all-carrot-no-stick

All Carrot and No stick — Token Economies

A token economy is defined​ as a form of behaviour modification designed to increase desirable behaviour and decrease undesirable behaviour with the use of ​tokens. A simple example is seen with children who are rewarded with gold stars for good behaviour, which may in turn be exchanged for a meaningful object e.g toy, Lollies etc.

In the Cryptocurrency space tokens are usually issued via an ICO (Initial Coin offering) these tokens give people access to a service or product which they can utilise or exchange for something else that they may find more valuable.

The token economy in regards to cryptocurrencies creates an interesting restructure for the parties involved. That being, it enables the incentives of the investors, employees and customers, to be aligned.

It is questionable whether Satoshi Nakamoto’s original idea had the foresight to see this, but the technology has evolved into something that really does change the way we think about how financial value is derived from a company. In this post we look at how this token economy works in more detail but first we must put in context of how companies work today.

The Company Today

Before showing you how the token economy works lets visualise the current incentive model that most corporations utilise today. Below is a very simplified idea of the corporate structure involving three key entities.

customer-shareholder-employee

The Customer: ​The customer is wanting a product or service that they value for a reasonable cost.

The Employee: ​Gives time and effort to provide that service in return for a salary.

The Shareholder: ​The owner of the company is extracting profit from the company. A shareholder will improve the value to the customer ​only​ if it is profitable, otherwise there would be no economic benefit of doing so.

In this situation it is clear that the incentives of the shareholder, employee and customer are not aligned.

The Token

This is where the token economy gets interesting, with a token the distinction between these parties begins to blur.

The customer wanting to access the service or product must purchase the token, and in doing so also inherently becomes the shareholder as well. Meaning that any added value that comes from holding that token, the customer also receives i.e. via price due to demand or a better product/service.

customer-shareholder-employee-tokenOnce it is established that token holders can benefit, then the customer/shareholder are more likely to also wear the ‘employee hat’. They will start to look at ways they can help increase the value of that token. Maybe, if they are a developer they will help by writing code, if they are translator they may help to translate marketing documents or possibly just provide useful feedback. Token holders are likely to show the benefits of this product or service to people they know. This last point can cause concern, as the token holder may not have the buyers best interest at heart, and is one of the key reasons one must do their own research before purchasing.

In effect the token system is a paradigm shift in the way we can exchange value, and aligns the incentives involved on the exchange of value for the service or product.

Does This Cross Over To The Real world?

If this is hard to relate to it may be easier to run through an example. Let’s take Uber. Imagine that every Uber ride you took had to be purchased via the Uber token. The moment you purchase the token any increase in value benefits you the customer as well. If you hold tokens for a long period of time you will be more likely to help the service improve, maybe as small as giving feedback, but if you have certain skills you may look to utilise those skills to improve the value of that token.

The Uber driver is paid in Uber tokens, and therefore it is in his best interest to ensure that it maintains its value, and so they are more likely to uphold a high quality level of service. Essentially all parties are working to ‘add value’ to the token because not doing so would be financially disadvantageous. It’s not to say that these parties must hold the token, they are free to sell immediately but if they believe in the product then they may choose to retain some.

Beyond Incentive alignment

The token economy also has other benefits beyond the above. This token economy encourages early adoption, a huge benefit for entrepreneurs. The rapid adoption incentive encourages innovation. The digital tokens allow for crowdfunding to occur from all over the world, without intermediaries. Meaning that Venture Capitalism is now being outsourced to the crowd, as oppose to a small group of individuals. In fact in 2017 ICO funding surpassed Venture Capital funding, and this is only the beginning.

The truth is that this token economy opens up a world of opportunity to people globally; it will dramatically change the way we think about work, and encourage the highest quality of workmanship over the long term. There will no doubt be many individuals along the way that will take advantage of this opportunity.