Tokenology: going beyond tokenomics – a16z crypto

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Tokens are a hot topic for those in crypto and web3. Even beyond the web3, the tokens capture the minds of anyone interested in art, cryptography, design, economics, gaming, math, psychology, and more.

Tokens have been described as everything from a breakthrough in open network design to a new digital primitive (analogous to the website). We can generally define tokens as a unit of value native to the Internet. But here is the key point: tokens do not only represent monetary value, but also social value, reputation, etc. There are many forms of value.

Tokens represent multidimensional value; they are a vector, not a scalar. Borrowing from mathematical notation, scalars have only magnitude vectors that have both magnitude and direction. A specific token can represent ownership, membership, identity, etc. Fundamentally, tokens are important because they allow builders to retain the high dimensionality inherent in any representation of value, and thus open up a rich new design space.

This is also why I think the term tokenomics to describe the study and design of tokens is very limited and inherently limiting. It fails to capture and convey all the dimensionality of this rich design space. Tokens can be used to coordinate and organize people not only within, but beyond a purely economic context.

Token design is still in a nascent phase, so reducing token dimensionality to a purely economic context limits what is possible to build here. That’s why I think we need another term. I propose tokenology, referring to the study of how to coordinate people, organizations, and/or computation toward a common goal primarily through the use of cryptography and mechanism design.

But first, a bit more about what tokens are and why they are important.

To put tokens in the larger context of blockchains and crypto: blockchains are a new computing paradigm that has created a new way of organizing people, corporations, and capital. Two key benefits of blockchains are composability and tokens. Here I focus on tokens.

Terms that people use in the crypto industry also include token model, token mechanism, or token design (we also use the latter; see here). But they all refer to how a token interacts with an associated protocol, system, or mechanism. For example: the Ethereums token model specifies how ether works in the protocol; the token model is a subset of the protocol as a whole.

So, more concretely, how to use tokens? There are many ways, but to summarize a few current use cases, we can use tokens:

For the property. Blockchains are the first way to scale user-owned and operated open-source services; Ethereum is a prime example of a user-owned and operated global computer. Tokens also give users digital ownership rights, which is another important concept here. Finally, tokens enable ownership of hyperstructures, defined as cryptographic protocols that can operate for free and forever, without maintenance, downtime or intermediaries. In this context, they would also create value accessible and destructible by the owners; but that value doesn’t have to be purely monetary and can be extremely valuable in other ways.

For alignment. Creator Coins, Social Tokens and NFTs allow fans to interact directly with the artists they love the most and prove their fandom, whether as an early adopter, to show the intensity of support or for community and meaning. The strength of Dogecoins, for example, is the meme, community, and religion it represents. Tokens can also be extended not only to represent membership in that community, but to establish a digital cultural identity; in this context, holders of such tokens can also vote on creative decisions in a decentralized collaboration between the creator and the community.

For incentive structures. Incentive design has often been described as the key to understanding and motivating human behavior, but it can also align systems, organizations, and networks. The tokens help coordinate validators and miners in Ethereum and Bitcoin, respectively. They also enable decentralized governance in DeFi protocols like Uniswap, Compound and others. Tokens can help grow memberships and create derivatives for NFT projects like BAYC or digital native DAOs and communities like FWB.

To access goods and services. Smart contract platforms like Ethereum sell the compute service; Helium allows anyone to purchase LoRaWAN and 5G transit; and Filecoin allows anyone to pay for data storage, to name a few examples. Many NFTs are also used to create digital and physical experiences. Token Gating can be used to prioritize early or more active members of the community, or through other criteria as a way to distinguish between casual and more dedicated participants and ensure a richer overall experience.

This list of token use cases is far from a complete list, of course; it is still only the beginning. But as you can see, it’s an extremely rich design space that spans arts, economics, and more.

The case for a new mandate

Tokens are clearly important and not just for the crypto industry, but beyond. Once they are combined with the other key feature and advantage of blockchains, that of composability, one can truly understand more deeply how the direction, and not just the magnitude, of tokens can mean so much more.

The tokens, again, represent the value as a vector, not a scalar. Only when we recognize tokens as the native way of representing vectors of value can we begin to convey the rich design space here.

Value is an abstraction and most people confuse value with money. Tokens allow you to make value explicit without being money. I would argue that because modern Western economics expresses value almost entirely in US dollars, it loses information by reducing a high-dimensionality vector to a scalar. Today, most of the time, the value is either 1) implicit or 2) only explicit in the form of US dollars. Value can be represented in several other ways, including around the US dollar. All interactions actually transfer value, most easily visible in the form of time and information.

The key is that developers must be able to make the implicit value explicit using a new token design.

So whether we call it Tokenology as I suggest here, simply relying on the study of tokens; or something else, I’m curious what you offer as an alternative too! we need to go beyond simple tokenomics = tokens + economy. Its tokenology = tokens x economy x art x . A new term can also help us usher in a richer new era of token design.

editors: Sonal Chokshi, Steph Zinn

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