From Medium

You’ve probably heard quite a bit about the Token Economy, but what is it and how do we get there? No one, including Radar, has a crystal ball. This article adds to the excellent exploration begun by Ehrsam, Tomaino, Szabo, Warren, and Srinivasan.

Definitions

Token: A digital asset, object, or representation of something that can be owned. Historically, tokens have been analog and have included everything from shells, to precious metals, to fiat currencies.

Economy: The allocation of scarce resources. Historically, different economic systems (market, command, traditional, or mixed) have vied for dominance.

Token Economy: An economic system, similar to a market economy, where decisions are made purely through supply and demand, but facilitated or executed with a token.

Background

Economic systems evolve over a long time, they don’t just arrive fully functional and frictionless. Historically, the common practice to test a novel system has been to use a centralized structure. Centralized systems allow easier creation and enforcement of rules via clear hierarchies of authority. However, in the long run, these systems are exploited and the evolution of a decentralized system is inevitable. Based on token sales allowing the pre-distribution of value, the network effects of incentivizing open source development, and the transformative technology of blockchains the Token Economy has already started.

Outcomes of the Token Economy

There is an accelerating rate of talent migration (not just engineers) into the blockchain space. This exponential adoption of tokens will lead to one of the most vibrant innovation ecosystems in history as new resources (time, identity, attention) become tokenized. Like all transformative innovations, a brief period of creative destruction will force legacy firms across industries with heavy investments into enterprise technology to maintain relevancy. Mainstream adoption will catalyze the reorganization of institutions, industries, and social constructs to put users in control.

Relayers, and other Modular Trade Network participants will be responsible for contributing to pools of networked liquidity to onboard the world to the Token Economy. Future posts will explore specific examples of full stack dApp development and institutional reorganization in this new epoch.

Obstacles

In the near term there are a few highly correlated obstacles for the Token Economy to overcome.

First, there is a general lack of understanding amongst token issuers regarding their token’s utility.

In the Token Economy there are two general token types, protocol tokens and application tokens.

Protocol token issuers should focus on building foundational infrastructure, not on building user tools. Time and resources should be dedicated to pursuing standardization and accelerating the flywheel of network effects for their developer community. Most value will be captured at the “fat protocol” level, but may be aggregated across a sea of forked “thin protocols.”

Conversely, application token issuers should focus on providing users with a managed and frictionless experience. Time and resources should be dedicated to interoperability across protocols, not building redundant functionality. While less value will be captured at the “thin dApp” level, there will be outlier value capture from category king dApps.

Token issuers building protocols should be actively exploring ways to do a token sale. Token issuers that are building dApps should be cognizant of securities law and avoid duplicating the efforts of protocols. This conflation happening with dApps is driving inflated expectations, confused policymakers, and is counterproductive for the Token Economy.

Second, there are a growing number of regulatory arbitrage strategies concerning regulators.

The Token Economy isn’t going to circumnavigate regulation. Participants in the Token Economy ecosystem that choose not to engage or hold themselves accountable to regulations are putting the entire ecosystem in danger.

Regulation is important and policymakers are responsible for the rights and resources we take for granted. Whether it’s clean water, education, or healthcare, we can thank a determined team of policymakers for making it happen. The financial system is no different. Regulators are trying to protect retail investors. Regulators don’t “swing the hammer” unless there is necessary and sufficient reason to do so.

Those projects spending time on regulatory arbitrage instead of improving their communities or products are suspect. To be clear, there are legitimate reasons to select different jurisdictions, entity formations, or corporate strategies, but if the goal is to obfuscate information, the project is not supporting the Token Economy.

Conclusion

The Token Economy has just begun to develop. With stewardship from participants in this new economic system it can flourish and become the next evolution in market economies. Billions of people around the globe can access new markets, new ideas, and build a truly open source meritocratic socioeconomic system.

However, there are some obstacles that token issuers need to address before the nascent Token Economy falters. Fortunately, there are simple solutions, and we’re confident this community is ready for the challenge.