You may have heard of the Token Economy in various cryptocurrency related YouTube videos, on CNBC Crypto Trader, hashtags on Twitter, a Medium post about the Token Economy, etc. But what is the Token Economy?? Read on to learn all about the Token Economy!
There is the token economy as it relates to cryptocurrency, which is obviously the focus of this article. However, I will point out that a different, older, but not entirely dissimilar token economy has existed for decades.
The old token economy of the past was as simple as a child earning gold stars from chores or good behaviour or accomplishments (i.e. scoring good grades etc), and then being able to exchange those gold stars for a treat, or toy or outing etc.
Additionally, there is another old token economy for adults, which includes things like air miles points, or grocery card points or gasoline points for your vehicle that you accumulate over time and trade in later.
HOWEVER, the cryptocurrency token economy is different and more advanced and exponentially more interesting.
- What is the token economy
- What is a Token
- Programmable Money/Smart Contracts
- The Tokenized Economy and Token Economics
What is the Token Economy?
Today distributed ledgers (cryptocurrency) can account for and validate the exchange of (next to) any form of value. A token economy is utilized in a trustless, peer-to-peer, distributed and decentralized network of value. It utilizes digital tokens to represent generic value of specific goods or services.
Digital tokens may represent value in a currency, real estate property, kilowatt-hour of energy, the usage of a parking spot in a neighbourhood, the number of followers on social media, etc.
What is a token?
- A token is not the same as a coin.
- There are cryptocurrency coins and tokens.
- A token is a subset of a coin, and exists only on a coin cryptocurrency network.
- I.e. Bitcoin is a coin. Ethereum and EOS are coins. A coin is the native digital asset of a network.
- There are many tokens that can be built on top of Ethereum (ERC20, ERC721) and EOS that “live” within their respective cryptocurrency ecosystem.
- A token is a quantified (defined) unit of value.
- It is generic – it can define (practically) any specific form of value.
- It is fungible – it is exchangeable between different specific forms of value.
- Tokens are programmable. (Smart Contracts).
Today’s fiat money is similar to tokens but does not meet the exact definition, nor flexibility of a token. Fiat is (somewhat) fungible, but it is not fully fungible in that there are certain goods/services that cannot be easily bought/sold… no, I’m not referring to illicit drugs or assassins or any silk road stuff.
I am referring to things such as social media value, like the value of social influence certain personalities on social media carry. Or the value of a network, such as Facebook, YouTube or Reddit, or the value of real estate (easily valued, but difficult and bulky to buy/sell).
Of course, all of the above things have “value” as in Facebook and YouTube (Google) have stock prices and earn money by selling advertisements based on your data. You can monetize your twitter account by being sponsored or paid to promote certain things if you have a large dedicated following, etc. However, these measurements of value are both clunky, slow, indirect and difficult to exchange between.
Because tokens exist online on a decentralized blockchain they are more fluid, transmit value in real time and a more direct measurement of intangible (and tangible) value. Tokens are generic they can fit into a broader set of value. Fiat is good for a discrete/finite tangible good or service (i.e. groceries, cell phone, tax accountant, car oil change, etc).
Whereas with the token economy we can capitalize and provide value for those above-mentioned items as well as for social capital (social media influence/likes), cultural capital, and natural capital (the integrity of an ecosystem that enables it to function and provide ecosystem services to people) to name a few.
Today we simply pay for the end goods of the ecosystem such as clean water, wooden furniture and groceries. With a generic token, it can be used to account for the value of the ecosystem that provides these goods – natural capital. Similarly, a large social influencer on Twitter or Instagram captures value in chunks with sold advertisements etc. With tokens, a social influencer can be valued for the intangible service they provide rather than having to advertise.
Token Economy – Programmable Money and Smart Contracts
The ability/capacity to differentiate between different forms of value is made possible by the programmability of token units. They are digital and therefore programmable. So a token can execute certain contractual terms when spent, or may only be spent under certain contractual terms. These are known as smart contracts.
For example, you can program a token that cannot be spent on gasoline or other high carbon footprint goods or services, which not only serves a financial function, but expresses a cultural value.
Additionally, government unemployment insurance payments can be distributed to the unemployed and programmed to only be spent on certain essentials such as housing, groceries, healthcare and education, but restricted for things such as alcohol, entertainment or luxury/miscellaneous goods.
The same applies to parents funding their children’s accounts, specifying/programming funds for education, groceries and student housing costs.
Additionally, programmable insurance policies can ensure reliable claims are made in a timely fashion with rapid confirmation and payout of the policy. Such insurance policies can also be designed to auto-cancel if there are “x” number of missed payments, etc.
