Token economy whitepaper

With the new collaborative internet, that is web 3, the user will be in control of their data. What does this mean for the enterprise? What are the sorts of marketplace models that the enterprise could end up operating in and making money in? What is the business model for web3? ?

This paper enhances and updates an earlier version, called “The Token Economy ”? and can be referenced here

Market opportunity

Most enterprise networks today are on the left-hand side of this chart below. They're setting out to optimize the world as it is. This is a helpful start but it's not a destination. If that is the limit of your ambition for your network, you're probably better off using traditional tools, like a central database to address that problem.

Figure 1, The Market Opportunity

Rather, where the token economy really starts to function, is where we're creating something new. A new social contract between owners and creators of data and creativity with its use. Either a brand-new, white-space marketplace, where there is no incumbent or where we're bringing the old world and the new world together in a hybrid. For example, the machine-to-machine economy, where your car, rather than sitting on the drive for 20 hours out of 24 doing nothing, becomes a business of its own. It has a wallet, with tokens, so that it can negotiate on the internet to be hired out to known identities. It can pay for tolls. It can pay for parking. We can build a new economy- a new sharing economy - around trading in the time of that car and the power in its battery, building a new economy. This is the context for the market opportunity for the Token Economy.

Universal state machine for the internet

?Quoting Shermin Voshmgir (1), blockchain is a back-end technology, for governing the state of objects of value on the internet. In other words, keeping track of who owns what, as assets are bought and sold, peer to peer, and who has done what to these assets as they go through their lifecycle.?This shared visibility & provenance helps to organize sustainable or regenerative systems.

Figure 2, The Token Economy

The smart contract changes the state of these objects as they are traded and enhanced. The user controls access to their data via tokens and credentials in their wallet. These tokens (and credentials) do jobs in three main categories giving the user control and management of (1) their identity, be this pseudo anonymous by way of reputation or be this KYC in terms of compliance and (2) access to their data ownership (fungible or non-fungible), e.g. ?to our medical records and how are they monetized and (3) internet money and digital liquidity. ?What's important about internet money is that it will enable transfer of ownership and value at the same time. For example, I've just bought a mutual fund and it takes seven days for the trade to settle and I have no idea what price I'm going to pay. In the Token Economy, value and ownership are transferred at the same time. Critically, we can do this in very small transactions and at great velocity. This is the magic sauce to build out these marketplaces, as we buy and sell access to data.

What’s different?

What are the key things that are changing as we move from the old world to the new world? We're moving into this digital liquidity - so very fast and lots of small transactions, clearing and settling at the same time, so great velocity. But critically we're looking to change the power equation, from all the power and the market knowledge accumulating in the hands of a Facebook or a Google but instead having an incentive model which shares the benefits fairly across the owner of the data, the innovator - so the builder of the applications, and the driver of the platform.

Figure 3, What’s Different?

These are win-win-win models where we're looking for collaborative governance. Where the user is in control of how their data is used, and where we are looking to fix the problem of identity, so the web as we know it. Today you are just a subscriber to a website. You're not a member of the internet, whereas we're now looking to make you a full member of the internet where you can control your identity on the internet. That's a key a key change in the old to the new.

A business that looks more like a network

What might this new way of working look like??I'm going to quote Shermin (2) again and she said that it's helpful to think of this new internet, not so much as a decentralized internet, but to think of it as a collaborative internet. So, a few companies, across, in the example below, a supply chain come together to collaborate. What's important to understand is that the level of decentralization is on a scale - you can start quite centralized and gradually open the valve to become more decentralized over time. ?What we're looking to do is to use this money, this internet money, this marketplace token or native coin of the DAO, to provide the currency for buying and selling on our marketplace, and for creating the finance to drive the funding through the value chain, as we link small, medium, and big companies together to share this credit across the supply chain.

Figure 4, Collaborative Business = Token + DeFi + DAO

We are creating, quoting Don Tapscott, a new type of business that looks more like a network, with composability and reuse of business components, like the DeFi funding. This composite, networked business, could exist for a short period of time. It may exist for a project. It may exist to fix a particular problem. An individual company may belong to a number of these networks, and it may have different roles on different networks. Our three tokens are driving through this value chain as (1) it’s native token as the digital liquidity, (2) the asset being traded – e.g., a container of oranges and (3) we have identity as we know who we're dealing with either by reputation or KYC.

