What Is the Token Economy? Token economics can be understood as a subset of economics that studies the economic institutions, policies, and ethics of the production, distribution, and … – Selection from What Is the Token Economy? [Book]

Blockchain technology seems to be the driving force of the next-generation internet, what many refer to as Web3.Web3 enables tokenized economic interactions without intermediaries.It provides a unique set of data, a universal state layer, also referred to as the ledger, which is collectively managed by a network of untrusted computers. This unique state layer allows us to send digital values in the form of tokens entirely peer to peer (P2P), circumventing the double-spending problem.² Sending digital values over the web has therefore become as cheap and easy as sending an email. As of April 2019 more than 2,200 publicly traded tokens are listed on CoinMarketCap, and more than 175,000 Ethereum token contracts were found on the Ethereum main network. In June 2019, social media giant Facebook announced that it is working on its own token (the Libra token) and Web3 infrastructure (the Libra network).

Tokens, as an application of blockchain and derived technologies, might therefore prove to be as revolutionary as the emergence of the World Wide Web as an application of the internet. In the early 1990s, when Tim Berners-Lee introduced a new standard—Hypertext Markup Language, or simply HTML—that allowed us to create visually appealing web pages with just a few lines of code, it allowed anyone to “surf the web” following links instead of using command-line interfaces. However, most people back then did not know how to code HTML, nor did they know how to create meaningful and user-friendly websites with appealing content. For a long time, many websites just said “Hello World” and often did not have any other content displayed, or they just listed a collection of links to other websites. It took us almost a decade to figure out how to use websites beyond the scope of online directories and online billboards, and when we did, the Web2 emerged. Compared to those early days of the web, we are at a very similar stage when it comes to understanding what we can potentially do with tokens as an application of blockchains and the Web3.

Although early blockchain tokens were first minted only as part of the incentive scheme of the underlying blockchain protocols, with the advent of the Ethereum network, tokens have moved up the technology stack. Ethereum has made it easy and cheap to issue a token with just a few lines of code—with a simple smart contract and without the need to build your own blockchain infrastructure. The challenge, however, is that most people still don’t know what to do with these tokens, or how to properly design them. The space still lacks best practices.

The existence of tokens in general and digital tokens in particular is not new, but the speed with which these cryptographic tokens are being deployed and issued is an indicator that they might be the game-changing application of blockchain many people have been waiting for. However, though more and more people are starting to create and invest in cryptographic tokens, at this early stage of the technology the understanding of different token types and their potential application is still limited, even among professional investors and seasoned members of the blockchain community. To add to the confusion, terms like “cryptocurrency,” “crypto assets,” and “tokens” are very often used synonymously. The media mostly tends to refer to these new assets as “cryptocurrencies,” which is often used to describe a diverse range of “crypto assets” or “tokens” that could represent all sorts of physical or digital goods, such as a security, a collectible, a royalty, a reward, or a ticket to a concert. I would, therefore, like to argue that the term “cryptocurrency” is not ideal, because many of these new assets were never issued with the intention of representing money in the first place. “Cryptographic asset” would be a more generic term that we could use for certain types of tokens. The term “token” however, is even more generic and encompasses all tokens, not just asset tokens.

What Is a Token?

Cryptographic tokens represent programmable assets or access rights, managed by a smart contract and an underlying distributed ledger such as a blockchain network. These tokens are often issued with just a few lines of code, using a simple smart contract running on a distributed ledger. Contrary to what the metaphor might suggest, a token does not represent a digital file that is sent from one device to another. Instead, it refers to the aforementioned asset and/or access rights that are collectively managed by a network of computers, a blockchain network, or some other distributed ledger. The distributed ledger hereby provides a public infrastructure in the form of a distributed record of transactions that is stored on multiple computers in the network, and it keeps track of which wallet address is the owner of which token.

Token contracts are a specific type of smart contract. They define a bundle of conditional rights assigned to the token holder. Tokens can represent anything from a store of value to a set of permissions in the physical, digital, and legal world. They can also incentivize an autonomous group of people to individually contribute to a collective goal (as in the case of Bitcoin). These “purpose-driven tokens” are created upon proof of a certain behavior. Tokens are digital assets or access right tools that have the ability to facilitate collaboration across markets and jurisdictions. They allow more transparent, efficient, and fair interactions between market participants, at low cost.

Digital assets are not a new thing, but cryptographic tokens on the blockchain have lower issuance and management costs involved. A big part of the lower cost results from the fact that the transaction validity of the business process itself is enforced dynamically (on the fly). This is very different from traditional settings, in which the validation of financial operations consists of labor-heavy auditing systems to avoid “misbehavior.” Replacing human resource–heavy tasks that requires domain expertise with automated real-time cryptographic proof of oversight can reduce costs of bureaucracy by orders of magnitude; depending on the industry and use case, the exact numbers will vary. As a result, cryptographic tokens can be easily issued and securely traded on a blockchain network, without an intermediary or escrow service. Whereas state-of-the-art digital assets are controlled by centralized entities, they can now be issued with a few lines of code and managed by a public and verifiable infrastructure like a blockchain network.

The ability to deploy tokens at a low cost relatively effortlessly on a public infrastructure is a game changer, because it makes it economically feasible to represent certain types of assets and access rights that might not have been feasible before. Examples thereof are fractional ownership of art or real estate. Fractional ownership tokens of real-life assets like art and real estate might improve the liquidity and transparency of existing asset markets with traditionally low liquidity. Such token types might also fundamentally affect our market dynamics and economic interactions, much more than might meet the eye at such an early stage of their existence.

Source: What Is the Token Economy?