to
look at the tokens what they're doing, the tokens are doing the coordinating, and adjust their
behavior with respect to that and what you get then is emergent order that emergent order is
an economy, the proper word for it is catallaxy, not an economy, but the tokens are doing the
coordinating and they're not doing it because of their exchange value or they use value or
the store value, value they're doing it because of their coordination value... anything that
can do that, use rules that can create private coordination using a public signal is an
economy

In this respect the best way to understand money and currencies is as "current" "sees" that
is to say tokens allow us to see currents within the network.

Jason goes on to note that "what [tokens are] about to open up is a whole new world of
coordinating signals that didn't exist before, that's the big thing, that's the game changer that
we've never seen before" we are going to get a much more refined pricing system with all
these tokens and automated exchanges "that means we can coordinate an economy so
much better with all this new coordinating information which requires a token."
Long Tail
This reduction in transaction costs that will be enabled by distributed blockchain networks
will have a systemic nonlinear effect, it is not like simply altering one component or one
section of the system, it will alter many exchanges within the economy, that kind of nonlinear
systemic change can give exponential improvements. Transaction costs are fundamental to
wealth creation and economic well-being. Interestingly reducing transaction costs across an
economy by just a small percentage can massively increase the wealth creation in that
country.

The result of that lowering of transaction cost means that it will be easier to access
resources out on the edges of the network. What decentralization and the reduction in
friction does is to enable access to resources out on the very edges of the network. By
shifting from closed organizations to open decentralized markets we have the opportunity to
really build global networks that begin to include those right out on the edges.

Today, about two billion worldwide remain unbanked. In Asia 60 percent of the people are
cut off from the world economy, they do not have bank accounts, they don't have access to
the financial system. In South America, it is 65 percent and in Africa, it's 80 percent. The
majority of the world's population is cut off from the world economy, in most cases, they can
only use cash which means they can only deal with the people that they see face to face, it's
a very small community of economic trade.

The average sub-Saharan African makes about 550 dollars a year, it is simply not financially
feasible to expand a traditional banking system into remote countries that are sparsely
populated with individuals that make only a little income. The marginal cost of adding an
account at that level with a protocol and open source community is marginally close to zero,
so if we are able to build this decentralized economic infrastructure that is where the value
will be, out on the edges of the network. There are 4 billion under and unbanked individuals
in the world and that is huge global growth potential.

With blockchain base token economies we are not just expanding what value types get
incorporated into the economy but also by reducing transaction cost we are extending
markets further out. By converting centralized organizations with boundaries and borders
into open networks we are making the networks of the global economy accessible to many
more people. These token networks are going to be incredibly global like we have never
experienced before. The infrastructure does not reside on a centralized server in silicon
valley, but on computers around the world. We can create protocols as peer networks that
reside on a distributed computer network and simply provide the coordination mechanisms
through which people interact without anyone necessarily owning or really controlling that
system, thus reducing borders to entry and expanding markets to almost everywhere.
Token Service Networks
In just the past few decades our world has been radically changed by the development of
almost invisible layers of information networks that now wrap around the planet connecting
ever more people into common exchanges. Telecommunications has connected us, online
platforms have provided the coordination mechanisms for organizing more and more
spheres of our lives. But now a new dimension is being added to this as blockchains enable
us to securely record and exchange value automatically and with low friction. It is when we
put all these components together that we get the infrastructure for truly rethinking and
redesigning economic and enterprise structures based upon open dynamic networks.

Information technology, telecommunication networks, online platforms and blockchains are

enabling us to create ever larger systems of organization for economic production and
exchange; enabling the switch from closed organizations competing to open networks with
these networks being organized via market mechanisms.

The blockchain, through smart contracts, lowers the information costs and transaction costs
associated with many interorganizational contractual arrangements, and so expands the
scale and scope of economic activity that can be undertaken. It allows markets to operate
where before only large firms could operate, and it allows businesses and markets to
operate where before only government could operate.

Previously institutional structures and technologies worked to strengthened coordination and

cooperation within organizations leading to the formation of ever larger centralized
operations.
Large-scale differentiation of labor was a key innovation in the enterprise that greatly
expanded during the industrial revolution. With mechanized automation individuals could
focus on repeatedly performing the same operation rapidly with those diverse activities being
coordinated through production processes, meaning that it was now not any one individual
that produced things but instead the whole organization. We saw the development of the
very large enterprises of the industrial age such as the corporations that were hired to build
the American railroads with ranks of salary middle managers expanding as fast as the tracks
were being laid down.

This industrial model for the generation of value is largely a product of two factors; firstly, the
centralization of production and economies of scale that is inherent to an industrial economy,
and secondly, it is also a product of the relatively high cost of collaboration and
communication. In order to achieve the mass scale that the industrial environment
selectively favored, standardization and predictability were a key component. Within this
model, there is a strong divide between producers of value and consumers. On the one side,
we have formal well-bounded professional organizations. By aiming to maximize their
efficiency, they include only the people who are most productive. On the other side, we have
the consumers who consume the products and services made by the professional
organizations. There is a strong divide between producers and consumers, professionals
and amateurs, work and play.

Today information technology is changing the very foundation of this dynamic. Blockchains
radically reduce the cost of interaction and collaboration between organizations, compared
to within them. Thus, the natural size of an organization can be far smaller. So, once large
enterprises have tokenized, then it will also be natural for them to split into smaller and
smaller entities, and to reform as needed.

The distinction between the inside of organizations and their external market economy will
become increasingly eroded as networked forms of coordination span across traditional
boundaries linking inside and outside in a greatly more fluid fashion. This will have a very
profound effect on the overall structure of our economies, as they go from many closed
organizations competing within markets to the emergence of large ecosystems of
collaboration along whole supply chains and within the provisioning of complex service
systems. Indeed the last few decades with the emergence of the internet has already seen
the formation of large business ecosystems.

Eamonn Kelly of Deloitte consulting describes this transformation well when he notes
"ecosystems today are doing nothing less than redefining the shape and structure of the
economy. They're increasingly determining business success and business failure. They're
enabling massive and rapid innovation around the world and essentially they're playing a
very, very critical role in shaping the future of our society… Essentially boundaries are
blurring everywhere, the boundaries between what large firms and small firms can do, the
boundaries between industries and sectors, the boundaries between organizations, the
boundaries between technology domains, the boundaries between producers and
consumers. Where consumers used to be passive recipients now they're active participants
in the economy... We're now living in a world where there are more nodes across more
networks with more specialized capabilities and above all this extraordinary ability to connect
them, to collaborate, to co-create across these systems. That's the fundamental shift that's
restructuring economies and I think is actually going to fundamentally change our society."

