Part III: Tokens as Tools of Coordination
In this post, I am going to take a brief hiatus from the punishing onslaught of newsflashes about how fucked up we all are. This post presents an old model — the token economy — as it has recently been rebranded in Web3, leveraging all kinds of technological bells and whistles to revive the spirit of this tool as a potentially game-changing modality of coordination. This post is intended to unpack philosophical, behavioural, and technological the nuances of the token economy, for those who have yet to stumble down the digital token rabbit hole yet, and for those who seek a deeper understanding of its potentiality IRL. The point here is to facilitate a connection between real-world coordination failures (aka, the past two threads), and this yet half-baked token ecosystem that just might, offer the keys to our salvation. Many challenges we face appear as classic social traps, whereby short-term social pressures guide individual behaviour in opposition to the best long-run interest of the individual and society. How can the Token Economy help unlock circular value and lay the groundwork for finally collectively-aligned outcomes?
The Token Economy circa 1970 A bit of history on the concept of Token Economies for you. They’ve basically been around forever, with records dating back Mesopotamians and littered throughout the ages in between. But only in the 1960s were token economies practically studied as behavioural modification techniques, originating as motivational systems for rehabilitation in psychiatric hospitals. At its core, a token economy is a system designed to incent behaviour change by offering rewards in the form of tokens (which are proxies for anything of social or economic value). There is a broad range of possible target behaviours including encouraging positive actions or avoiding negative ones, including the possibility of token loss as punishment for defection, also known as “response costs”. Tokens can generally be exchanged for other reinforcers that are highly appealing to the recipients (like materials, services, privileges, and status). Tokens have no intrinsic value, but can either be exchanged for other valued reinforcing events or automatically confer a non-economic reward. Checkmarks, gold stars, hearts, likes, badges — any form of symbol that indicates an elevated achievement according to some objectively-defined metric — qualify as tokens, and are grounded in the belief in value of different forms of capital. Based on the principles of operant conditioning, the token economy is primarily interested in reinforcing or shaping prosocial behaviour. When a behaviour is reinforced or rewarded, it is likely to be repeated. This results in motivation alignment between the participant and the system in a self-selecting manner, as dopamine circuitry of participants gets hacked each time they receive their “award”. Social media giants like Facebook and Twitter surreptitiously re-invented the token economy with the pervasive “like” buttons, allowing users to achieve social capital (ie, status) by engaging on their platforms. Silicon Valley even has a moniker for this process: sticky. It is literally the conscious exploitation our brain chemistry to keep us tapped into apps, anxiously awaiting our social reinforcement bone. The goal for token economies is to reach a “naturalistic” level where additional resources are not needed and individuals are no longer working for tokens and instead working for the social praise they accompany. Voila, Facebook! It all sounds rather Black Mirror, but it doesn’t necessarily have to. The crucial component of the benevolence or malevolence of this type of programming is the intended outcome. Optimizing for eyeballs on screen to increase ad revenue and hacking the attention economy resulting in fractured social structures has long-been proven catastrophic, but what if we were optimizing for the rehabilitation of nature, or time spent in community, or up-skilling. What if we could program the token economy for a regenerative outcome rather than an exploitive one? The Token Economy circa 2022 In many regards, Web3 is an earnest attempt at exactly this. Branded as the umbrella label of all things blockchain, at its core, it is a much more profound innovation than pure technology. It is an ecosystem of tool builders trying to understand the coordination and governance needs of the world. It is not — crypto. Contrasted against the “garish excesses and brazen misbehaviour of the flashing-neon crypto casino”, Web3 is an almost achingly idealistic philosophy: to free society from capital dominions and exploitative hierarchies — and to do it purely through code. Tokens are internet-native assets that incentivize network participants to work together without requiring a human intermediary or central authority. Instead, the operating rules are encoded at the inception of a protocol, enforced by smart contracts that cannot be altered without the consent of a majority of network participants. Andreeson Horowitz Web3 practice lead and notorious cheerleader for the sector, Chris Dixon, calls Web3-based tokens “new digital primitives, analogous to the website.” This framing makes them quite a big deal. Web3 products perform specific functions in the digital economy that offline analogues can’t fulfill. What we’re actually witnessing is the birth of the world’s first global internet-native economy. To elaborate on why this moment in time is so broadly acclaimed as significant in the Web3 universe, requires a jump back in time to the early internet days. Most Web3-natives are familiar with the Web 1–2–3 narrative, but at this risk of drumming the same bell, I feel it is important to elucidate specifics for context. Below I have outlined the key defining features of the arch of the internet that makes today so freaking exciting:
