Token Market System

Markets can be seen as decentralized systems for aggregating information and allocating resources according to the price signaling system

Openness is one of the key design features of blockchain networks, they are inherently designed to enable intra-organizational collaboration. As soon as you start to use a blockchain to support a closed organization you start to find that there is no real reason to use a distributed ledger at all and that it is better just to use a centralized authority to maintain the database. With closed centralized institutions the drive is to concentrate the most efficient resources in the center, indeed the most valuable and effective centralized organizations are the ones that can concentrate the most efficient nodes in the center and exclude those that are less efficient. Distributed networks, however, have a very different dynamic, quite the opposite, they create the most amount of value by going outwards towards the edges to harness the resources of the mass of people within user-generated systems of exchange. These open user-generated systems are what we would call markets.

One of the most effective ways to understand this shift into a token market economy is through looking at transaction costs, as it is the reduction in transaction cost and the increase in automated coordination that is now enabling us to convert centralized organizations into open networks. By automating transactions, automating compliance and trust and connecting people peer-to-peer blockchain systems will radically reduce the friction within economic networks of exchange and make markets a primary mode of organization.

Markets can enable the decentralized coordination of large and complex organizations. One of the basic features of complex systems that we see in the world around us is that complex organization can, in fact, be the product of simple rules. Markets engender this principle, actors in markets can operate based only on very simple local information, if someone will pay me more for this car than it is worth to me, then I will sell it. If I get paid more at one job than another and I like the job then I will do it. The rules under which actors operate within an economy are often very simple, but through all the interactions we can get complex emergent behavior on the macro level without that organization being prespecified. Blockchain networks enable the shift in organization from formal structures to much more fluid structures based on value exchange via markets and those markets are organized through price signaling that alter people’s local incentives.

Price Signaling

Prices are the signals that coordinate economic activity via markets. A price is a signal wrapped up in an incentive.1 An increase in the price of oil signals users that oil has become more valuable in alternative use. But we don’t just want to signal to people we also want them to move in the right direction, to take the signal seriously, to adjust in the right way. The higher price does exactly this. It gives users of oil an incentive to respond to the signal. They respond by using less, by substituting a lower cost alternative. Suppliers are also incentivized by the signal to invest more in exploration, to look for alternative sources, to build more etc.

The price system economizes on information. It’s able to allocate resources in a decentralized fashion using all of the information available, but without collecting all of that information, without having to transmit all of the information, because it makes use of the information in a decentralized fashion. It uses the information which is in people’s heads via the local choices they make in the market. Markets are linked. They are linked geographically across the world. They are linked across different goods. They’re also linked, through time. The market acts like a giant computer that arranges our limited resources over space, time, and across different goods so that we can allocate resources via a decentralized mechanism.2

Prices set much of the incentive structures under which people act in markets and are often said to be a “signal wrapped up in an incentive”

For example, after a hurricane,  it’s quite common for the price of generators and chainsaws to become very expensive. It’s signaling that we need more of those resources. The higher prices in a hurricane-devastated region, that says, “Bring the resources here!” The high price is a signal saying that the value of generators, the value of chainsaws — it’s really high in this location, at this time. And that higher price is acting as an incentive. It’s telling entrepreneurs, “You can profit by bringing resources from where they have low value to where they have high value.” The price system is doing exactly its right job. It’s signaling and incentivizing people to respond to these shortages.

Jason Potts an economies at RMIT University describes well how tokens work similar to the pricing system.3 “The purpose of the token system is to publicly coordinate private actions and that’s the interesting part of this, it’s not a monetary system it’s not a price system per se but it’s still a system where you’ve got coordination going on where individuals are able to look at the tokens what they’re doing, the tokens are doing the coordinating, and adjust their behavior with respect to that and what you get then is emergent order that emergent order is an economy, the proper word for it is catallaxy, not an economy, but the tokens are doing the coordinating and they’re not doing it because of their exchange value or they use value or the store value, value they’re doing it because of their coordination value… anything that can do that, use rules that can create private coordination using a public signal is an economy

In this respect the best way to understand money and currencies is as “current” “sees” that is to say tokens allow us to see currents within the network. Jason goes on to note that “what [tokens are] about to open up is a whole new world of coordinating signals that didn’t exist before, that’s the big thing, that’s the game changer that we’ve never seen before” we are going to get a much more refined pricing system with all these tokens and automated exchanges “that means we can coordinate an economy so much better with all this new coordinating information which requires a token.”

Long Tail

This reduction in transaction costs that will be enabled by distributed blockchain networks will have a systemic nonlinear effect, it is not like simply altering one component or one section of the system, it will alter many exchanges within the economy, that kind of nonlinear systemic change can give exponential improvements. Transaction costs are fundamental to wealth creation and economic well-being. Interestingly reducing transaction costs across an economy by just a small percentage can massively increase the wealth creation in that country. The result of that lowering of transaction cost means that it will be easier to access resources out on the edges of the network. What decentralization and the reduction in friction does is to enable access to resources out on the very edges of the network. By shifting from closed organizations to open decentralized markets we have the opportunity to really build global networks that begin to include those right out on the edges.

Today, about two billion worldwide remain unbanked. In Asia 60 percent of the people are cut off from the world economy, they do not have bank accounts, they don’t have access to the financial system. In South America, it is 65 percent and in Africa, it’s 80 percent.4 The majority of the world’s population is cut off from the world economy, in most cases, they can only use cash which means they can only deal with the people that they see face to face, it’s a very small community of economic trade. The average sub-Saharan African makes about 550 dollars a year, it is simply not financially feasible to expand a traditional banking system into remote countries that are sparsely populated with individuals that make only a little income. The marginal cost of adding an account at that level with a protocol and open source community is marginally close to zero, so if we are able to build this decentralized economic infrastructure that is where the value will be, out on the edges of the network. There are 4 billion under and unbanked individuals in the world and that is huge global growth potential.

With blockchain base token economies we are not just expanding what value types get incorporated into the economy but also by reducing transaction cost we are extending markets further out. By converting centralized organizations with boundaries and borders into open networks we are making the networks of the global economy accessible to many more people. These token networks are going to be incredibly global like we have never experienced before. The infrastructure does not reside on a centralized server in silicon valley, but on computers around the world. We can create protocols as peer networks that reside on a distributed computer network and simply provide the coordination mechanisms through which people interact without anyone necessarily owning or really controlling that system, thus reducing borders to entry and expanding markets to almost everywhere.

1. YouTube. (2018). A Price Is a Signal Wrapped Up in an Incentive. [online] Available at: https://www.youtube.com/watch?v=aBYzvPbIFNw [Accessed 23 Mar. 2018].

2. Google Books. (2018). Modern Principles of Economics. [online] Available at: https://goo.gl/vGHjUV [Accessed 23 Mar. 2018].

3. YouTube. (2018). Panel: Alternative Economies and Reputation-Based Systems – COALA’s Blockchain Workshops. [online] Available at: https://www.youtube.com/watch?v=aM57WEl0cDI&t=1051s [Accessed 23 Mar. 2018].

4. World Bank. (2018). Global Findex. [online] Available at: http://www.worldbank.org/en/programs/globalfindex [Accessed 23 Mar. 2018].

2018-06-22T20:19:04+00:00