Service Ecosystems
Recently an important idea has been gaining acceptance within the business community, the
idea that businesses of many shapes and sizes can thrive and serve customers better as
participants in ecosystems. More diverse and collaborative, more adaptive and agile than
traditional industry structures and supply chains. The term "ecosystem" is a useful metaphor
that points to a deep interdependence across players as they Co-evolve and together create
and share resources. Many of these ecosystems are built on top of powerful platforms that
facilitate connectivity and invite
the active participation of a large number of other players. Businesses that understand
ecosystems and how they work are discovering exhilarating new opportunities to co-create
new value streams with multiple players often including customers. They achieve this by
harnessing the new coordinating power of advanced technologies to create scale and serve
untapped markets, faster than ever before, work with others to meet important human needs
and by delivering complex services in ways that would be beyond the capacities of any
single organization, they attract and activate passionate communities of talented individuals
and organizations and accelerate learning and innovation. To understand the potential of this
idea we need just think of one relatively trivial example.
Imagine all of the drug companies having the means and incentives to collaborate on
producing a single best drug instead of 90% of their resources being wasted competing
while only one gets to patent a new drug.

Architecture
With the shift towards token economics, our economies will evolve from the traditional model
of the industrial age, based around centralized closed organizations competing, to more
user-generated systems that both collaborate and compete within large open networks.

The critical change that will come about will be the move towards a Service-oriented
architecture to whole macro economies and indeed the global economy as a whole. As the
strength of these open trusted networks grows and connectivity proliferates the centralized
organization will become unbundled along many dimensions and the product based, push
model of competition of the past will evolve into a dynamic, plug and play networked model
that works to aggregate modular on-demand services around the needs of end users. Over
time those service-oriented blockchain based networks will become increasingly automated
through the development of smart contracts.

In a recent article from the RMIT Blockchain Innovation Hub, the authors write "for many
industries, the blockchain will radically redefine the boundaries of the firm, allowing
individuals to trade their talents and skills in an environment devoid of big business. The
eclipse of the large public firm has been predicted before, of course, but this time we believe
those predictions will eventuate for many, if not most, industries."

The organizational paradigm of the token economy will be large service networks. Digital
networking technologies enable networks to overcome their historical limits. They can, at the
same time, be flexible and adaptive thanks to their capacity to decentralize performance
along a network of autonomous components, while still being able to coordinate all this
decentralized activity towards a shared purpose.

A huge structural change that is coming about as we move into the information services
economy - base on these information networks - is the shift from static structures to dynamic
flows of value as the organizational model. Unlike the industrial economy that was based on
fixed structure such as the formal hierarchy or products produced, a service and token
economy is one that is fundamentally based on value delivered. The organization is not
based on fixed structures, roles or boundaries, but instead is based more upon value
produced and exchange, this value can be defined in terms of services. From this
perspective, the organization is a network of value exchange and the members of the
organization are those that provide value, the service providers.
Micro Transactions
Existing centralized companies when they design their products they have to design around
the constraints of the existing fiat currency system. Although not often noticed this, in fact,
has a lot of limitations as transfer costs are high, they are slow that's why we pay employees
at the end of the month. It is for this reason that we don't pay every person, every second,
that's a constraint of the existing financial system and we build our products around those
constraints but this is going to change with the micro-transaction capacities of the
blockchain.

When economic activity is moved to a blockchain, tokenized and servitized we can then
begin to actually track the real flow of value exchanges and match those with token
exchanges. Instead of buying a song you stream it and pay in tokens for what you stream,
instead of paying a flat rate road tax you pay as you drive, or instead of paying a fixed
insurance rate you pay your insurance as you drive etc.

Global System
Digital communication networks are the backbone of the network society, as the electrical
power networks were the infrastructure on which the industrial society was built.
Furthermore, because the network society is based on networks, and communication
networks transcend boundaries, the network economy is global, it is based on global
networks. By reducing the border around centralized organizations blockchain networks
morph into ever-larger systems as they provide the underlying infrastructure for the evolution
of a new level of economic organization on a global level. These token economies can be at
once local, in that they enable anyone to set up their own micro exchanges of value, but also
inherently global. These networks - because they're living in this global computer network
rather than inside of a specific cluster of servers somewhere - have a certain magical
property which is that they're global by default, they're everywhere from the day that you
release them and the services are universally available. This is quite interesting because it
changes delivery at the edges of the network. Currently, we are not very good at delivering
services beyond the two billion richest people on earth.
The fact that these networks are inherently global, the fact that all the logic is kind of buried
in the payments architecture, the fact that there's no real recognition or international borders
in these systems, because they all operate embedded in the internet they don't see the world
as a set of countries they just see as an enormous global network, all of those things point to
the possibility, currently quite far off, that we are beginning to see global service
architectures that run on these systems. Not just the payments which we already have and
are being used very successfully in a lot of poorer countries but also the possibility that the
services which are built on top of those payments will turn out also to be global by default,
which could have a huge democratizing effect on the global economy.
Automated Networks & Smart Contracts
The term used to describe the new forms of organization created by blockchain networks is
"decentralized autonomous organizations" but one could just as well term them
"decentralized automated organizations" as the automation of basic organizational
procedures will be a central aspect of this new form of economic organization.

Blockchain protocols build upon the capacities of telecommunication networks to

interconnect, and of the capacities of the microprocessor to run complex software systems
for coordination. But whereas the previous set of information technologies gave us digital
platforms for organizing economic production the blockchain promises to extend this model
to fully automated distributed networks.

The promise of the blockchain since its beginnings has been to challenge centralized,
top-down decision-making through, distributed consensus, radical transparency, and auto
enforceable code. Smart contracts on the blockchain disintermediate existing institutions and
radically reduce transaction costs thus allowing for new forms of decentralized organizational
structures that were not feasible before. More specifically, this business model “automates”
the governance to a certain degree. It frees up more time to actually spend on getting work
done, although it also requires a much larger leap of faith by all parties involved to trust in an
automated "trustless system."

As one commentator noted, we can call private blockchains training wheels for public
blockchains and now public blockchains are in many ways just training wheels for these new
autonomous decentralized networks which just work and everyone can trust them. These
are gonna be some of the most powerful networks that we have seen because the code is
immutable and many functions are automated; in many ways, they will be unstoppable in the
way that Bitcoin is automated and likewise in many ways unstoppable.