Some real-world examples of types of programs and networks born out of Web3 mechanics include social networks, play-to-earn (P2E) e-games, freelance communities, identity management, online states, and decentrally-managed companies (among about a gazillion others). The below three are the most widely used applications, but a lot more exciting innovations are underway. Social Networks: Blockchain-native social platforms, for example, would operate differently from their Web2 predecessors by rewarding the creation of content with tokens. Instead of relying on algorithmic curation of feeds and lists, people with tokens get to decide on how content is curated. “Likes” and “shares” can be turned into portable tokens owned by users themselves, meaning that creators are no longer vulnerable to de-platforming if they say the wrong thing. You could actually bring your followers with you. Cancel culture becomes a socialized system rather than an autocratic one. This will completely change how social interaction happens online. E-gaming is not a new model, but the novelty in Web3 allows players to actually benefit “IRL”. Move over Ready Player One, the P2E future is a lot less dystopian than you predicted. These online games let players earn rewards with real-world value by completing tasks, battling other players and progressing through various game levels. Create your own game using the digital asset acquired in another game, and you can earn royalties and franchise fees. It’s kind of a whole new work-life model. Online Work is reconceived in the Web3 economy. Rather than mining your attention or spamming your inbox, companies in Web3 pay you for discrete tasks performed, as currently exists on 1729.com. Think of it like paid research studies, for everything. Watch an ad, receive a token. Peer review a post, another token. Learn a new skill, engage with community, support your peers, more tokens. Income Share Agreements from the Lambda School are a legacy example, but with tokens, utility extends beyond economic rewards and bleeds into true community reciprocity. Token Nomenclature and Applications This is about the time when I should explain how tokens can actually work in Web3. Broadly speaking, tokens in the digital asset form can be bifurcated into two categories: fungible and non-fungible. Fungible tokens are the currency of the internet-native economy. They can be exchanged for other cryptocurrencies at a market rate based on demand. In contrast with fiat currencies, cryptocurrencies are native to the internet, governed by decentralized networks, and insulated against arbitrary supply increases (inflation) by encoded digital contracts. Non-fungible tokens (NFTs) opposite from fungible tokens, NFTs are unique digital tokens stored on a blockchain. They are virtual goods that act more like commodities than mediums of exchange, though they often do bear economic value. The utility of virtual goods like NFTs can be (non-exclusively) categorized into a few primary categories: 1) representing individual identity; 2) granting entry into a community or fueling a sense of kindship or belonging; 3) conferring social status; 4) sentimental value or asset accumulation; 5) reputation management and trust-building; 6) superpowers and privileges; 7) ownership.
Identity management is uniquely attributed to Web3. With the advent of self-custodied wallets (basically owning your own bank account), Web3 provides a platform for secure digital identities whereby users own their personal data and information, available for them to monetize or access on-demand.
Community access is not novel to Web3; as Sapiens famously illustrated, the paleolithic drive for a sense of shared history and storytelling is integral to being human. This is why the Catholic Church is one of the most powerful organizations in the world. A few NFT projects have impressively harnessed the power of values-based communities to establish quasi-religious digital cults. HODLing a Bored Ape or CryptoPunk signals profound community association, an emotional connection far more powerful than the potential market value.
Status is driven by scarcity. This means one of two things: it is expensive, or it must be earned. Follower counts and engagement metrics such as likes, shares, retweets, etc are just virtual metrics representing status. Badges of honour based on work performed or memetic relevance. Crypto-native social apps can allow consumers to vote on their favorite content and reward top-voted creators with NFTs which can be redeemed for a percentage of a prize pool.
Sentimental Value: typically gifts, awards and memorabilia, these types of NFTs represent milestones and achievements. They are the online trophy case commemorating important life activities or milestones.
Reputation & Trust: whether we end up with social credit scores like China, or some more moderate derivation, the reality is that our online reputation is both traceable and matters for internet trust. Uber ratings, eBay reviews, and Airbnb comments are all examples of uncoordinated reputation scores that help unrelated and generally anonymous parties interact in a trusted and safe manner. This type of peer-to-peer credentialing allows us to far surpass Dunbar’s number; thanks to internet ratings, we can peacefully coordinate with complete strangers at ease. NFTs applied in this way can act as our online identity scorecards, holding publicly verifiable data of our online avatars.
Superpowers & Privileges: this is the example of VIP or premium tiers in marketing vernacular. The idiosyncratic feature here is the ability for creators and users to interact directly for specific privileges based on ownership. Artists can speak directly to their fans via their NFT community, they can distribute early releases, share exclusive access, or crowdfund for their next collection, truly nurturing a reciprocal relationship rather than one of unidirectional consumption.
