How token economies organize people around endeavours

When you think about it, Bitcoin is incredible. It got many people to pour lots of money into running a public goods system, a very important system that we all need – a monetary system.

Sure, there have been monetary systems before. But which one is valuable and easy to transport at the same time, yet easy to verify its authenticity? Not gold. Paper is supposed to be backed by actual reserves of (whatever’s valuable, usually gold), but who trusts the people running the reserve? Plus they all encourage you to spend (inflation), not save (deflation).

But we’re not here to debate monetary systems. We’re here to generalize the Bitcoin achievement into other subjects.

A Very Quick Overview of the Bitcoin Concept

The best way to make a system uncensorable (countries hate it when you issue your own currency, because it makes them irrelevant – just see W├Ârgl in Austria) is to spread the system across many computers, just like Bittorent.

But how do we coordinate many computers and get them to share the same state? Bitcoin says “might makes right”, or “whoever has the most computing power is correct”. Specifically, “whoever can take a bunch (block) of valid transactions and create a hash (fingerprint) that starts with n zeros in front is correct”, where n is adjusted for difficulty periodically.

Since you have to spend a lot of electricity and computational power to find such an answer, you probably aren’t trying to sabotage the Bitcoin system. Congratulations, the algorithm will reward you with some Bitcoin (12.5 BTC as of time of writing).

Basically, if you you do honest work (Proof of Work) for the system, the system will reward you with Bitcoin. Now how can we use this to reward other kinds of work?

Decentralized Computation/AWS Lambda: Ethereum

Proof of Work: Ethereum works just like Bitcoin. The only difference is while Bitcoin tokens have no use on Bitcoin other than transferring them around, Ether is actually useful. A developer can upload programs and other people who want to use them pay for the program to run with Ether.

Or they could just send them around like Bitcoin.

Decentralized CDN/cloud storage: Siacoin, Filecoin

Siacoin: Proof of Storage + Proof of Work: A user uses SIA to pay for a file he wants stored on the Siacoin network. This SIA is set aside in escrow. To earn the SIA, storage hosts regularly submit a random segment of the original file and a list of hashes of the other segments to prove that they’re still storing the file. Regular Bitcoin-style Proof of Work ensures that everybody in the Siacoin network agrees that these proofs are valid.

Filecoin: Proof of Storage + Byzantine “Expected Consensus”: Filecoin has a very different design – nevertheless, the idea is still the same if you zoom out enough. Storage hosts must stake FILC token as collateral in case they behave dishonestly. Every 24 hours, every storage host must submit a proof that they stored the data over a period of time. If they miss this deadline, their staked FILC is slashed and they won’t earn extra FILC for that round. Randomly chosen storage hosts validate each other and produce the chain in Filecoin’s Proof of Work replacement, called Expected Consensus.

Observe: the system wants to reward you for honest work, and wants to punish you for dishonest work.

It’s just that sometimes, it’s difficult to tell a computer what “honest work” exactly is.

Decentralized Video Transcoding Service: Livepeer

Proof of Stake + proof of correctly done work: since it is difficult and expensive to verify that a video was transcoded properly, Livepeer makes it difficult to be a Transcoder. To earn the right to transcode video on Livepeer, you put lots of LPT tokens on escrow (you can ask other people to contribute to this stake, i.e. delegate their tokens to you) and if you’re in the top n, the network trusts you enough to send your computer some transcoding work. Livepeer sends random segments of the video you encoded to a third party service on Ethereum called Truebit.

I don’t quite understand just how Truebit verifies the transcoded video without actually doing the same computation, though.

If Truebit finds that a Transcoder didn’t transcode anything, Livepeer will slash the Transcoder’s staked LPT tokens. To further increase peer pressure on the Transcoder to be honest, delegated tokens are also slashed.

Decentralized Spotify: Audius

What does one need to run a streaming music service? (let’s read their whitepaper) Audius defines a content service, which hosts the actual music, encrypted of course; and discovery service that keeps track of what content is out there.

Obviously if you run the content service, you could pirate the music that artists uploaded to your server. And obviously if you run the discovery service, you might try to game the system by unfairly promoting certain artists. That’s why you have to stake (put in escrow) at least 200,000 AUDIO for the network to recognize you as a content host, and the same for the discovery service. Artists can stake their own AUDIO tokens on you if they trust you not to pirate their music, or run their own services. If you misbehave, your tokens get slashed, just like in Livepeer.

However, a blockchain can’t tell if music was pirated, or if an artist was unfairly promoted. Audius therefore leaves these behaviour checking mechanisms to the community to call a vote on. This pattern is obviously not as reliable as having a computer check things, but we will definitely see more of such patterns in the future as we apply token economics to new use cases which computers cannot completely evaluate.

A new way to organize humans around endeavours

As you can see, having your own economy enables you to do what a company does – except that while a company motivates you with salaries in a national currency, in these new organizations you’re motivated by earning their own token.

And while in companies, humans approve your salary, in these new organizations the computers give out rewards – humans are only needed to verify that honest work was done.

You can’t pay for rent and food with these tokens, but it’s not like they’re useless either.

In fact, a group of people with their own economy can be thought of as its own living unit, its own organism. Isn’t that what a country is?

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