Decentralized Enterprises
An enterprise can be defined by its business model as a system that operates within some
environment, intercepting resources and processing those into some output of value, while
capturing some of that value and redistributing it within the organization.

People work together to create value and then redistribute that value amongst members,
what changes with the blockchain model is that we take out the centralized coordination
component and replace it with code in the form of smart contracts. Smart contracts on the
blockchain radically reduce transaction costs and automate basic management operations
creating the basis for a peer-to-peer economy; allowing for new forms of organizational
structures that were not feasible before. The enterprise can be converted into an automated
plug-n-play model where anyone who can deliver a service can plug into the system and
provide that service directly through a smart contract receiving tokens in exchange.
Brendan Blumer CEO of Block.one, the makers of the EOS network, describes this evolution
in the enterprise when he says "what we're really moving into is the era of open source
companies and the types of innovations that you're seeing with open source technology, the
explosion in development and projects like GitHub... the core of open source allows us to all
build on each other's work. In the future when I wake up I may not even have an employee
or employer, I may be able to just work for absolutely any company in the world that I can
add value to, imagine that you wake up and say I have a great idea for Airbnb, you examine
the code you start writing something and you put it out there, the public accepts that, forks
you into the network, pays you a bounty, now you've got a decentralized network a piece of
code that has essentially just hired you, that has taken your ideas, that has incorporated
them into the organization and you have been paid and they don't even know who you are."

When everything is open source and everything is able to be viewed anyone can add value
to that business, anyone can connect and say what if we do this, or what if we add that
feature. The past decades have shown how open-sourcing software and open-sourcing
development can skyrocket the acceleration of technology innovation and service delivery.
Because we're not reinventing the wheel anymore and anyone can come in and add a good
idea and it can be adopted by the greater public. What happens when you do that to a
company? When you're competing with Uber with everybody as your employee? Every bit of
your code is auditable anyone can make suggestions, if those suggestions are good they
can be forked right in that's really what these decentralized autonomous corporations
enable.

Employment
Blockchain networks will extend the recent development of the on-demand economy and
online freelancing platforms that have enabled people to work as freelancers contributing to
many different projects without one fix form of employment. By digitizing everything,
automating networks and enabling micro exchanges of value token networks will enable a
new mode of production where tasks are modularized and made available for anyone with
skills to pick up, perform and receive tokens in exchange. And of course, because token
economies are multi-value economies this production process could be of any kind.

The influential blockchain thinker William Mougayar describes this when he says "We are
moving from user-generated content that you are familiar with, which is really the
cornerstone of social media when you post a picture on Instagram, when you write a few
lines on Facebook or Twitter, that is called user-generated content. In the future, we are
going to have user-generated work, but this is work that we are going to get paid for by the
blockchain by all of these cryptocurrencies that will come into existence"

A good illustration of this is initial bounty offerings (IBO) which are a more recent
development to ICOs. IBOs are "a way to crowdsource human resources, business
development, marketing and user acquisition for blockchain technology ecosystems, by
offering network tokens in exchange for contributions to the ecosystem.” They represent a
limited-time process by which a new cryptocurrency is made public and distributed to people
who invest their skills and time to earn rewards in the new cryptocurrency. Unlike an Initial
Coin Offering where the coins are sold, an IBO requires an exchange of skills and greater
commitment by community members in the development of the technology.

UCash is one project using this method, you can earn UCASH tokens for doing tasks like,
writing an article, blog post or producing a video about UCASH or translating the UCASH
white paper into different languages.

The technologist Vince Meens talks about the potential at the intersection of virtual reality
(VR) and blockchain for enabling these new on-demand token networks. Where anyone
could put a bounty on something that they want to see done, whether that is having the lawn
mowed in the park or feeding homeless people. With the use of VR goggles, one could walk
around and see the digital currency bounties left all around us available for earning by
performing valued tasks.

Indeed bounty hunting is a surprisingly general and powerful model which could be used to
incentivise people to find and remove any unwanted phenomena. We could have bounty
hunters that are going after rewards for finding bad transactions on the blockchain, for
finding bad data on the internet, for removing spam messages or for finding violations of
some law etc. We just simply post rewards for finding anything that we don't want and it is a
decentralized system anyone can go after the reward. Once again this is the power of being
able to now design incentive systems.

Service Delivery
Likewise, these smart contract networks will automate the provisioning of services.
Entrepreneurs will be able to create an application and release it into the “wild” ready to be
employed by anyone and everyone who needs that functionality. The entrepreneur in turn
simply observes micro-payments accumulating in their wallet. A designer could release their
design into the “wild” and end users could download that design to their 3D printer and have
the product almost immediately, paying automatically with their download.

Likewise, music services will follow suit. Currently, music licensing relies heavily on
paperwork and trust in a music industry dominated by centralized organizations that take the
majority of profits at the expense of producers. These intermediaries between the producer
and listener of the music can easily take 80% of the price of the good. Musicians hope and
trust that sales of their music and merchandise are properly calculated and reported to them
but have no way of really verifying. As streaming and digital downloads eliminate physical
sales of media containing songs, the music would appear to be a great candidate for
tokenization. If music ownership was represented on a blockchain, the many participants in
creating the music could have their shares set electronically. The vision would be to have
every listener of their music require "unlocking" the file and paying, with payment then being
distributed to the appropriate holders.

This model could though, be generalized to the whole of the economy. Once a product has
been turned into a service the terms of that service can be encoded in a smart contract, the
contract is put on the blockchain and made publicly accessible through APIs, tokens are
then automatically streamed to a wallet in exchange for the usage of the service. That is a
generic model that would apply to any economic good once it has been servitized.

Supply Networks
These automated blockchain token networks hold out the possibility to radically improve the
efficiency across the supply networks that run our globalized economy. The founder of the
Sweetbridge project describes well the role of supply chains in the global economy when he
notes, "most people don't know what supply chains are, but everything you eat everything
you wear almost everything you own and everything we use on a day to day basis was
processed by, moved, stored or created in a supply chain. Supply chains manage 2/3 of
global trade, so that's about 54 trillion dollars worth of global GDP. Supply chain is the
science of managing the creation of something and the construction of it through value
chains that have many, many parties involved in them, so the blockchain has an ability to
affect the supply chain far more than I think most people recognize."

Token networks will enable automated coordination and the flow of goods along whole
supply chains. Supply chains that currently involve massive amounts of friction, in terms of
verification, regulation, financing and various forms of information exchanges. These supply
chains may work to a certain extent in developed economies, but 40% of exchanges are now
between emerging markets. Take for example a rice farmer who wants to sell rice from
Vietnam to Nigeria, this involves an exchange between Vietnamese dong and Nigerian
pounds, just to go from one of those currencies into the dollar - the international exchange
currency - and then back into the other currency it may costs up to 20% of the transaction
value.