Ownership: due to their inherently immutable and traceable nature, NFTs are ideal to be programmed to represent asset ownership. Be it a land title or a marriage license, NFTs can be programmed to reveal irrefutable ownership, and can be algorithmically programmed to automatically transfer ownership subject to pre-defined conditions, with no human intervention at all.
Where do tokens fit into DAOs? A DAO, (standing for Decentralized Autonomous Organization), is exactly as its name implies: organizations whose operating functions are both decentralized and autonomous. Unpacking that at a practical level, a DAO can be any form of coordinated institution (a company is the most common example, but theoretically, a government, or community or a process qualifies) whose governance functions are in full or part, decentralized to its users or stakeholders (the opposite of the traditional hierarchical model employed by traditional organizations), via processes of automated (programmatically pre-defined and automatically-executable, hard-coded) contracts. At its simplest, a DAO is a company managed by its users, mediated by code. A DAO allows people who work for or participate in a project to both own it and make collective decisions to support it for true incentive alignment.
The closest parallel in legacy markets would be employee stock option plans, but even within these schemes, hierarchical structures of governance predicate that the ownership value of the company is established by its leadership, and stock is not frequently granted on a dynamic basis to represent additional contribution. “DAOs are to the internet-native economy what the joint stock corporations were to the traditional economy — a new way of organizing people to fractionalize ownership, engage in joint enterprises, pool together capital, produce products or services, and make collective decisions. Just as traditional corporations own many of the productive assets (factories) and produce many of the goods (food, cars) of the traditional economy, it is likely that DAOs will end up owning many of the productive assets and producing many of the digital goods in the future.” Through to now, the most viable applications of DAOs have been observed in the e-gaming space, singular-purpose activities (like fundraising for a copy of the US Constitution or resurrecting a cult brand) , and more efficiently moving around money via Decentralized Finance (the top 5 largest DAOs hold a combined treasury north of $15 billion). From a meta-coordination perspective, while DAOs are still very much in proof-of-concept stage and in traditional venture parlance, have not yet identified product-market-fit, philosophically they present a major breakthrough opportunity for how we coordinate. Humans are imperatively herd animals so arguably there is nothing more human than building solutions to be better at communing. On that note, based on turnout metrics, we participate in fictional world and online communities with more fervency than our local democracies. Why is this? Probably because we feel meaningful agency in the former and not in the latter. This is why the decentralized part of DAOs requires a double-click. DAOs aim to implement frictionless and direct democracy, with decisions made directly by a form of community vote that is accessible and weighted according to pre-defined and public rules. This encoded approach to control eliminates the need for intermediaries or administrative barriers, meaning that decisions actioned by a DAO should directly reflect the preferences of the members of the DAO. No single participant should have disproportionate amounts of governance power. Rules may be changed, but only subject to collective agreement. DAOs present the opportunity for (finally) a true meritocracy, rewarding contribution according to fixed rules and eliminating room for bias. Users, builders, contributors and funders are all parts of the same pie, with the opportunity to earn an outsized weight available only according to set parameters, rather than the arbitrary, opaque or nepotistic rules we play by now. Access to a DAO is typically granted via native tokens issued programmatically, which may have some economic value or other form of reward, but in most cases represent rights (frequently, voting on governance or ownership) within the community. Amorphous in nature, DAOs can be programmed to do just about anything, which also makes them tricky to wrap our heads around. Some functions and notable examples to help you chew on are listed below.
Protecting and monetizing data: there are many industries where data protection is a paramount feature of their survival. Healthcare is one of them. But what if you could not only own and protect your data, but profit from it? Genomes.ai offers to sequence your genome, but let you own and secure your data in the DNA Vault. With Genomes, you can learn about your genes, share the insights with your GP, and opt in to earn interest paid in tokens if your data is used to power research.
Values-based communities: the shelf-life of members-only and interest-based communities is historically quite short. This is because of user attrition and declining perceived social value as the novelty of the new continues to capture our limited attention space. Friends With Benefits is an online club accessed by the FWB token, whereby the more tokens a user holds, the more interaction and connection opportunities become available. The idea is to hack FOMO and make it beneficial for community members to continually participate, theoretically extending the longevity and robustness of its community.
Crowdfunding resources: whether amassing large treasuries for something as innocuous as buying an NFL team, or collecting and distributing donations to assist those at war, DAOs have proven impressively efficient at attracting resources. Imagine if Change.org had a DAO behind it and all voted resolutions were immediately funded, giving these social causes real legs in the real world.