Programmable money and smart contracts can significantly reduce costs, time and administrative burden to people and organizations.
The Tokenized Economy and Token Economics
Tokens, as mentioned above, are defined units of value. Bitcoin is a token of sorts. However, the token economy goes beyond a simple currency/store of value. The Token Economy extends to digitize/tokenize all assets or things of value.
Tokens define the value of whatever is tokenized in a particular organization and the market system is used as a distributed coordination mechanism for managing and growing that resource. The token economy expands the definition of value.
This means that everything can, and likely will be assigned a tokenized value. For example, instead of traditional finance stocks and bonds, there will be tokenized stocks and bonds. These are known as Security Tokens, or STOs (Security Token Offerings). I.e.: instead of traditional Apple or Facebook stocks, one could purchase Apple/Facebook tokens, which work nearly identically to stocks, except for the underlying technology, which makes them highly more liquid, flexible and fungible.
A token may be a hybrid of capital investment and a unit of exchange. A token may appreciate (or depreciate) in value over time. For example, a tokenized stock like Apple or Facebook.
If and when tokenized, the underlying technology behind the stock changes in that it still represents ownership in the company, but its token technology underneath it allows it to be used as a unit of exchange. I.e. as income and as payment for goods/services directly, as the token economy allows the asset to be fungible/interchangeable.
So you can buy Apple stocks (security token) and then spend them on groceries or a new car, or on your mobile phone plan, etc; or you can choose to buy the Apple stocks (security token) and hold on to it as an investment like an ordinary stock.
A user can also be an investor. A company can have employees and pay their salary/wages in part or in whole as a token (i.e. security token/stock token) as a stake in the company/project. Then workers are not only trading their time for money, but also for exposure to the company/project’s success or failure. This gives them some stake/skin in the game and creates a positive incentive for workers since the value of the tokens they are paid in is dependent on the value of the whole company that the token is a derivative of.
Additionally, the token economy allows programmability of stocks (security tokens), meaning that as an investor you are a legal part owner of a company (i.e. Apple, Facebook, McDonalds, etc) and therefore you would have certain voting rights and access to corporate information. The tokens would easily grant one access to online voting and information, which today is actually quite difficult to do with electronic/paper stocks held with trusted third parties.
Intangible assets that can be tokenized are things such as social influence quantified by social media followers, views, likes etc, which we are seeing being developed with BAT (Basic Attention Token).
Moreover, other tangible things can be tokenized such as real estate.
Imagine paying off your mortgage over 20 to 25 years, every month a large percentage of your paycheque is eaten up by that pesky mortgage principal and interest payment. Then you near retirement and while you have a small pension and a small nest egg of investments you may want to access the capital that has built up in your home over time.
Currently there are only two ways to do that:
- Sell your home
- Refinance your home
If you sell your home you no longer own it and cannot live in it and you need a place to stay anyway. Not the greatest idea. You may also have sentimental value attached to the home.
Refinancing your home only makes sense for very good investments since it is a mortgage that needs to be repaid over time. So refinancing and taking hundreds of thousands of dollars out of your home just means that you need to repay it for the rest of your life on your small pension… sounds like a bad idea.
A new, better way, would be to tokenize your house. This means that your house, say its arbitrarily worth $500,000 USD. Tokenize it into 100,000 “house tokens”, each worth $5/token ($5/token * 100,000 token = $500,000).
You could actually sell off 20,000 tokens (20%) and capture $100,000 dollars of equity without losing majority ownership of your home. This gives you capital to invest or use for living expenses for X years (lets say 5 years). Then after those 5 years, your property may be worth $600,000 total (up 20%), but you sold $100,000 worth (now worth $120k to whoever holds those tokens), so you still have $480,000 of equity… you can sell more equity later if you want.
Eventually, with that strategy, you would lose majority ownership of your house. But if you take the equity and invest it and make a good return it may be very worth it. Or you might be able to purchase back some equity. Versus just taking a loan and having to pay it back like a mortgage.
Markshire Crypto Conclusion on the Token Economy
I personally think that the token economy will definitely have a good fit in our global economy. It will make finance so much more flexible, transparent and liquid.
The distributed web is the convergence of economic market systems with information technology that enables us to convert traditional economic organization into distributed markets based on tokens.
The token economy gives people access to assets that previously were very difficult to monetize as well as to program money for specific uses. This is a highly adaptable future that holds unlimited potential.
In reality, to develop such an integrated economic system would probably take at least 15 to 20 years, but with the pace of technology today it could be sooner. But definitely minimum 10 years at least (2019 today, so 2029 or 2030 I expect to see huge strides in the token economy).
Head to What is Cryptocurrency for more information on cryptocurrencies.
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