Binkabi, is one blockchain startup that tries to replace this model with a direct peer-to-peer
network for agricultural products, which automatically identifies the trades coming from the
different countries in different directions and tries to match those of similar size so that the
companies can exchange currencies directly between them, this can work to take out the
centralized component and remove massive amounts of redundancy in the network.

But going forward we will start to tokenize whole supply chains, as we begin to understand
supply chains not in terms of products and companies but instead as service networks or
value networks that deliver a service and build token economies around that process of
value delivery. Here again whole supply chains, just like enterprises and whole economies,
will evolve into service-oriented networks where tokens reflect the service delivered and
individuals and organization can plug in to deliver modular capabilities to the network
receiving tokens in return.

IoT
The important thing to always remember in this respect is that much of the greatest potential
of blockchain systems is only possible given the effective interaction between the token
network and the physical world. Having highly efficient automated token networks that then
bump into very slow, manual, physical procedures would be like driving a super fast Ferrari
in rush hour traffic. Blockchains are protocols for networks, they can only deal with what is
inside the network. But for those networks to become the dominant mode for organizing
society and economy they have to interact with the real world of people, organizations,
things, and physical environments.

At present virtually all of our newly formed networked systems are dependent upon
traditional centralized systems of organization to support their existence in the physical
world. The only way that these networks are going to gain their full autonomy is by
interacting directly with physical technology and real-world environments. This is now made
possible by the Internet of Things and advanced data analytics.

The blockchain and token economies exist within the context of this next generation of web
technologies and they have to all be working synergistically. If the linkage between IoT, big
data, and the blockchain is not made then these new systems will remain - like the networks
of web 2.0 - dependent upon industrial age institutions and the potential will be lost. We will
end up in the same situation as previously where networks like Twitter and Facebook gave
people the tools to connect and start the protests of the Arab spring, but not the physical
means to realize that change. Both the Internet of Things and complex analytics are massive
technological changes, if you simply focus on token economies and the blockchain without
thinking about those other elements you are missing the bigger picture. The platforms that
manage to use all three effectively and synergistically will likely, for better or worse,
dominate the world of tomorrow.
Trust & Transparency
In a Facebook survey done in 2016 asking millennials if they trust banks, 92% of them said
they do not trust banks. In contrast to this, the blockchain is creating a new form of native
digital trust that is significantly absent in existing institutions today. This loss of trust in
centralized institutions is one of the hallmarks of many post-industrial societies today. In a
world of trusted centralized institutions, few would take interest in a distributed system that
requires a paradigm shift in thinking. These token economies are going to gain the trust that
is lost from our existing institutions by being more transparent and the fact that they are
auto-enforced by code. Blockchains are a technology of transparency, public ledger systems
let us see all the interactions in the whole system - even if those interactions are anonymous
- and this is very different to the world we live in today.

Transparency
The closed nature and misalignment of interests within centralized institutions of today
reduces their capacity for transparency. Facebook does not tell you that they are making a
profit out of you, with your data and the advertisements they deliver to you because there is
a subtle misalignment of interests there and they don't want that to be transparent. Likewise,
their algorithms are black boxes, they don't want others to know about them.

Centralized systems create many boundaries that block the flow of information across the
whole network and increase its overall opacity. Gavin Wood a co-founder of Ethereum
describes well the kind of economy that we have created with centralization when he says
"the world is much like a set of walled gardens, within the garden you're free to play, you are
taken in if you accept the authority of the household that actually owns the garden, but it's
very difficult to get between the gardens in reality. This boils down to banks and various
financial institutions making it very difficult and timely reconciling transactions that go
between them, but the more important thing is that as individuals and small business owners
it's very difficult for us to interact with each other if we don't yet know or trust each other,
instead we have to go to these guardians of society, these intermediaries, these trusted
authorities the middlemen in order to interact."

When you remove the centralized component in these networks you also remove the wall
around them that they create which can work to greatly increase transparency across whole
networks. By switching to a peer-to-peer model you switch to a model based upon direct
feedback loops between peers, to get that dynamic real-time information feedback loop you
need transparency; the information has to actually flow directly instead of being mediated.
By aligning the interests of the network, you can make transparency possible as people have
less of their misaligned incentives to hide from each other. When things are on the
blockchain then everyone can go and audit what has happened, this is like finding bugs in
open source software where "many eyes make all bugs shallow."
Part of the problem with centralized systems is that they are vulnerable to a rich get richer
lock-in effect. The issue with the centralized model is that large organizations get capital
easier, greater liquidity and they get to dictate terms because they are seen to be more
efficient and stable, this makes it more difficult for new startups to compete. When the
Internet started it was built on open protocols like email or TCP/IP and everyone was able to
create, it was easy to discover websites. That’s not true in the internet anymore. Closed
networks like Facebook or Twitter are gated communities that use their user data to gain an
advantage. If you are a startup they also have the potential to shut you down as soon as you
compete with them or violate their terms of service. Once a centralized organization of this
kind has grown it is very easy for them to become extractive, because it is difficult for people
to change providers. Any system that becomes extractive will not want you to know that it is
such and this will again reduce transparency in the system.

Fractured System
One of the major challenges faced by organizations today is rapidly escalating complexity
within almost all domains. As our environments become more complex bureaucratic
organizations have responded to that by creating more subsystems - more specialized
departments and domains - the result being that things have been broken up into these
different silos. These silos provide the organization with some of the specialized capabilities
for it to respond to the increased complexity within its environment but at the same time have
the effect of locking information about what's going on inside because they don't wanna
share that information; because they're afraid competitors or customers will
take advantage. The more complicated things get the more we basically break things up and
the more fractured and siloed the system becomes; the greater the resistance to the overall
flow of information within the system and the greater the overall opacity. Blockchain
networks enable us to collaborate within large networks, connecting horizontally and replace
proprietary technology with open source protocols, greatly increasing transparency on the
network.

This transparency can be used to reduce risk and uncertainty and thus reduce costs. With
the blockchain - because everything is digitally native - we can have the actual information
about transactions within the network and we can, for example, lend against that with
minimal risk. If there is a smart contract that an organization pays you every month then you
can use that to get a loan against it with minimal risk and thus minimal cost. Also because
these may be smart contracts you could just adjust those contract so that the capital is
automatically routed to the lender as payback. Also no one can run away with the money
because it is controlled by the network which reduces risk again, likewise the network could
control for bad actors routing the finance around them.