Property ownership, IRL or in the metaverse: instead of relying on elected representatives, a DAO’s voting community could determine how property and capital are allocated to its jurisdiction. Somewhat like a Co-Op, the people directly impacted by the decisions of the neighbourhood get to decide what goes where and to whom. Decentraland does exactly this in the metaverse already, but this model is already being tested in traditional real estate.
Breaking the broken media: it’s now a platitude that the media is broken, but business models built around ad dollars are very difficult to change from within. MirrorDAO is attempting to recreate incentives around publishing and online content. Members vote on content to be published, and contributors receive direct and public support based on the quality of their work. Sounds to me like a viable upgrade to the media bias we are plagued with today.
New nation-states: theorized by the poster-child of Web3, Balaji Srinivasan, the Network State offers an alternative to our legacy state system, one of territory-first imperialism rather than value-first. As he writes: “a network state is a highly aligned online community with a capacity for collective action that crowdfunds territory around the world and eventually gains diplomatic recognition from pre-existing states.” These are just a few examples of the potential of DAOs to coordinate us headless chickens and orient us around common goals in self-reinforcing processes. We are early days still, but to demonstrate the values distinction between DAO communities and pretty much every public corporation out there, Aave, the largest DeFi lending protocol with over $6B in “total value locked” (owned by Aave’s treasury), voted last week to retroactively compensate developers $15 million for their work building the latest iteration of the platform. How many times have you read that a Blue-Chip company (with roughly the same cash on their balance sheet) gave away millions to their teams? It’s an inspiring start.
But what went wrong? Ponzi-nomics and Yield Farming Borrowing from the playbook of usury-based capitalism, the DeFi (Decentralized Finance) movement is effectively a financial betting market, providing loans collateralized by, and financial derivatives on top of, other cryptocurrencies. While DeFi can in principle, meaningfully provide easier access to capital which genuinely provides for value accrual, it also provides for new vehicles with which to blow up all the fake money in the system. The key incentives powering DeFi are staking (for staking’s sake, not just for securing the network), and yield farming. Neither of these creates any new value. Both are methods of putting digital assets to work and earning passive income without needing to sell them. The crypto equivalent of putting money in a high-yield savings account. Except the bank doesn’t pay you back in 2% APYs, but something like 203,000% APYs. How is this possible? The staking model uses a “stake tokens for rewards” scheme that lures in new users to buy their token. The rewards offered are used as promotional devices to accelerate adoption; a technological leap from multilevel marketing, it is essentially programmatically paying out rewards from the pockets of earlier users. In a bull market with lots of available cash, this works great. New users drive token demand, inflating the price and all stakeholders benefit. But once speculative tension is eviscerated by a large market event or eclipsed by a shinier token elsewhere, the price collapses. We’ve seen this a few times recently, but most acutely with the 99% collapse of Terra’s Luna token that wiped $60 billion of real money off the internet. That is up in the territory of one of the world’s biggest financial scams, Enron, for which, several key execs landed prison sentences. A lot of hard lessons here. Now I am not principally against the financialization of digital assets, but I do think that most of us (myself included) who are not traders or full-time savants in financial engineering, really have no business gaming for triple digit APYs. Potential has definitely been proven in the DeFi space, but I am much more interested in theorizing around the values-based token economy.
Token Economy Summary If we zoom out to a longer-term view, the digital-native economy is still in its infancy, with some key levers like NFTs and DAOs, being much newer. Today there are only about 10 million Ethereum users, which is 0.2% of the total number of internet users. Challenges to realizing crypto-economies still stems from things like high transaction fees and clunky onboarding, but over the past decade, crypto has ascended from a geeky fringe, to an institutional norm. Builders and creators now have a generational opportunity to meaningfully impact the next era of the internet. Just as it was once preposterous to summon a stranger’s car with your phone or find a life partner by scrolling through photos, it might be equally farcical to have a boss to whom you report or be vulnerable to the whims of cancel culture-powered autocracies — you could just pick up your digital belongings and convene elsewhere, and they know that. Eventually businesses and governments will be rallying for their community’s money and support, not the other way around. As Co-Founder of Ethereum, Vitalik Buterin describes, “the goal of crypto was never to remove the need for all trust. Rather, the goal of crypto is to give people access to cryptographic and economic building blocks that give people more choice in whom to trust.” We are all suffering from failed institutions and coordination breakdowns because we don’t know who to trust anymore. Maybe Web3 and the Token Economy can help infuse a sense of faith in our next generation institutions. Now that we have covered the Web3 basics, I continue back into the meta philosophy of the challenges with our current coordination systems (namely, the imperatives of the Growth Economy), and how we can apply Web3 as building blocks for a healthier society. 5