ERP for the internet

Let’s drill down to the next level on that same supply chain in the chart below. Shermin (1) said that blockchain is a back-end technology and from an enterprise perspective the back-end systems are its ERP like SAP or Oracle. What we're now looking to do is to create a thin layer, in blue, on top of those existing ERP systems in red. We're looking to automate those phone calls, those emails, and those piece of paper in B2B transactions to create a digital ERP for the internet.?Our collaborative business now has its composite ERP and as we start to move into much smaller transactions, perhaps we have IoT devices on the crane and in the in the container, so we now can bring AI to use that data to drive more value.

Figure 5, ERP for the Internet

What's interesting is the data becomes the differentiating asset of the business. When you sell access to your data, you must be terribly careful to maintain control of the monetization of that data. How do you price your data if you sell it and once it's gone it can be used a million times and you've no idea what happened to it? When you sell access to your data, you sell access to an autonomous agent. This is some machine learning agent that will aggregate your data with other players in the value chain but the only data which moves is the metadata or the insight, learnings, or analytics. In this way you can create a trickle feed income from your data, as you're constantly updating your pool of data.?Your data is aggregated with other members of the supply chain and the ML has been driven on top of that to drive a new generation of apps. ?

Blockchain is a governance technology

We should think of blockchain as a governance technology, not a financial technology1. ?Governance exists at multiple levels. We need to govern the ledger itself. We need to govern the keys of your assets in your wallet but it's the middle piece that I’m most interested in as we govern the market. This is where we govern the DAO. This is the composite business organization and where we govern the individual business models which are the applications that are going to run on this network.

Figure 6, Blockchain is a Governance Technology

I think that we start with something like supply chain, but inevitably these networks are going to bleed into adjacent industries. For example, in healthcare you're not going to get anywhere without the insurance because that's going to be paying for the services. We need to be linking these marketplaces together either interoperability, as assets move from network to network, or individual platforms will grow beyond an individual industry into a cross-industry marketplace. But it's that middle layer of governance of the market, that I’m most interested in.

3-part business model

?There are three components of the collaborative business model for the enterprise. First is the economic model of incentives to drive the collaboration. The governing organization of the DAO can create value for members by minting tokens and allocating tokens to compensate them fairly for the value they're adding to the collaboration. This is to democratize value across the members of the network to drive collaborative win-win outcomes. Second the DAO’s native token is linked to a voting token. The DAO can start off quite centralized with delegated voting roles, which is like electing a member of parliament for a particular skill or function.

Figure 7, 3-part Business Model

Third is the commercial model setting the fees and having competition among service providers driving the platform and the apps. business models. At the centre of these three models, is the DAO’s native token which is driving the digital liquidity in this marketplace

Industry reinvention

The Token Economy in born in the invention and reinvention of industries. Markets are reinvented at the level of the enterprise, new types of collaborative platform and new types of business, governed in a DAO, that look more like a network. We can think of this at the (1) Go to Market (2) products that you're buying and selling and (3) tokenomics. First the company is now going to market as a network, as a collective. Value potential grows with network effects as the community grows.?The enterprise’s core asset is its data, which it buys or sells to drive applications and collect value in wallets.?We design the economics to ensure that the various actors across that supply chain are better off collaborating than not. Then we move to the platform which will probably start for an individual industry or an individual market but could grow as we bleed across industries.

Figure 8, Token + DeFi + DAO = Industry Reinvention

The platform earns value through fees for processing transactions and for professional services to support the community. The key thing that the platform is bringing is reuse, or synergies, in composing these new businesses that look like a network. To be compliant, this network will sit within a zone of sovereignty. Stepping outside that zone of sovereignty will create a yet unsolved compliance problem.