Outcomes Economy
Just as the underlying technology is based upon a proof-of-work or proof-of-stake system, so
to a true services economy that the blockchain enables should be based on outcomes
delivered. Unlike selling products which are all about the promise of a functional system,
services can be measured according to the actual functionality delivered; the work delivered
instead of simply being given a product that may or may not function well. The proliferation
of sensing and big data analytics will enable us to measure and quantify our economies in
unimaginable ways and in so doing begin to track the actual functionality delivered, which is
at the end of the day what people really want, or are increasingly wanting as the so-called
"burden of ownership" of the industrial age product-based system starts to take hold within
consumer societies.
An "outcomes" system of this kind is again just one more way that a blockchain based
economy could work to better match the information layer of token exchange with the
underlying flows of real value.
The Plug-N-Play Enterprise
A central concern of economics is the question of how do people work together within some
form of enterprise and then redistribute the value created by that collective effort, in a way
that is optimal for the entire organization.

An enterprise is a structured project or organization designed to achieve valued ends. What

defines a business, enterprise or company is a business model. For something to be
considered a business there must be some coherent business model which defines how the
organization creates value, exchanges it and generates revenue and thus achieve its
objectives.

A business model can emerge wherever there is the opportunity to create, exchange and
capture value. If we discover a new source of mineral under the ground that people need,
then we can build a business model on top of it by extracting it, exchanging it and capturing
some revenue from that value stream. This business model is realized through the
construction of a business or enterprise. Enterprises then operate on top of some value
stream, intercepting, transforming, exchanging and retaining value.
These enterprises enable the specialization and division of labor within economy and thus
the production of complex products and services.

Previously we found that we have to typically be inside of one of these formal structured
organizations to be able to be productive in this way. But the proliferation of connectivity and
reduction of transaction costs taking place bring about a deep structure transformational in
the economy from closed organization defined by their boundaries to open networks defined
by their protocols, and this offers new ways to really unlock and harness the assets and
creative potential of people around the world within new larger and more complex networked
organizations.

Platforms
With the rise of the internet has come a new way for structuring the division of labor within
the economy through on-demand, networks or what have come to be called platforms.
Platforms are information networks that enable two-sided markets, for producers and
consumer to connects and exchange value. These web platforms like Alibaba, Amazon,
Google or Facebook have today already risen to the top of market capitalization within the
space of just a decade or so to replace the corporations of industrial capitalism.

These platforms differ from the traditional organization as they are designed to be dynamic
and event-driven; where providers and consumers can couple or decouple from the network
on-demand instead of having fixed roles, like Uber drivers, or Airbnb hosts. They are
modular, tasks and service provisioning are broken down into small modules that can be
easily produced and consumed, like on-demand videos on YouTube or blog posts. They are
scalable, a seller on Alibaba can easily and rapidly go from a few hundred dollars in sales to
a few million. They are based around interactions and the exchange of value in real-time
instead of fixed structures and procedures. Much of the platform's operations are automated
through software running on centralized servers.

The advent of blockchain technology will overtime extent these previous trends into the
world of fully automated and autonomous networked platforms. On a more technical level,
this will create a new architecture for our enterprises and entire economies. This new design
paradigm is best captured in the term service-oriented architecture.

SOA
Service Oriented Architecture (SOA) is an approach to distributed systems architecture that
employs loosely coupled services, standard interfaces, and protocols to deliver seamless
cross-platform integration. It is used to integrate widely divergent components by providing
them with a common interface and set of protocols through which they can communicate
within what is called a service bus. Over the past few decades, service-oriented architecture
has arisen as a new systems architecture paradigm within I.T. as a response to having to
build software systems adapted to distributed and heterogeneous environments that the
Internet has made more prevalent.

There are many definitions for SOA, but essentially it is an architectural approach to creating
systems built from autonomous services that are aggregated through a network. SOA
supports the integration of various services through defined protocols and procedures to
enable the construction of composite functions that draw from many different components to
achieve their goals. It requires the unbundling of monolithic systems and the conversion of
the individual components into services that are then made available to be reconfigured for
different applications.

Over the course of the latter half of the 20th-century enterprises consolidated their IT
infrastructure within Enterprise Resource Planning systems(ERP) behind firewalls. Over the
past decade or so those IT systems have started to migrate to the cloud, but now they will be
moving increasingly to this distributed cloud of these next-generation blockchain networks.

As today's enterprises face new challenges of having to collaborate across large networks,
foster innovation within their organizations and as information technology is greatly
accelerating the pace of change, reducing the barriers to entry, shorter and shorter product
life cycles are the norm. These enterprises have to respond to fast-changing environments
by becoming more agile and the most advanced and forward-looking of these enterprises
are already moving towards a platform model to achieve this.
Event-Driven Enterprise
The enterprise of tomorrow will unlikely be based on the static structures of today, but
instead will be event-driven networks as we go from a push model of industrial production to
the pull model of the services economy. Service-oriented blockchain based networks will use
advanced analytics to pull together resources when and where needed on demand.

The enterprise of tomorrow will be more like an ever-evolving swarm rather than a structured
machine, with value being created in micro-interactions dynamically within networks of
peers; some large, some small. Enabling this rapid coupling and decoupling from blockchain
networks - of people, resources, and technology - when and where needed will require
plug-n-play, API like interfaces. With the confluence of the services economy, blockchain,
and analytics for the first time, we can actually identify what people are contributing to an
enterprise, what economic value they are creating, and begin to reward people in real-time.
The enterprise will need to be inherently designed to be able to plug in any capacity to the
network as required. The most successful of these networks will be those that are able to
harness the efforts of the many, along multiple dimensions, in a frictionless automated
fashion. When we start to combine these capabilities we start to see a new and very different
architecture to the enterprise and economies.
Token Economic Development
Economies are large-scale systems for the production and exchange of value within society.
One of the key functions of economies and economics is to figure out what might happen in
the future and enable economic development by coordinating the efficient allocation of
resources within that system. An economic system has to aggregate large amounts of
information and figure out how to allocate available resources in an efficient manner to
support its future development. The same is true for all organizations, enterprises, and
individuals, they also have to figure out how to allocate both their current resources but also
where to invest their resources to enable future success and growth.

