The Token Economy is an alternative behavior model that encourages participants in the economy to build, contribute to and benefit from the economy simultaneously. With the development of the crypto industry, the Token Economy is believed to be a major part of the future.
What is the Token Economy?
People on earth produce, consume, allocate and distribute goods and services, during the process different types of value are created, changed, and realised. The activities and relationships generated during this is basically what we know as the economy. Modern science and technology have made it involve much more complicated sectors like finance. Though varying in scale and nature, the economy today is still about individuals and their interactions with society while finance relies on people’s trust in centralized entities like governments, companies and central banks. However, recurring crises worldwide, the latest one being the 2008 GFC, indicate that we may need to take a step back and look at the bigger picture of whether the current economic framework can be improved on in an overall sense.
Originally brought up by the psychologist B.F. Skinner in 1972, the Token Economy was conceived as a model that can stimulate positive actions through providing a set of value units, namely tokens, thus creating a sustainable and self-driven pattern that generates value. The new model believes that a positive loop is possible through a paradigm shift in value-creation relationships. Nowadays the Token Economy is generally considered as the economic model empowered by the crypto industry while tokens are usually referred to as cryptocurrencies. It differs from the traditional economy as it refreshingly reconstructs the way people create value and get rewarded, without being interrupted or coerced by centralised banks, big companies or governments. Different from the current internet economy, the Token Economy will hand over the ownership of privacy, data and value to the online user, as it should be.
The thriving crypto market has turned the idea into half a reality by embedding value into crypto tokens, and the growing industry has proven the idea can be a practical and feasible solution to fixing existing problems in the traditional financial and economic sectors.
How Does the Token Economy Work?
Here are two examples of the Token Economy. Bitcoin, the biggest cryptocurrency in the world, is the first-ever successful example of the Token Economy. A spontaneous and vibrant network, Bitcoin has grown into a visible market worth trillions of dollars, from which numerous brand-new ecosystems are deriving everyday.
Revolutionising the tech industry through Blockchain, Bitcoin disrupts traditional corporate relationships as well. In the traditional economy of Web 2.0, you will need to go through the following steps chronologically to build a network with the same scale as that of Bitcoin. First, a company will need to raise a huge amount of funds, from centralised institutions like banks or financial institutions, before applying for licenses and registrations. Then the company will need to hire the right people to build the network, allocate servers and devices, maintain and develop the network. Cast aside the fact that the network will never reach the size and safety of Bitcoin, if something goes wrong in one of those steps, it will take an enormous amount of time to remedy.
Bitcoin did it in an entirely different way. Like the founder Satoshi Nakamoto, Bitcoin’s miners believe in the value of Bitcoin. Powered by the consensus of Proof-of-Work, numerous miners in the world spontaneously design, manufacture and run Bitcoin rigs to build and keep the network going, so that they can get rewarded in Bitcoin. Ecosystems built within the Token Economy grow over time and edge into traditional industries like manufacturing (chips and components of the devices for example), media, finance etc.
This is how Bitcoin, or the Token Economy, differs from the traditional economy. Bitcoin showed us how the Token Economy can actually work and proved that a positive, self-driven, open and transparent economy is more than just wishful thinking. It is a reality in the making.
Another practice of how the Token Economy works is Ethereum, which accounts for the second-largest share of the crypto market and it is currently a blockchain that has the biggest number of developers in the world. Based on the fact that Bitcoin’s value is being recognized, Ethereum enriches the categories of the Token Economy by providing interoperability to blockchain developers and expanding crypto communities. Smart Contracts and Virtual Machine technology make Ethereum one of the leading platforms for entrepreneurship and innovation, where new types of economic entities like Decentralized Autonomous Organizations (DAO) and financial movements like Initial Coin Offerings (ICO) are becoming popular among the community. Increasing efficiency while lowering the cost of operations, DAOs improve the way a company runs, as it allows a group of people from different nationalities, beliefs and jobs to conduct collective collaborations and vote towards a united goal. Constitution DAO, an Internet collective gathered solely to win the Sotheby’s auction of a rare copy of the U.S Constitution, managed to raise $65 million AUD worth of crypto in the short span of a few days. Despite the DAO losing the bid, due to the transparency of their offer, the project proved that cross-border and big scale alternative organizations are highly workable in the time of the Token Economy.
Imagine A World Running On the Token Economy
Though Bitcoin and Ethereum are the two most representative cases, the Token Economy is considered an evolving and ongoing process as the crypto industry has not fully come to fruition yet. New types of innovations are arising everyday with many efforts being made to solve latency and low TPS problems of current blockchains. Ethereum, for example, will change its consensus mechanism from Proof-of-Work to Proof-of-Stake to save energy and Layer 2s will be added to improve its scalability. Many believed that a multichain world is on the rise thanks to the work of crypto communities worldwide. Though it might be challenging to picture a world that runs completely on the Token Economy, questions of what traditional sectors may look like in a Token Economy are already being answered.
Financial markets in the traditional world will be reshaped completely in the Token Economy. Quite different from the stock market, token holders are endowed with more rights and interests as they might be offered opportunities to engage, manage and operate the project or business directly. As a matter of fact, a growing number of professional talents and derivative products in the traditional financial world have entered the Token Economy through the sector of Decentralized Finance (DeFi), where lending, borrowing, or quantitative trading are conducted through tokens. The DeFi economy is considered to be the future of finance due to its robustness and ever-growing speed of innovation.
The gaming industry will free itself from a company-centered mode and turn into a community or user-oriented economy when powered by blockchain and crypto. To many players, gaming is part of their life as they spend valuable time and effort in the virtual world developing their characters, but they don’t have any control over the future of the game e.g. An NBA2k user can’t stop the 2k team from shutting down servers on old games. In the Token Economy players will take back control of the direction of the game and services. What’s more, the token economy in the gaming sector has already incubated healthy and new profit-generating models such as Play-to-Earn, which allows players to make a living through playing games. Axis Infinity, one of the most popular blockchain games, emphasises how the Token Economy can reshape the gaming industry and ecosystem. The huge potential in the market has attracted a lot of traditional tech companies to implement blockchain and crypto strategies. Facebook, or now Meta, is pitching an idea of Metaverse, Kickstarter will move onto the Blockchain, Ubisoft will introduce NFTs, Samsung smart TVs will be equipped with an NFT trading platform, the list goes on.
It is no exaggeration to say that everything in a digital form can be improved through the Token Economy. The growing crypto community and market worldwide indicate that the token economy may be coming sooner than we realise.