DAO native (utility) token

This DAO’s native (utility) token, that I call the Marketplace Token, represents: (1) a store of value created by the innovators in the marketplace (2) a unit of account for the revenue of innovators’ apps, and (3) a medium of exchange, or in other words, a provider of digital liquidity in and out of fiat. This liquidity and control of volatility is provided by the reserve fund that should contain wholesale CBDC collateral. The store of value might be represented by an interest rate over and above what you can earn in fiat or by an exchange rate giving you more fiat as the token takes on equity-like properties. ?This token represents private digital money. The treasury of the DAO is effectively a new type of digital bank. This private money should be used in preference to retail CBDC, to limit the power of central banks and politicians. This is analogous to the role of private commercial banks today.

DAO Tokenomics Equation

We have our three tokens (and credentials) for identity, asset ownership (fungible or non-fungible) and value.?In the Tokenomics Equation (see the chart below) the value token is broken out into three sub-jobs: (1) digital liquidity from the reserve fund, liquidity pools and gamifying composability or reuse and (2) driving behaviour changes by way of incentives and (3) governing decisions by way of voting.

Figure 9, Token Economy = Behaviour Change Machine

The token economy is driven by the ownership of the data owner who grants access to their data. Then we innovate new ways to bring buyers and sellers together, to provide apps and services, and to incentivize and to govern and make decisions for the community on a spectrum of decentralization.

Marketplace vending machine

The marketplace is like a vending machine. We issue and redeem the marketplace token which is used for buying and selling of access to (1) fungible or non-fungible data and (2) services from apps that use that data. Liquidity is created by staking the token in liquidity pools and the reserve fund to on/off ramp from fiat. Ownership of this DAO native token is linked to (delegated) voting rights.

Figure 10, Think “Vending Machine”

Business model for web3

Expanding the vending machine picture into the marketplace model below, we add the wallet on the left-hand side containing the three types of token (and credentials). We add the ledger on the right-hand side and in the middle, we have the marketplace for buying and selling of data to drive innovative apps.

Figure 11, Marketplace Model

At the top are the business data owners who, along with the user, sell access to their data. This is bought by innovators (e.g., the developers) who want to use that data in an app. or it could be used by another enterprise it to drive efficiencies in their own business by way of ecosystem reconciliation. Innovators build services using the marketplace data, native micro. payments combined with the provenance of the asset that is traded using appropriate identity.?Liquidity is provided by the reserve fund and by liquidity providers (e.g., a bank) who stakes tokens, such as the data set token, in liquidity pools.

Circular economy avoiding leakage

We want to keep value inside the marketplace. We do this by creating a market of buyers and sellers of the Marketplace Token. Buyers might include innovators (developers) who must stake this token to earn the right to deploy apps. Users must buy the token to buy access to services. Liquidity providers use the token in liquidity pools. Innovators charge for their services in this token as well as data sellers who are paid in this token.??

We aim to eliminate leakage as value is off-ramped back to fiat and we aim to increase the velocity of that of that token inside our marketplace economy.

Figure 12, Circular Economy for the DAO’s Native (Utility) Token

Incentive model design

Turning the above chart through 90 degrees we can view it by economic actor. We're looking to make sure that each of these actors, in each of these columns, has an appropriate incentive as we look at money in versus money out. We have an element of design here as the governing body can mint and then allocate marketplace tokens (maybe in an airdrop) to act as incentives and to democratize benefits across the value chain to make sure everybody has a fair incentive to want to collaborate.

Figure 13, DAO Incentive Model Design

Adoption roadmap

Where might the enterprise start? Think of those three token and credential types. We're going to have to start with identity, be it pseudo anonymous or KYC. Then we're going to have to understand what is being bought and sold, so we have the provenance of that asset. We need to have the data to eliminate ecosystem reconciliation, so that everybody can agree on what's going on in the market. Then we can then move into that reinvention, as we move into the Token Economy, such as with the car e-wallet. Finally, we move into the value exchange in the marketplace, perhaps at that machine-to-machine, micro level.

Figure 14, Token Economy – Where to Start?

References and credits

1.???Shermin Voshmgir, Insureblocks ???????

2.????Shermin Voshmgir, LinkedIn ?????????????

3.????Token Economy (pt. 1), SSRN ??????????

4.????Audio version, YouTube ?????????????????????

5.????Deck, LinkedIn

6. Downloadable/printable version?? ????

7. Referenceable version