This can be done either in a centralized fashion or a decentralized fashion. The centralized
approach involves having a large bureaucracy that monitors the economy, bringing in
information from the many different industries and employing an army of economists,
statisticians, and analysts of various kind to try to forecast the future and figure out a plant
for the economy, then use subsidies, taxes and various forms of regulation to try to allocate
resources according to some centralized vision. This we would call a command and control
economy, as exemplified by the former communist system, but it is also a key part of how
most economies are managed today by their respective national governments.

This centralized approach has its advantages and disadvantages, we can look at China's
current rapid development which has to a large extent been a function of the central
government's planning. But equally this approach has its failings, it is critically dependent
upon the information processing of a limited number of people, who may be highly
competent, but just as likely, they may be incompetent. Either way, they can only process so
much information which means there are information bottlenecks, as the information is
centralized. Likewise, the people are making decisions about other people's resources, not
their own, which can lead to a misalignment of incentives and many opportunities for
corruption.

Adaptation
With fast-paced technological and market evolution and mass, automation innovation is
moving to the forefront of what enterprises are required to do. At the relatively low level of
change of the past, the enterprise could confine change and innovation to some small R&D
department and could afford lengthy production cycles and change processes. The mass of
the organization was built around a stable and predictable hierarchical structure, long
production processes and product life cycles through which stable income streams could be
maintained. But as the pace of change increases this model is becoming increasingly less
viable.

We are living in a more and more complex and dynamic world; there are more things coming
at us and they're coming at us at a faster rate and it is not just that the pace of change is
accelerating but we also have more extreme events, the so-called "black swans" that come
at us out of nowhere and we're part of nobodies plans. In this kind of world to think about the
future is a waste of time, in that kind of world all you can focus on is how to adapt more
quickly, sense and respond more quickly to what is going on in the world.

Blockchain networks and token economies are distributed, that is to say, they have no
centralized component, because of this we can not develop the economy in the traditional
top-down approach but instead have to work with the innate peer-to-peer market dynamics.
Without centralized coordination, they rely on markets to predict the future and decide how
to allocate resources and invest in response to that. It has long since been noted that
markets themselves are decentralized systems for the processing of information and the
distributed allocation of resources. One of the key aspects to economies and markets is as
information processing systems; they aggregate all the local information that people have
and use it to formulate a price that indicates something about the supply and demand of a
good or service, both now and possibly in the future. Market prices are good ways of
aggregating dispersed information and summarizing that information in a single key figure,
the price. Futures markets are good examples of this where traders bring their knowledge
into the market about some future outcome with the price then reflecting that dispersed
information.

Evolution
These loosely-coupled evolutionary type systems are long-term much more reliable than
highly structured centralized systems - whether it's from biology or whether it's even
engineering systems - and we are entering a world where we can have business systems
that have these properties and that means that it's able to absorb and adapt to small and
large changes on an ongoing basis. With highly centralized systems you have a lot of
internal fault lines that get covered up by the opacity and boundaries, they just sit and sit
until things break massively and you get massive crashes. When you open the door to
identifying and adjusting to your small perturbations and letting systems evolve through
interaction with the community you can actually massively reduce the probability of these
mega like corrections because you're making micro corrections all along the way.

As an example we can think about a large financial institution or enterprise going bankrupt,
the internal dysfunctionalities and stresses within the system will not be revealed for long
after they happen and it will take years to wind down the operation. A token economy is a
real-time economy, think about how hard-coded financial regulation into a decentralized
autonomous organization would be. Ten minutes after a bank started trading insolvent the
automatic regulation smart contracts would kick in and that bank would just immediately shut
down and redistribute its assets to its creditors. That whole process of insolvency, the minute
it started trading insolvent and got to the threshold, would just automatically happen and we
wouldn't need agencies coming in and monitoring.

With these token economies a new form of economic development is emerging, one that is
more organic and evolutionary. Key components of that are; initial coin offerings as means to
bootstrap the token network; prediction markets as distributed mechanisms for bringing in
the best available information and predicting what will happen in the future; and advanced
analytics as means of optimizing the allocation of resources on the network through big data
analytics.
As we will talk about in the coming video ICOs are a critical part to these distributed
networks gaining their autonomy from the traditional financial system and enabling
communities to start their own networks based around their own value system. These
decentralized token networks can be biologically self-sufficient, we can add inflation to a
network every year, with say 5% more tokens distributed to the network, thus creating their
own value with which to fund their own development, which is being taken out of the value of
the whole ecosystem. The network inflates itself, to invest in itself, towards creating more
value which will compensate for the inflation.

So anyone can join and say I will do marketing or I will do all of these things to the platform
that will add value to the network in the future and if the network decides that they want to
allocate value to that activity then just by a simple vote the network can decide to produce
tokens and give them to the participant as an investment in its own development. The
network is self-sufficient in a sense that it creates its own value, it mints these new tokens
and distributes them as needed for future growth. In the case of Ethereum for example with
something like a 50 billion dollar token valuation and maybe a 10 percent inflation rate,
Ethereum is already allocating approximately 5 billion dollars a year in decentralized
budgeting, to its own development. This is an incredible degree of biological self-sufficiency
that we have never seen; these token networks do not depend on anything in this sense they
are completely autonomous code.

Likewise, the blockchain exists within the context of the next generation internet, the
so-called distributed web, a key part of this is advanced analytics. When whole economies,
supply chains, and enterprises are "on the blockchain" the potential for analytics becomes
extraordinary. One early example of this is the IBM Data Science Experience platform that is
used to analyze and visualize supply chain data from a blockchain environment, they
enhance the data with info taken from weather APIs and other sources, they then train and
deploy a machine learning model that predicts shipping delays. Blockchains open up data
silos and expose them for running analytics over whole networks and systems, this provides
new ways for us to determine the optimal allocation on a given economic network and even
run simulations as to future outcomes.
Initial Coin Offering
ICO, Initial Coin Offerings or first token sale, has become a new way to bootstrap a
community, through pre-selling tokens that give users access to the futures services that the
network will deliver. In an ICO, a quantity of the crowdfunded cryptocurrency is redistributed
to investors in the form of "tokens", in exchange for fiat currencies or other cryptocurrencies.
These tokens become functional units of currency when the ICO's funding goal is met and
the project launches.

The first token sale was held by Mastercoin in July 2013. Ethereum raised money with a
token sale in 2014, raising approximately $2.3 million in just 12 hours. Today first token
sales have become hugely popular within the blockchain community. At least 400 ICOs have
been conducted as of August 2017. According to Cointelegraph, companies raised around
$6 billion via ICOs in 2017. Already by February 2018, an estimated 46% of the 2017 ICOs
had failed; proving how risky an investment they are. Ethereum is (as of early 2018) the
leading blockchain platform for ICOs with more than 80% market share. Tokens are
generally based on the Ethereum ERC20 standard.

