Blockchain is a governance technology

Your iPhone offers you a magical user experience. You just open your wallet on your phone and there are all the tokens you need to get access to services and even to pay for them. The experience is so seamless. It just works.

Did you ever stop to ask yourself how this magic happens? Well Apple is acting as the centralised governance for this experience. It is Apple who build the network of all of us who bought and use iPhones. It is Apple that put the App Store on your phone. It is Apple who set up all the hoops that innovators have jump through to get their App onto the store. It is Apple that set all the rules for how much innovators must pay to use this platform.

We are doing almost but not quite the same thing for the Token Economy built on blockchain. The key difference is that we don't have one central authority, Apple, as the governance, but rather we use blockchain as the governance technology to create a decentralised governance. Don't think of blockchain as a tool. Rather think of it as bringing a capability to market that brings decentralised governance of the business and technology, at the back-end, to govern the state of assets stored (e.g. your credentials) on the internet, or web 3 as we now call it, in the form of tokens.

And very timely all this is too as Apple recently hit a market cap of $3 Trillion - that's about the same as the GDP of the UK! I don't want to live in a world dominated by an oligarchy of Bazos-like platform qazillionaires, but rather I choose a world for my children where that market power is decentralised. A far fairer and more democratic world methinks.

So how does this governance work in this, far better for our chidren, decentralised world? Well, we have a four level stack that looks like this.

Token Economy - blockchain governance layers

Blockchain is a back-end technology, so we focus our governance on the 3 layers under the user interface.

Wallet – Like the glass on an iPhone. It is the user interface?layer where ownership of 100’s of tokens can be accessed, and atomic swaps initiated

Application – Like an individual app. on the App Store. Many different businesses can be built on each network. App logic governs trading of tokens and are used to incentivise behaviour and denote ownership inside the app.?

DAO – Like the Apple App Store before you add any apps. This is the B2B2C value chain of economic actors (“the community”) who don’t need to trust each other, assembled together to support complex tokens. This is a marketplace and has its own marketplace token that is used for payments but also governance by way of voting and access and staking rights and duties?and critically as an incentive for better collective outcomes.

Internet of ledgers – Like the operating system for the network such as IOS for the Apple ecosystem. It governs activity such as atomic swaps of tokens in the network. Tokens are used to pay those who maintain the infrastructure by providing bandwidth and storage and to order and validate the ledgers

Token Economy - internet of ledgers

Blockchain - is a governance technology. So you see there are rules (as in "principles") to create the rules to govern. This is where a thinker thinks - if you combine this with a decentralised incentive model then you are cooking. The internet is everything and everyone. I know of consortia that spend the whole time talking and never actually do anything. With bitcoin Satoshi Nakomoto defined governance by defining proof of work. My thought is that is one app only. Satoshi did not define how any more apps could be governed.

So here’s the thing. If web 3 is about ownership and especially ownership of identity. Then what are the rules to define how the rules to govern how identity on web 3 is governed? So in my diagram that is talking to just one bubble - the SSI one - every part of diagram needs the same level of thought. So question - is TOIP complete? I dont think so but what do we do about that - not at the level of TOIP - but at the level of digital marketplaces where we need KYC/AML and compliance around identity?

Token economy - the incentive model

So I think of blockchain as a behaviour machine. And folks behave in a helpful way because they have an incentive to do so. If we want to govern the state of the assets on the internet, then we need to build incentives at each of the 3 levels of App, Network and Platform, to make this happen. Who pays for what? Who benefits from what?

And the beauty of blockchain is that we can design our very own incentive model - just like Satoshi Nakomoto did. We can design our own marketplace currency and we can reward tokens for helpful behaviours and to democratise benefits across the community.

How NEAT is that!!

If you want to learn more about this thinking you can read or reference my whitepaper about all of this?which is published on SSRN.

Suggested Citation: "Martin, Andy, The Token Economy (October 16, 2021). Available at SSRN:?https://ssrn.com/abstract=3972111?or?https://dx.doi.org/10.2139/ssrn.3972111?"