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 it1 “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”2 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.
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.
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.
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.
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.
The alternative to these centralized systems is decentralized peer-to-peer networks.3 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.3 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 today4 “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.
1. YouTube. (2018). From Competition to Cooperation | Primavera De Filippi | TEDxCambridge. [online] Available at: https://www.youtube.com/watch?v=aYOPcHRO3tc [Accessed 22 Mar. 2018].
2. Medium. (2017). The Blockchain Economy: A beginner’s guide to institutional cryptoeconomics. [online] Available at: https://medium.com/@cryptoeconomics/the-blockchain-economy-a-beginners-guide-to-institutional-cryptoeconomics-64bf2f2beec4 [Accessed 22 Mar. 2018].
3. Wiki.p2pfoundation.net. (2018). Peer Production – P2P Foundation. [online] Available at: http://wiki.p2pfoundation.net/Peer_Production [Accessed 22 Mar. 2018].
4. YouTube. (2018). Juan Benet – Decentralize Computing. [online] Available at: https://www.youtube.com/watch?v=Uo4rOvh8mDM&t=979s [Accessed 22 Mar. 2018].