In contrast to initial public offerings (IPOs), where investors gain shares in the ownership of
the company, in ICOs, the investors buy coins of the company, which can appreciate in
value if the business is successful. These coins are sometimes "pre-mined", eliminating the
need for proof of work. Often contributions are capped at a certain value. ICOs are a way for
self-funding a project by selling future access to the service the network will deliver, as such
they can be seen as an extension of the crowdfunding process, but different in important
ways.

How do ICOs differ from IPOs or issuing shares? When you're investing in stocks what
you're doing is you're taking a piece of the equity, a piece of the operating company, all the
cash flows; the holder of the equity owns a part of all of the profits that the company makes.
Generally speaking, tokens are different you're not buying a part of an operating company
you're buying the money supply of the future technology project. With tokens, one is buying
the tokens before the company has built the technology, but if the technology grows and if
it's well used then the value of the tokens will correlate with the value of the company. Most
tokens do not actually provide any sort of claim to an underlying asset and that is different
from traditional securities.

ICO Dynamics
The token may start as "magic internet money" but as the ecosystem matures and becomes
more valuable in use the tokens start to look like and feel like "real money" to their end
users.
Any one or group of people can launch a project where ever they see an opportunity for
value creation through the coordination of people's activities.
At first, people come together and define what the future service of the network will be and
then create a token that will be the medium for accessing and exchanging that service. At
first, the project is nothing but an idea and a little bit of code on the blockchain for minting
some new tokens during the initial offering. Often when a token is first issued it has
essentially zero value. The value of the token at this point is largely dependent upon
people's perceived future utility of the network, thus the early purchasers of the token are
both believers in the network and risk takers, but they give the token value through their
belief in its potential and willingness to pay for it. Over time as people contribute to the
project the network starts to materialize and at a point, it can be opened up to the community
and start to deliver a service to the end user.

At this stage, the tokens that were previously just crypto equity now become utility tokens
which are used to benefit from the services in the ecosystem. Anyone who has contributed
to the community, in the beginning, can now use the crypto-equity to benefit for free from the
service that is provided. Those that did not contribute have no tokens and they now need to
purchase those tokens which gives the token more value as more people use the network
and it matures. At this mature state, the token should shift from being an object of
speculation to the actual use-value determining its price.
So money which starts as "magic internet money" becomes "real money" as the community
materializes and starts to deliver a real service that people would otherwise be paying for
with fiat currencies; the token actually starts to feel like real money.

Community Growth
Part of what blockchain technology enables is for our newly formed network systems of
organization to mature and become greatly more autonomous; ICOs are a way for these
networks to become autonomous in their initial financing, to become self-funding.

Token offerings can provide a very agile development model. As with this model to funding it
is now possible to set up an organization rapidly wherever there is a perceived business
opportunity and for anyone to invest in that organization with limited friction. Unlike in
traditional venture capitalism, contributors can transfer their assets instantly and easily to
other people.

Whereas previously only projects that could pass through the formal financial system and
look like profitable enterprises received financing, with token offerings people can finance
the things that they value directly peer-to-peer.

Take for example the blockchain project ImpactPPA that uses blockchain technology to
provide a direct vehicle for people to invest in energy projects in developing economies.
ImpactPPA tries to use the power of the blockchain to bring together capital and consumers
in a way that is direct, responsive, and expedient. Energy financing and distribution are
currently bottlenecked by large, centralized NGOs and government agencies that have
established a lengthy financing system that can take years from proposal to product
implementation. ImpactPPA offers a system that permits anyone, anywhere, to create a
proposal for a project of any size enabling the funding of clean energy microgrids in
emerging economies around the world.

ImpactPPA CEO Dan Bates explained that the current funding process with centralized
NGOs is “too cumbersome and costly for many developing nations… ImpactPPA’s use of the
blockchain and the crowd dramatically changes this paradigm, tapping into the vast potential
of the socially minded impact investor and concerned citizen, looking to benefit the
well-being of others while mitigating climate change.” - https://goo.gl/NY9Gv4

Examples
With token offerings suddenly it's possible to create all these business models that didn't
exist before which allow us to monetize open data and open networks in a completely new
way. ICOs have the potential to unlock huge amounts of untapped resources and fund
projects that would otherwise fall outside of the mainstream financing system as they can be
used to provide resources for any kind of project.

Building a new park in your neighborhood could be funded through an ICO. People come
together to form a plan for the park, they then create park tokens on the blockchain, inform
everyone in the area of the project and that to access its services they will need park tokens.
Tokens are distributed and used to remunerate those creating the park and maintaining it.
There doesn't even necessarily need to be any fiat money involved; people who contribute
receive tokens that they then use later to avail of the park's services.

Although we often think about ICOs in terms of investment and monetary increases the
token offering can be used to fund any project that may or may not have monetary value. It
is simply a way of recognizing the contributions that people have made to the development
of a project and rewarding them with access to the service that the system delivers at a later
date, thus creating a self-funding, self-sustaining system, that can be completely
independent of traditional market financing or government support.

This model supports the idea of multi-value as it actually becomes now possible to have a
variety of value systems in the sense that every organization can have its own tokens and
those tokens are actually representing what is the value system of that community. While it is
always possible to exchange the token for a particular fiat currency it also becomes possible
to create enough systemic exchange by which certain communities that see value in the
token of another community can start exchanging between them and eventually you can
actually create a really sophisticated system of exchange that could almost bypass the fiat
currency.
Token Prediction Markets
Prediction markets are speculative markets, very similar to futures markets which have been
designed so that the prices can be interpreted as probabilities for events occurring and used
to make predictions. Put very simply prediction markets enable users to trade shares in the
outcomes of an event and in so doing to reveal the information that people have about the
likelihood of an event occurring. In a very elegant way, blockchain prediction markets use
tokens to reduce uncertainty and find truths about future events, as they align truthful
statements with token investments. They create a way for people and groups to come to
consensus about a shared conception of reality by using markets to create valid sources of
information.

How It Works
A number of blockchain based prediction markets now exist such as Augur, Stox or Gnosis,
using one of these networks anyone anywhere in the world can create a market for people to
try and predict the outcome to some event, such as a sports match, an election, the weather,
sales of a company, price fluctuations of commodities, the availability of almonds in Spain
next year or the likelihood of a conflict occurring in central Asia at a given time.
Market makers provide initial funding for the market and for this receive some trading fees,
anyone can then buy and sell shares in the outcomes of that market.

Predictions are based on a binary event where something either will or won’t happen. The
value of a bet will in most cases reflect the probability of an outcome materializing. If you
place a bet on a coin flip, the outcome will always be 50% heads, 50% tails. There are no
external market conditions that will influence the outcome. Luck plays a major role, and this
is called gambling. But prediction markets rely on the collective wisdom held by a group of
people on the probability of a future event materializing. The current market price of a share
is an estimate of the probability of an event actually occurring. The prices of each share add
up to one dollar. So if you buy a share at even odds it will cost you 50 cents. If you end up
being right, you’ll receive a dollar for that share. If you see a market price of 53 cents then it
is reasonable to assume that there is a 53% chance that outcome will occur.

As an example, we can think about a market for the hiring of a new CEO of a company
given just two candidates, Bob and Jane. In this market, one share for the Bob option pays
you a euro if he is hired and pays you nothing otherwise. One share for Jane pays you a
euro if you hold the share and she is hired, and pays zero if she is not. Now, suppose you
think Jane has a chance of winning that position, how much would you be willing to pay for a
Jane share? If a Jane share pays a dollar if Jane wins and she has a 70% chance of
winning, then that share is worth 70 cents. You would be willing to pay up to 70 cents for
such a share.

Suppose you enter this market and you find that Jane's shares are selling for just 55 cents,
well, that's a buying opportunity. Something which you think is worth 70 cents is selling for
55, so then, you should buy the Jane option. In buying the shares, you would be pushing up
their price. In this way, your predictions, your information, your opinions about which
candidate is likely to win become incorporated into the price of a Jane share.
Imagine however you thought Jane had a 70% chance of winning but her shares were
selling for 80 cents, then, you would want to sell Jane shares. Even if you really wanted Jane
to win the position of CEO, to make more money you would sell the Jane shares and buy the
Bob share, in this way we can see how prices come to reflect the market information.
The prediction market really boils down to one number and if there's anyone in the world
who thinks they would know better than this number they have direct financial incentives to
trade this market and basically with every trade they make they feed the information into this
market and in the end we have a better number from the market.

The outcome becomes more predictable over time. This is because the payoff depends on
the accurate prediction of an outcome of an event. As a larger number of people do more
market research to come to the most likely conclusion, the predicted outcome will lean more
favorable to one side. Current share prices over time come to reveal information about the
likelihood of an event occurring according to the information gained from the market
participants.

Advantages
Prediction markets are not a new invention they are in fact centuries old and have proven
their effectiveness many times. One of the most popular current markets is the Iowa
Electronic Markets. In over two decades of testing this market, in presidential elections,
congressional elections, and state elections, the market prices from the Iowa Electronic
Markets have turned out to be better predictors of the outcomes than have political polls.

The two key features that make them successful is that firstly they draw upon dispersed
information that is consolidated and averaged out, and secondly people have skin in the
game, that is to say people are putting their own money on the line and this ensures a
correspondence between what they predict and what they believe to be true.

Prediction markets work to align incentives by backing statements up with resources. They
work to obtain truthful and relevant information through financial and other forms of
incentives. With real money on the line, people have an incentive to think carefully when
they're investing and they have an incentive to collect, process and interpret all of the
information available all over the world. The resulting market prices potentially reflect a lot of
deep-seated and diverse information in a way which surveys or polling cannot.

Likewise because prediction markets rely on the collective view of many, not just one
person’s research, they can efficiently aggregate a plethora of information, beliefs, and data.
These markets work on the principle of the wisdom of the crowd, which states that if you ask
enough people something, their average answer is usually far more accurate than anyone
expert, which creates a powerful forecasting tool.
The author James Michael Surowiecki posits that there are a number of necessary
conditions for collective wisdom: independence of decision, diversity of information,
decentralization of organization. In the case of predictive markets, each participant normally
has diversified information from others and makes their decision independently. The market
itself has a character of decentralization compared to expertise decisions. Because of these
reasons, predictive markets are generally a valuable source to capture collective wisdom
and make accurate predictions.

Equally the ability of the prediction market to aggregate information and make accurate
predictions is based on the Efficient Market Hypothesis, which states that assets prices are
fully reflecting all available information. For instance, existing share prices always include all
the relevant related information for the stock market to make accurate predictions.

Prediction markets create a very dynamic system, as opposed to a seven-year plan or a

yearly assessment, prediction markets can incorporate new information quickly and may be
continuously updated.

Blockchain
Using a blockchain as the IT infrastructure adds additional benefits to prediction markets. By
creating prediction markets on a blockchain network we can ensure that the data always
remains open and accessible to all parties, it removes the possibility for the centralized
authority to alter results, it can thus be trusted, is secure and if designed well blockchain
prediction markets may be difficult to manipulate.

Prediction markets may be used to provide liquidity and hedging around all forms of futures
markets. We could have a prediction market for "will the price of bitcoin be more than ten
thousand dollars on the first of January 2019." All futures markets could be migrated to the
blockchain using prediction markets, likewise, all betting, such as online sports betting, could
be more securely and efficiently run on blockchain platforms. Migrating all of these disparate
betting, derivatives and futures markets, to the blockchain could create a much more
interoperable system where different networks could automatically draw upon the wisdom of
a given network through APIs that connect into the price of the token. These prediction
markets could work as networks that aggregate the best knowledge that we have about a
given unknown event, with the knowledge in those networks then being accessible for
automatic external use in smart contracts via APIs. A smart contract ensuring a wedding
event could plug into a token market predicting the outcome for the weather on a certain day
and use the token price to calculate the likelihood and cost of a weather disturbance to
formulate the cost of the insurance claim.
Reference
Discount tokens
https://goo.gl/574bqq

https://goo.gl/cA6iXe

Colu - Local Economies

https://goo.gl/jnXVpL

The Future of Contracts, Law & Commerce

https://goo.gl/PQq2cA

Blockchain Analysis
https://goo.gl/i8MDMd

Programmable Incentives
https://goo.gl/QhePK7

Supply Chain on Blockchain

https://goo.gl/3sCNMo

Cryptoeconomics
https://goo.gl/gQLHc1

Alternative Economies and Reputation-Based Systems

https://goo.gl/8bQXoJ

Distributed Collaborative Organizations

https://goo.gl/YcKDpy

Future of Decentralization
https://goo.gl/3XhAXr

Stox Prediction Markets

https://goo.gl/bW7EPZ

What is a Token?
https://goo.gl/5ovcS7

Blockchains and Mechanism Design

goo.gl/63BEc1